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 October 31, 2020

 

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

90-1494749

(State or jurisdiction of
incorporation or organization) 

(Primary Standard Industrial
Classification Code Number)

(IRS Employer
Identification No.) 

 

106 W. Mayflower, Las Vegas, NV 89030

(Address of principal executive offices)

 

(702) 267-6100

(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 [X]   No [_]

 

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 [X]   No [_].

 

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 December 8, 2020, there were 1,180,963 shares of Common Stock of the issuer outstanding.

 



TABLE OF CONTENTS

 

PART I.

FINANCIAL INFORMATION

3

 

 

 

ITEM 1.

Condensed Consolidated Financial Statements (Unaudited)

3

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

 

 

 

ITEM 2.

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

26

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosure About Market Risk

31

 

 

 

ITEM 4.

Controls and Procedures

31

 

 

 

PART II.

OTHER INFORMATION

31

 

 

 

ITEM 1.

Legal Proceedings

31

 

 

 

ITEM 1A.

Risk Factors

31

 

 

 

ITEM 2.

Unregistered Sales of Securities and Use of Proceeds

31

 

 

 

ITEM 3.

Default Upon Senior Securities

32

 

 

 

ITEM 4.

Mine Safety Disclosures

32

 

 

 

ITEM 5.

Other Information

32

 

 

 

ITEM 6.

Exhibits

32

 

- 2 -



PART 1: FINANCIAL INFORMATION


ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


THE 4LESS GROUP, INC.

Condensed Consolidated Balance Sheets


 

 

October 31, 2020

 

January 31, 2020

 

 

 

Unaudited

 

(*)

 

Assets

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

261,072

 

$

162,124

 

Inventory

 

 

299,628

 

 

371,896

 

Prepaid Expenses

 

 

12,200

 

 

8,106

 

Other Current Assets

 

 

8,445

 

 

1,059

 

Total Current Assets

 

 

581,345

 

 

543,185

 

Operating Lease Assets

 

 

368,605

 

 

483,193

 

Property and Equipment, net of accumulated depreciation of $82,524, and $64,091

 

 

86,326

 

 

114,509

 

 

 

 

 

 

 

 

 

Total Assets

 

$

1,036,276

 

$

1,140,887

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Accounts Payable

 

$

556,828

 

$

534,442

 

Accrued Expenses

 

 

1,229,541

 

 

1,709,797

 

Accrued Expenses – Related Party

 

 

125,673

 

 

155,750

 

Short-Term Debt

 

 

794,217

 

 

609,491

 

Current Operating Lease Liability

 

 

91,638

 

 

101,984

 

Short-Term Convertible Debt, net of debt discount of $152,621 and $689,176

 

 

263,879

 

 

2,286,896

 

Derivative Liabilities

 

 

229,895

 

 

2,611,125

 

PPP Loan-current portion

 

 

17,293

 

 

 

Current Portion – Long-Term Debt

 

 

433,184

 

 

4,166

 

Total Current Liabilities

 

 

3,742,148

 

 

8,013,651

 

 

 

 

 

 

 

 

 

Non-Current Lease Liability

 

 

265,378

 

 

365,085

 

PPP Loan -long term portion

 

 

192,154

 

 

 

Long-Term Debt

 

 

907,483

 

 

11,940

 

 

 

 

 

 

 

 

 

Total Liabilities

 

 

5,107,163

 

 

8,390,676

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

Redeemable Preferred Stock

 

 

 

 

 

 

 

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

 

 

870,000

 

 

870,000

 

 

 

 

 

 

 

 

 

Stockholders’ Deficit

 

 

 

 

 

 

 

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, 7,250 shares authorized, 7,250 and 6,750 shares issued and outstanding

 

 

7

 

 

7

 

Common Stock, $0.000001 par value, 15,000,000 shares authorized, 1,181,644 and 538,464 shares issued, issuable and outstanding

 

 

1

 

 

1

 

Additional Paid In Capital

 

 

13,946,305

 

 

13,449,336

 

Accumulated Deficit

 

 

(18,887,220

)

 

(21,569,153

)

Total Stockholders’ Deficit

 

 

(4,940,887

)

 

(8,119,789

)

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Deficit

 

$

1,036,276

 

$

1,140,887

 

__________

* Derived from audited information


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


- 3 -



THE 4LESS GROUP, INC.

Condensed Consolidated Statements of Operations

For the Nine Months and Three Months Ended October 31, 2020 and 2019

(Unaudited)


 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 31, 2020

 

October 31, 2019

 

October 31, 2020

 

October 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

2,334,826

 

$

1,890,461

 

$

7,262,106

 

$

6,218,386

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Revenue

 

 

1,861,130

 

 

1,542,836

 

 

5,291,026

 

 

4,692,915

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

473,696

 

 

347,625

 

 

1,971,080

 

 

1,525,471

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

6,299

 

 

7,033

 

 

18,897

 

 

26,021

 

Postage, Shipping and Freight

 

 

113,702

 

 

110,385

 

 

378,595

 

 

342,370

 

Marketing and Advertising

 

 

25,497

 

 

23,827

 

 

49,347

 

 

145,206

 

E Commerce Services, Commissions and Fees

 

 

222,425

 

 

163,002

 

 

641,692

 

 

551,943

 

Operating lease cost

 

 

23,279

 

 

30,360

 

 

91,437

 

 

83,762

 

Personnel Costs

 

 

330,184

 

 

251,923

 

 

829,788

 

 

902,592

 

General and Administrative

 

 

263,619

 

 

230,583

 

 

598,484

 

 

725,116

 

Total Operating Expenses

 

 

985,005

 

 

817,113

 

 

2,608,240

 

 

2,777,010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Operating Income (Loss)

 

 

(511,309)

 

 

(469,488

)

 

(637,160

)

 

(1,251,539

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) on Sale of Property and Equipment

 

 

 

 

4,436

 

 

464

 

 

4,436

 

Change in Fair Value on Derivative Liability

 

 

(939,873

)

 

(196,303

)

 

(507,674

)

 

(107,953

)

Gain on Settlement of Debt

 

 

2,845,742

 

 

 

 

5,018,388

 

 

67,623

 

Amortization of Debt Discount

 

 

(67,357

)

 

(212,004

)

 

(694,168

)

 

(462,175

)

Interest Expense

 

 

(227,130

)

 

(121,601

)

 

(497,917

)

 

(804,902

)

Total Other Income (Expense)

 

 

1,611,382

 

 

(525,472

)

 

3,319,093

 

 

(1,302,971

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

1,100,073

 

$

(994,960

)

$

2,681,933

 

$

(2,554,510

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Weighted Average Shares Outstanding

 

 

1,067,074

 

 

20,683

 

 

797,126

 

 

7,613

 

Basic Income (Loss) per Share

 

$

1.03

 

$

(48.11

)

$

3.36

 

$

(335.54

)

Diluted Weighted Average Shares Outstanding

 

 

5,268,957

 

 

20,683

 

 

4,999,009

 

 

7,613

 

Diluted Income (Loss) per Share

 

$

(0.13

)

$

(48.11

)

$

(0.13

)

$

(335.54

)


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


- 4 -



THE 4LESS GROUP, INC.

Condensed Consolidated Statement of Changes in Stockholders’ Deficit

For the Nine Months Ended October 31, 2019

(Unaudited)

 

 

Preferred Series A

 

Preferred Series B

 

Preferred Series C

 

Common Stock

 

Paid in

 

Retained

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Earnings

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 31, 2019

 

$

 

20,000

 

$

20

 

6,750

 

$

7

 

151

 

$

 

$

11,694,325

 

$

(17,689,307

)

$

(5,994,955

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of Notes Payable and Accrued Interest to Common Stock

 

 

 

 

 

 

 

 

 

303

 

 

 

 

258,594

 

 

 

 

258,594

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Liability Reclassified as Equity Upon Conversion of notes

 

 

 

 

 

 

 

 

 

 

 

 

 

237,500

 

 

 

 

237,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock Adjustments for Reverse Splits

 

 

 

 

 

 

 

 

 

1

 

 

 

 

11,115

 

 

 

 

11,115

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,813,076

)

 

(1,813,076

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 30, 2019

 

$

 

20,000

 

$

20

 

6,750

 

$

7

 

455

 

$

 

$

12,201,534

 

$

(19,502,383

)

$

(7,300,822

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of Notes Payable and Accrued Interest to Common Stock

 

 

 

 

 

 

 

 

 

4,027

 

 

 

 

357,419

 

 

 

 

357,419

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Liability Reclassified as Equity Upon Conversion of notes

 

 

 

 

 

 

 

 

 

 

 

 

 

281,621

 

 

 

 

281,621

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock Adjustments for Reverse Splits

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,419

)

 

 

 

(11,419

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

246,579

 

 

246,579

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 31, 2019

 

$

 

20,000

 

$

20

 

6,750

 

$

7

 

4,482

 

$

 

$

12,829,155

 

$

(19,255,804

)

$

(6,426,622

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of Notes Payable and Accrued Interest to Common Stock

 

 

 

 

 

 

 

 

 

61,864

 

 

 

 

245,497

 

 

 

 

245,497

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Liability Reclassified as Equity Upon Conversion of notes

 

 

 

 

 

 

 

 

 

 

 

 

 

150,231

 

 

 

 

150,231

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock Adjustments for Reverse Splits

 

 

 

 

 

 

 

 

 

 

 

 

 

(20,231

)

 

 

 

(20,231

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(988,013

)

 

(988,013

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 31, 2019

 

$

 

20,000

 

$

20

 

6,750

 

$

7

 

66,346

 

$

 

$

13,204,652

 

$

(20,243,817

)

$

(7,039,138

)

 

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

 

- 5 -



THE 4LESS GROUP, INC.

Condensed Consolidated Statement of Changes in Stockholders’ Deficit

For the Nine Months Ended October 31, 2020

(Unaudited)

 

 

Preferred Series A

 

Preferred Series B

 

Preferred Series C

 

Common Stock

 

Paid in

 

Retained

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Earnings

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 31, 2020

 

$

 

20,000

 

$

20

 

6,750

 

$

7

 

538,464

 

$

1

 

$

13,449,336

 

$

(21,569,153

)

$

(8,119,789

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of Notes Payable and Accrued Interest to Common Stock

 

 

 

 

 

 

 

 

 

82,361

 

 

 

 

3,399

 

 

 

 

3,399

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Liability Reclassified as Equity Upon Conversion of notes

 

 

 

 

 

 

 

 

 

 

 

 

 

8,104

 

 

 

 

8,104

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exchange of debt

 

 

 

 

 

 

250

 

 

 

 

 

 

 

9,105

 

 

 

 

9,105

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,186,898

 

 

1,186,898

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 30, 2020

 

$

 

20,000

 

$

20

 

7,000

 

$

7

 

620,825

 

$

1

 

$

13,469,944

 

$

(20,382,255

)

$

(6,912,283

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of Notes Payable and Accrued Interest to Common Stock

 

 

 

 

 

 

 

 

 

284,147

 

 

 

 

7,656

 

 

 

 

7,656

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Liability Reclassified as Equity Upon Conversion of notes

 

 

 

 

 

 

 

 

 

 

 

 

 

12,081

 

 

 

 

12,081

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

394,962

 

 

394,962

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 31, 2020

 

$

 

20,000

 

$

20

 

7,000

 

$

7

 

904,972

 

$

1

 

$

13,489,681

 

$

(19,987,293

)

$

(6,497,584

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of Notes Payable and Accrued Interest to Common Stock

 

 

 

 

 

 

 

 

 

211,987

 

 

 

 

4,757

 

 

 

 

4,757

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of Shares as Commitment Fee for Loan

 

 

 

 

 

 

 

 

 

19,685

 

 

 

 

50,000

 

 

 

 

50,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of Shares to Repay Accrued Expense Related Party

 

 

 

 

 

 

 

 

 

45,000

 

 

 

 

18,900

 

 

 

 

18,900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of Class C Shares as Part of Debt Settlement

 

 

 

 

 

 

150

 

 

 

 

 

 

 

20,290

 

 

 

 

20,290

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of Class C Shares Repay Accrued Expense Related Party

 

 

 

 

 

 

100

 

 

 

 

 

 

 

11,177

 

 

 

 

11,177

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of 950,000 Warrants as Part of Debt Settlement

 

 

 

 

 

 

 

 

 

 

 

 

 

351,500

 

 

 

 

351,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,100,073

 

 

1,100,073

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 31, 2020

 

$

 

20,000

 

$

20

 

7,250

 

$

7

 

1,181,644

 

$

1

 

$

13,946,305

 

$

(18,887,220

)

$

(4,940,887

)

 

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

 

- 6 -



THE 4LESS GROUP, INC.

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended October 31, 2020 and 2019

(Unaudited)


 

 

2020

 

2019

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net Income (Loss)

 

$

2,681,933

 

$

(2,554,510

)

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

 

 

 

 

 

 

 

Depreciation

 

 

18,897

 

 

26,021

 

Stock Based Compensation

 

 

50,000

 

 

 

Change in Fair Value on Derivative Liabilities

 

 

507,674

 

 

107,953

 

Amortization of Debt Discount

 

 

694,168

 

 

462,175

 

Interest Expense related to Derivative Liability in Excess of Fair Value

 

 

 

 

84,940

 

Original Issue Discount on Notes to Interest Expense

 

 

69,750

 

 

 

Loan Penalties Capitalized to Loan Included in Interest Expense

 

 

3,394

 

 

298,478

 

(Gain) Loss on Sale of Property and Equipment

 

 

(464

)

 

(4,436

)

Gain on Settlement of Debt

 

 

(5,018,388

)

 

(67,623

)

Change in Operating Assets and Liabilities:

 

 

 

 

 

 

 

Decrease (Increase) in Inventory

 

 

72,268

 

 

(56,727

)

Decrease in Prepaid Expenses

 

 

21,606

 

 

53,891

 

(Increase) in Other Current Assets

 

 

(2,853

)

 

(403

)

Increase (Decrease) in Accounts Payable

 

 

31,236

 

 

(17,167

)

Increase in Accrued Expenses

 

 

293,289

 

 

811,287

 

CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES

 

 

(577,490

)

 

(856,121

)

 

 

 

 

 

 

 

 

CASH FLOWS PROVIDED BY INVESTING ACTIVITIES

 

 

 

 

 

 

 

Purchase of Property and Equipment

 

 

 

 

(3,948

)

Proceeds from Disposal of Property and Equipment

 

 

9,750

 

 

137,035

 

CASH FLOWS PROVIDED BY INVESTING ACTIVITIES

 

 

9,750

 

 

133,087

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

Proceeds from Short Term Debt

 

 

635,000

 

 

1,160,000

 

Payments on Short Term Debt

 

 

(370,824

)

 

(1,090,869

)

Proceeds from PPP Loan

 

 

209,447

 

 

 

Payments on Long Term Debt

 

 

(2,856

)

 

(40,470

)

Due to/from Officer

 

 

 

 

(24,250

)

Payments on Convertible Notes Payable

 

 

(14,329

)

 

 

Proceeds from Convertible Notes Payable

 

 

210,250

 

 

787,250

 

CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES

 

 

666,688

 

 

791,661

 

 

 

 

 

 

 

 

 

NET INCREASE IN CASH

 

 

98,948

 

 

68,627

 

 

 

 

 

 

 

 

 

CASH AT BEGINNING OF PERIOD

 

 

162,124

 

 

59,401

 

 

 

 

 

 

 

 

 

CASH AT END OF PERIOD

 

$

261,072

 

$

128,028

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flows Information:

 

 

 

 

 

 

 

Cash Paid for Interest

 

$

49,638

 

$

51,294

 

Cash Paid for Income Taxes

 

$

 

$

 

Convertible Notes Interest and Derivatives Converted to Common Stock

 

$

35,997

 

$

1,530,862

 

Derivative Debt Discount

 

$

 

$

990,358

 

Stock issued to Related Party in Payment of Accrued Expenses

 

$

30,077

 

$

 

Operating Lease Asset to Operating Lease Liability

 

$

39,494

 

$

 

Operating Lease Liability to Operating Lease Asset

 

$

 

$

89,942

 


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


- 7 -



THE 4LESS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)


NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES


Business:


Nature of Business – The 4LESS Group, Inc., (the “Company”), was incorporated under the laws of the State of Nevada on December 5, 2007. The Company, under the name MedCareers Group, Inc. (“MCGI”) formally operated a website for nurses, nursing schools and nurses’ organizations designed for better communication between nurses and the nursing profession.


On November 29, 2018, the Company entered into a transaction (the “Share Exchange”), pursuant to which the Company acquired 100% of the issued and outstanding equity securities of The 4LESS Corp. (“4LESS”), in exchange for the issuance of (i) nineteen thousand (19,000) shares of Series B Preferred Stock, (ii) six thousand seven hundred fifty (6,750) shares of Series C Preferred Stock, and (iii) 870 shares of Series D Preferred Stock. The Series C Preferred Shares have a right to convert into common stock of the Company by multiplying the number of issued and outstanding shares of common stock by 2.63 on the conversion date. The Share Exchange closed on November 29, 2018.  As a result of the Share Exchange, the former shareholders of 4LESS became the controlling shareholders of the Company. The Share Exchange was accounted for as a reverse takeover/recapitalization effected by a share exchange, wherein 4LESS is considered the acquirer for accounting and financial reporting purposes. The capital, share price, and earnings per share amount in these consolidated financial statements for the period prior to the reverse merger were restated to reflect the recapitalization in accordance with the shares issued as a result of the reverse merger except otherwise noted.


4LESS was formed as Vegas Suspension & Offroad, LLC on October 24, 2013 as a Nevada limited liability company and converted to a Nevada corporation with the same name on May 8, 2017. On April 2, 2018, the Company changed its name to The 4LESS Corp. The Corporation had S Corporation status. The Corporation operates as an e-commerce auto and truck parts sales company. As a result of the share exchange, the 4LESS Group, Inc. is now a holding company operating through 4LESS and offers products including exhaust systems, suspension systems, wheels, tires, stereo systems, truck bed covers, and shocks. On December 30, 2019 4LESS changed its name to Auto Parts 4Less, Inc.


Significant Accounting Policies:


The Company’s management selects accounting principles generally accepted in the United States of America and adopts methods for their application. The application of accounting principles requires the estimating, matching and timing of revenue and expense. The accounting policies used conform to generally accepted accounting principles which have been consistently applied in the preparation of these condensed financial statements.


Basis of Presentation:


The Company prepares its financial statements on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States.


The accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim unaudited consolidated financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements. Certain information and footnote disclosure normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to instructions, rules, and regulations prescribed by the SEC. The unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended January 31, 2020 and notes thereto contained in the Company’s Annual Report on Form 10-K filed on May 6, 2020.


Principles of Consolidation:


The condensed financial statements include the accounts of The 4LESS Group, Inc. as well as The Auto Parts 4Less, Inc., and JBJ Wholesale LLC. All significant inter-company transactions have been eliminated. All amounts are presented in U.S. Dollars unless otherwise stated.


- 8 -



Use of Estimates:


In order to prepare financial statements in conformity with accounting principles generally accepted in the United States, management must make estimates, judgments and assumptions that affect the amounts reported in the financial statements and determine whether contingent assets and liabilities, if any, are disclosed in the financial statements. The ultimate resolution of issues requiring these estimates and assumptions could differ significantly from resolution currently anticipated by management and on which the financial statements are based.  The most significant estimates included in these consolidated financial statements are those associated with the assumptions used to value derivative liabilities.


Reclassifications


Certain amounts in the Company’s condensed consolidated financial statements for prior periods have been reclassified to conform to the current period presentation. These reclassifications have not changed the results of operations of prior periods.


Cash and Cash Equivalents:


The Company considers all highly liquid instruments with a maturity of three months or less to be cash equivalents. At times, cash balances may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. The carrying amount of cash and cash equivalents approximates fair market value.


Inventory Valuation


Inventories are stated at the lower of cost or net realizable value. Inventories are valued on a first-in, first-out (FIFO) basis. Inventory is comprised of finished goods.


Concentrations


Cost of Goods Sold


For the nine months ended October 31, 2020 the Company purchased approximately 55% of its inventory and items available for sale from third parties from three vendors. As of October 31, 2020, the net amount due to those vendors included in accounts payable was $393,729. For the nine months ended October 31, 2019, the Company purchased from three vendors approximately 53% of its inventory and items available for sale from third parties. As of October 31, 2019, the net amount due to those vendors included in accounts payable was $128,461. The Company believes there are numerous other suppliers that could be substituted should a supplier become unavailable or non-competitive.


Leases


We adopted ASU No. 2016-02—Leases (Topic 842), as amended, as of February 1, 2019, using the full retrospective approach. The full retrospective approach provides a method for recording existing leases at adoption and in comparative periods. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification.


In addition, we elected the hindsight practical expedient to determine the lease term for existing leases. Our election of the hindsight practical expedient resulted in the shortening of lease terms for certain existing leases and the useful lives of corresponding leasehold improvements. In our application of hindsight, we evaluated the performance of the leased stores and the associated markets in relation to our overall real estate strategies, which resulted in the determination that most renewal options would not be reasonably certain in determining the expected lease term.


Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of $454,087 and $454,087 respectively, as of February 1, 2019. The standard did not materially impact our consolidated net earnings, retained earnings and had no impact on cash flows.


- 9 -



Income Taxes


Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized when items of income and expense are recognized in the financial statements in different periods than when recognized in the tax return. Deferred tax assets arise when expenses are recognized in the financial statements before the tax returns or when income items are recognized in the tax return prior to the financial statements. Deferred tax assets also arise when operating losses or tax credits are available to offset tax payments due in future years. Deferred tax liabilities arise when income items are recognized in the financial statements before the tax returns or when expenses are recognized in the tax return prior to the financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.


On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. ASC 740, Accounting for Income Taxes requires companies to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. The Company’s gross deferred tax assets were revalued based on the reduction in the federal statutory tax rate from 35% to 21%. A corresponding offset has been made to the valuation allowance, and any potential other taxes arising due to the Tax Act will result in reductions to the Company’s net operating loss carryforward and valuation allowance. The Company will continue to analyze the Tax Act to assess its full effects on the Company’s financial results, including disclosures, for the Company’s fiscal year ending January 31, 2020, but the Company does not expect the Tax Act to have a material impact on the Company’s consolidated financial statements.


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 October 31, 2020:


 

 

October 31, 2020

 

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

 

$

229,895

 

$

 

$

 

$

229,895

 

Totals

 

$

229,895

 

$

 

$

 

$

229,895

 


- 10 -



Related Party Transactions:


The Company has a verbal policy that includes procedures intended to ensure compliance with the related party provisions in common practice for public companies. For purposes of the policy, a “related party transaction” is a transaction in which the Company or any one of its subsidiaries participates and in which a related party has a direct or indirect material interest, other than ordinary course, arms-length transactions of less than 1% of the revenue of the counterparty. Any transaction exceeding the 1% threshold, and any transaction involving consulting, financial advisory, legal or accounting services that could impair a director’s independence, must be approved by the CEO. Any related party transaction in which an executive officer or a Director has a personal interest, or which could present a possible conflict under the Guide to Ethical Conduct, must be approved by Board of Directors, following appropriate disclosure of all material aspects of the transaction.


Derivative Liability


The derivative liabilities are valued as a level 3 input under the fair value hierarchy for valuing financial instruments. The derivatives arise from convertible debt where the debt and accrued interest is convertible into common stock at variable conversion prices and reclassification of equity instrument to liability due to insufficient shares for issuance. As the price of the common stock varies, it triggers a gain or loss based upon the discount to market assuming the debt was converted at the balance sheet date. When evaluating the effect of the issuance of new equity-linked or equity-settled instruments on previously issued instruments, the Company uses first-in, first-out method (“FIFO”) where authorized and unused shares would first be used to satisfy the earliest issued equity-linked instruments. As of October 31, 2020, warrants to purchase 0 common shares (583 shares before the reverse split of 2/25/2020 referred to in Note 6) 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.


The fair value of the derivative liability is determined using a lattice model, is re-measured on the Company’s reporting dates, and is affected by changes in inputs to that model including our stock price, historical stock price volatility, the expected term, and both high risk and the risk-free interest rate. The most sensitive inputs to the model are for expected time for the holder to convert or be repaid and the estimated historical volatility of the Company’s common stock.  However, because the historical volatility of the Company’s common stock is so high (see Note 7), the sensitivity required to change the liability by 1% as of October 31, 2020 is greater than 25% change in historical volatility as of that date.  The other inputs, such as risk free rate, high yield cash rate and stock price all have a sensitivity for a 1% change in the input variable results in a significantly less than 1% change in the calculated derivative liability.


Revenue Recognition


The Company recognizes revenue under ASC 606, “Revenue from Contracts with Customers. The core principle of the revenue standard is that a company should recognize revenue when control is transferred over the promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods and services transferred to the customer. The following five steps are applied to achieve that core principle:


Step 1: Identify the contract with the customer

Step 2: Identify the performance obligations in the contract

Step 3: Determine the transaction price

Step 4: Allocate the transaction price to the performance obligations in the contract

Step 5: Recognize revenue when the company satisfies a performance obligation


Because the Company’s sales agreements generally have an expected duration of one year or less, the Company has elected the practical expedient in ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations.


Disaggregation of Revenue: Channel Revenue


The following table shows revenue split between proprietary and third party website revenue for the nine months ended October 31, 2020 and 2019:


 

 

 

 

 

 

Change

 

 

 

2020

 

2019

 

$

 

%

 

Proprietary website revenue

 

$

3,704,215

 

$

2,572,137

 

$

1,132,078

 

44%

 

Third party website revenue

 

 

3,557,891

 

 

3,646,249

 

 

(88,358

)

(2%

)

Total revenue

 

$

7,262,106

 

$

6,218,386

 

$

1,043,720

 

17%

 


- 11 -



The Company’s performance obligations are satisfied at the point in time when products are received by the customer, which is when the customer has title and obtained the significant risks and rewards of ownership. Therefore, the Company’s contracts have a single performance obligation (shipment of product). The Company primarily receives fixed consideration for sales of product. Shipping and handling amounts paid by customers are primarily for online orders, and are included in revenue. Sales tax and other similar taxes are excluded from revenue.


Stock-Based Compensation:


The Company accounts for stock options at fair value. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model and provides for expense recognition over the service period, if any, of the stock option.


Earnings (Loss) Per Common Share:


Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS give effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used to determine the number of shares assumed to be purchased from the exercise of stock options and/or warrants. Diluted EPS excluded all dilutive potential shares if their effect is anti-dilutive.


Basic loss per common share is computed based on the weighted average number of shares outstanding during the period. Diluted loss per share is computed in a manner similar to the basic loss per share, except the weighted-average number of shares outstanding is increased to include all common shares, including those with the potential to be issued by virtue of convertible debt and other such convertible instruments. Diluted loss per share contemplates a complete conversion to common shares of all convertible instruments only if they are dilutive in nature with regards to earnings per share.


Recently Issued Accounting Standards:


In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) which simplifies goodwill impairment testing by requiring that such periodic testing be performed by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The policy is effective for fiscal years, including interim periods, beginning after December 15, 2019. We adopted on February 1, 2020 and the adoption had no impact.


Fair Value Measurement: In 2018, the FASB issued amended guidance to remove, modify and add disclosure requirements for fair value measurements. This amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted for any removed or modified disclosure requirements. Transition is on a prospective basis for the new and modified disclosures, and on a retrospective basis for disclosures that have been eliminated. The adoption of this guidance on February 1, 2020 did not have a material impact on our consolidated financial statements.


In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvement to Nonemployee Share-Based Payment Accounting, which is part of the FASB’s simplification initiative to maintain or improve the usefulness of the information provided to the users of financial statements while reducing cost and complexity in financial reporting. This update provides consistency in the accounting for share-based payments to nonemployees with that of employees. The updated guidance had no impact on the Company’s consolidated financial position, results of operations or cash flows.


In addition to the above, the Company has reviewed all other recently issued, but not yet effective, accounting pronouncements, and does not believe the future adoption of any such pronouncements will have a material impact on its financial condition or the results of its operations.


There were various other accounting standards and interpretations issued recently, none of which are expected to a have a material impact on our financial position, operations or cash flows.


- 12 -



NOTE 2 – GOING CONCERN AND FINANCIAL POSITION


The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has an accumulated deficit of $18,887,220 as of October 31, 2020 and has a working capital deficit at October 31, 2020 of $3,160,803. As of October 31, 2020, the Company only had cash and cash equivalents of $261,072 and approximately $167,000 of short-term debt in default. The short-term debt agreements provide legal remedies for satisfaction of defaults, none of the lenders to this point have pursued their legal remedies. While the Company has continued to grow its revenues, at this time, the three months ended July 31, 2020 was only the first quarter the Company was able to achieve profitability from operations prior to interest and other expenses.  While the Company believes it will continue to build on the results achieved in this quarter, our current liquidity position raises substantial doubt about the Company’s ability to continue as a going concern.


Management’s plan is to raise additional funds in the form of debt or equity in order to continue to fund losses until such time as revenues can sustain the Company. However, there is no assurance that management will be successful in being able to continue to obtain additional funding. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.


NOTE 3 – PROPERTY


The Company capitalizes all property purchases over $1,000 and depreciates the assets on a straight-line basis over their useful lives of 3 years for computers and 7 years for all other assets. Property consists of the following at October 31, 2020 and January 31, 2020:


 

 

October 31, 2020

 

January 31, 2020

 

Office furniture, fixtures and equipment

 

$

85,413

 

$

95,163

 

Shop equipment

 

 

43,004

 

 

43,004

 

Vehicles

 

 

40,433

 

 

40,433

 

Sub-total

 

 

168,850

 

 

178,600

 

Less: Accumulated depreciation

 

 

(82,524

)

 

(64,091

)

Total Property

 

$

86,326

 

$

114,509

 


Additions to fixed assets were nil for both the three months and nine months ended October 31, 2020 and $3,948 for both the three and nine months ended October 31, 2019.


Office equipment having a cost of $9,750 and a net book value of $9,286 was disposed of during the nine months ended October 31, 2020. Proceeds received of $9,750 and a gain on sale of property and equipment of $464 were recorded.


Vehicles having a cost of $144,662 and a net book value of $132,599 was disposed of during the nine months ended October 31, 2019. Proceeds received of $137,035 and a gain on sale of property and equipment of $4,436 was recorded.


Depreciation expense was $6,299 and $7,033 for the three months ended October 31, 2020 and October 31, 2019, respectively.


Depreciation expense was $18,897 and $26,021 for the nine months ended October 31, 2020 and October 31, 2019, respectively.


- 13 -



NOTE 4 – LEASES


We lease certain warehouses and office space. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. For lease agreements entered into or reassessed after the adoption of Topic 842, we did not combine lease and non-lease components.


Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 17 years or more. The exercise of lease renewal options is at our sole discretion. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.


Below is a summary of our lease assets and liabilities at October 31, 2020 and January 31, 2020.


Leases

 

Classification

 

October 31, 2020

 

January 31, 2020

 

Assets

 

 

 

 

 

 

 

 

 

Operating

 

Operating Lease Assets

 

$

368,605

 

$

483,193

 

Liabilities

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

Operating

 

Current Operating Lease Liability

 

$

91,638

 

$

101,984

 

Noncurrent

 

 

 

 

 

 

 

 

 

Operating

 

Noncurrent Operating Lease Liabilities

 

 

265,378

 

 

365,085

 

Total lease liabilities

 

 

 

$

357,016

 

$

467,069

 


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.


Effective February 29 ,2020 the Company and landlord terminated the September 2019 lease with an annual rent of $15,480, a 3 year term an 1 year renewal. There were no costs associated with the termination. The Company eliminated the operating lease asset and operating lease liability at termination which was $45,032. (see Note 11)


CAM charges were not included in operating lease expense and were expensed in general and administrative expenses as incurred.


Operating lease cost was $23,279 and $30,360 for the three months ended October 31, 2020 and October 31, 2019, respectively.


Operating lease cost was $91,437 and $83,762 for the nine months ended October 31, 2020 and October 31, 2019, respectively.


NOTE 5 – PPP LOAN


On May 2, 2020 the Company entered into a Paycheck Protection Promissory (PPP) Note Agreement whereby the lender would advance proceeds of $209,447 at a fixed rate of 1% per annum and a May 2, 2022 maturity. The loan is repayable in monthly instalments of $8,818 commencing September 2, 2022 and continuing on the second day of every month thereafter until maturity when any remaining principal and interest are due and payable. At October 31, 2020 the loan is classified as $17,293 current and $192,154 long-term. The Company used the proceeds of this loans for working capital and the Company intends to use these proceeds in a manner consistent with obtaining loan forgiveness.


- 14 -



NOTE 6 – SHORT-TERM AND LONG-TERM DEBT


The components of the Company’s debt as of October 31, 2020 and January 31, 2020 were as follows:


 

 

October 31, 2020

 

January 31, 2020

 

Working Capital Note Payable - $ 200,000 dated October 25, 2019, repayment of 10% of all eBay sales proceeds until paid in full, minimum payment of $20,417, fees of $4,173 effective interest rate of 7%(4), maturing January 25, 2020(4) , repaid in full February 5, 2020

 

$

 

$

6,978

 

Loan dated October 8, 2019, and revised February 29, 2020 and November 10, 2010 repayable June 30, 2022 with an additional interest payment of $20,000

 

 

102,168

#

 

63,635

 

Loan dated October 14, 2019, repayable in average monthly installments of $11,200, maturing April 14, 2020, interest and fees $7,200, effective interest 35.50% per annum(4)(5) repaid in full at maturity

 

 

 

 

30,000

 

Working Capital Note Payable - $ 200,000 dated July 19, 2019, repayment of 10% of all eBay sales proceeds until paid in full, minimum payment of $20,334, fees of $3,343 effective interest rate of 7%(4), repaid in full on October 22, 2019

 

 

 

 

 

Working Capital Note Payable - $200,000, dated March 5, 2020, repayment of 10% of all eBay sales proceeds until paid in full, minimum payments of $20,695 per quarter until paid, interest rate of 7%(3)

 

 

 

 

 

SFS Funding Loan, original loan of $389,980 January 8, 2020, 24% interest, weekly payments of $6,006, maturing April 7, 2021(5)

 

 

239,302

*

 

371,963

 

Forklift Note Payable, original note of $20,433 Sept 26, 2018, 6.23% interest, 60 monthly payments of $394.54 ending August 2023(1)

 

 

13,250

#

 

16,106

 

Demand loan - $122,000 dated August 19, 2019 25% interest, 5% fee on outstanding balance(4)(6)

 

 

 

 

122,000

 

Demand loan - $5,000 dated February 1, 2020, 15% interest, 5% fee on outstanding balance

 

 

5,000

*

 

 

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

 

 

2,500

*

 

2,500

 

Demand loan - $65,500 dated February 27, 2019, 25% interest, 5% fee on outstanding balance, Secured by the general assets of the Company

 

 

12,415

*

 

12,415

 

Promissory note -$60,000 dated September 18, 2020 maturing September 18, 2021, including $5,000 original issue discount, 15% compounded interest payable monthly

 

 

60,000

*

 

 

Promissory note -$425,000 dated August 28, 2020, including $50,000 original issue discount, 15% compounded interest payable monthly. The notes matures when the Company receives proceeds through a financing event of $825,000 plus accrued interest on the note.(7)

 

 

425,000

*

 

 

Promissory note -$1,200,000 dated August 28, 2020, maturing August 28, 2022, 12% interest payable monthly with the first six months interest deferred until the 6th month and added to principal .(8)

 

 

1,225,249

#

 

 

Promissory note -$50,000 dated August 31, 2020, maturing February 28, 2021, 10% interest payable at maturity

 

 

50,000

*

 

 

Total

 

$

2,134,884

 

$

625,597

 



 

 

October 31, 2020

 

January 31, 2020

 

Short-Term Debt

 

$

794,217

 

$

609,491

 

Current Portion of Long-Term Debt

 

 

433,184

 

 

4,166

 

Long-Term Debt

 

 

907,483

 

 

11,940

 

 

 

$

2,134,884

 

$

625,597

 


- 15 -



__________

*

Short-term loans

#

Long-term loans of $13,250 including current portion of $4,347

 

$102,168 including current portion of $0

 

$1,200,000 including current portion of $445,200

(1)

Secured by equipment having a net book value of $18,243

(2)

On February 29, 2020 the Company amended the agreement extending the maturity to June 1, 2022 from April 8, 2021 and changing monthly payments to $5,705 from $4,679 and interest rate from 15% to 13%.In addition prepaid rent and interest of $27,500 and $8,005 were added to the loan’s principal amount and the 1st monthly payment commence July 1, 2020.

(3)

The Company has pledged a security interest on all accounts receivable and banks accounts of the Company.

(4)

The Company has pledged a security interest on all assets of the Company.

(5)

The amounts due under the note are personally guaranteed by an officer or a director of the Company.

(6)

On February 26, 2020 the lender exchanged the $122,000 note along with $22,076 for 26 Class C preferred shares as part of a larger debt exchange transaction as described in Note 7.

(7)

Financing event would be a sale or issuance of assets, debt, shares or any means of raising capital. As the Company expects to enter into such a transaction within the next year this loan is treated as current.

(8)

Secured by all assets of the Company. Includes $25,249 accrued interest. Loan payable in 2 instalments, $428,837 payable August 28, 2021 and $826,800 payable August 28, 2022


The Company had accrued interest payable of $13,547 and $0 interest on the notes at October 31, 2020 and January 31, 2020, respectively.


- 16 -



NOTE 7 – SHORT-TERM CONVERTIBLE DEBT


The components of the Company’s debt as of October 31, 2020 and January 31, 2020 were as follows:


 

Interest

Default Interest

Conversion

Outstanding Principal at

 

Maturity Date

Rate

Rate

Price

October 31, 2020

 

January 31, 2020

 

Nov 4, 2013*

12%

12%

$1,800,000

$

100,000

 

$

100,000

 

Jan 31, 2014*

12%

18%

$2,400,000

 

16,000

 

 

16,000

 

Apr 24, 2020*(ii) Y

12%

24%

(3)

 

 

 

69,730

 

July 31, 2013*

12%

12%

$1,440,000

 

5,000

 

 

5,000

 

Jan 31, 2014*

12%

12%

$2,400,000

 

30,000

 

 

30,000

 

Dec 24, 2015*(v)

8%

24%

(1)

 

5,000

 

 

5,000

 

Feb 3, 2017*(ii)(iv) Y

8%

24%

(4)

 

 

 

2,500

 

Mar 3, 2017*(ii)(iv)

8%

24%

(5)

 

 

 

 

Mar 3, 2017*(ii)(iv) Y

8%

24%

(5)

 

 

 

33,000

 

Mar 24, 2017*(ii)(iv) Y

8%

24%

(5)

 

 

 

27,500

 

Apr 24, 2020*(ii)(iv)(vi) Y

12%

24%

(3)

 

 

 

517,787

 

July 8, 2015*(v)

8%

24%

(1)

 

5,500

 

 

5,500

 

Apr 24, 2020(ii)(iv)(vi)X

8%

24%

(3)

 

 

 

4,500

 

Apr 24, 2020 X

8%

24%

(3)

 

 

 

23,297

 

Apr 24, 2020 X

8%

24%

(3)

 

 

 

7,703

 

Apr 24, 2020 X

8%

24%

(3)

 

 

 

26,500

 

July 19, 2016*(v)

8%

24%

(1)

 

5,000

 

 

5,000

 

Mar 23, 2019*(ii)(iv)(vi)X

15%

24%

(3)

 

 

 

4,444

 

Feb 20, 2019*(ix)X

10%

10%

(6)

 

 

 

343,047

 

Jun 6, 2019*(viii)X

12%

18%

(7)

 

 

 

43,577

 

Oct 24, 2019*(ii)(iv) Y

8%

24%

(5)

 

 

 

45,595

 

Nov 14, 2019*(ii)(iv) Y

8%

24%

(5)

 

 

 

86,625

 

Dec 14, 2019*(ii)(iv) Y

8%

24%

(5)

 

 

 

143,000

 

Dec 28, 2019*(i)(iv)(vi) Y

12%

18%

(6)

 

 

 

133,333

 

Jan 9, 2020*(ii)(iv) Y

8%

24%

(2)

 

 

 

68,750

 

March 1, 2020*(x)Z

10%

15%

(8)

 

 

 

40,939

 

March 14, 2020(iv)(vi)X

15%

24%

(9)

 

 

 

44,967

 

April 3, 2020*(iv) Y

8%

24%

(2)

 

 

 

172,148

 

April 12, 2020*(xi) Y

10%

24%

(3)

 

 

 

185,130

 

May 13, 2020(iv)(vi)X

15%

24%

(9)

 

 

 

55,000

 

May 14, 2020*(iv)(vi) Y

8%

24%

(2)

 

 

 

52,500

 

May 24, 2020(iv)(vi)X

15%

24%

(9)

 

 

 

40,000

 

June 11, 2020(iv)(vi)X

15%

24%

(9)

 

 

 

85,000

 

June 26, 2020*(iv)(vi) Y

15%

24%

(9)

 

 

 

76,000

 

July 11, 2020(iv)(vii)X

15%

24%

(9)

 

 

 

60,000

 

Aug 29, 2020(iv)(vii)X

15%

24%

(9)

 

 

 

45,000

 

Sep 16, 2020(iv)(vii)X

15%

24%

(9)

 

 

 

34,000

 

Sep 27, 2020(iv)(vii)X

15%

24%

(9)

 

 

 

34,000

 

Oct 24, 2020(iv)(vii)X

15%

24%

(9)

 

 

 

122,000

 

Nov 7, 2020(iv)(vii)X

15%

24%

(10)

 

 

 

42,000

 

Nov 22, 2020(ii)(iv)(vi) Y

8%

24%

(2)

 

 

 

55,000

 

Dec 10, 2020(iv)(vii)X

15%

24%

(9)

 

 

 

55,000

 

Dec 23, 2020(ii)(iv)(vi) Y

8%

24%

(2)

 

 

 

30,000

 

Oct. 12, 2022

12%

16%

(11)

 

250,000

 

 

 

Sub-total

 

 

 

 

416,500

 

 

2,976,072

 

Debt Discount

 

 

 

 

(152,621

)

 

(689,176

)

 

 

 

 

$

263,879

 

$

2,286,896

 


- 17 -



__________

(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 fifteen trading days prior to conversion day, but not higher than $0.001.

(5)

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

(6)

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

(7)

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

(8)

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

(9)

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

(10)

45% of the lowest bid price for the fifteen trading days prior to conversion day

(11)

closing price on the day preceding the conversion date


* In default.


X On February 26, 2020 the Company exchanged convertible and short term notes and accrued interest for 250 Class C shares (transaction described further below).


Y On August 28, 2020 the Company exchanged convertible notes and accrued interest for a $ 1,200,000 promissory note with a 2 year maturity bearing interest at 12%, 950,000 warrants with a 3 year maturity and an exercise price of $0.40 and 150 Class C preferred shares (transaction described further below).


Z On August 25,2020 the Company settled a convertible note with principal of $ 40,938 for a $14,329 cash payment.  On September 14, 2020 the Company settled $20,111 in accrued interest and default interest related to this note for a cash payment of $52,446 (transaction described further below).


(i) If the Company fails to maintain its status as “DTC Eligible” for any reason, or, if the effective Conversion Price as calculated in Section 4(a) is less than $0.0001 at any time (regardless of whether or not a Conversion Notice has been submitted to the Company), the Principal Amount of the Note shall increase by ten thousand dollars ($10,000) (under Holder’s and Company’s expectation that any Principal Amount increase will tack back to the Issuance Date). In addition, the Conversion Price shall be permanently redefined to equal the lesser of (a) $0.00001 or (b) 50% of the lowest traded price during the twenty five (25) consecutive Trading Days immediately preceding the applicable Conversion Date on which the Holder elects to convert all or part of this Note, subject to adjustment as provided in this Note. If at any time while this Note is outstanding, an Event of Default (as defined herein) occurs, then an additional discount of 15% shall be factored into the Variable Conversion Price until this Note is no longer outstanding (resulting in a discount rate of 65% assuming no other adjustments are triggered hereunder). These above contingencies have not occurred.


(ii) In the event the Company experiences a DTC ” Chill” on its shares, the conversion price shall be decreased to 40% instead of 50% while that “Chill” is in effect. If the Company fails to maintain the share reserve at the 4x discount of the note 60 days after the issuance of the note, the conversion discount shall be increased by 10%.


(iii) The share purchase agreements ancillary to the convertible note agreements do not allow the lender to engage in short sales.


(iv) If the Company becomes delinquent or continues its delinquency in its periodic filings with the SEC after the 6-months anniversary of the note, then the holder is entitled to use the lowest closing bid price during the delinquency period as a base price for the conversion.


(v) In the event the Company experiences a DTC ” Chill” on its shares, the conversion price shall be decreased to 42% instead of 52% while that “Chill” is in effect.


(vi) If the Company fails to maintain the share reserve at the 4x discount of the note 60 days after the issuance of the note, the conversion discount shall be increased by 10%.


(vii) If the Company fails to maintain the share reserve at the 3x discount of the note 60 days after the issuance of the note, the conversion discount shall be increased by 10%.


(viii) If at any time while this Note is outstanding, an event of default occurs, then an additional discount of 15% shall be factored into the Variable Conversion Price until this Note is no longer outstanding (resulting in a discount rate of 65% assuming no other adjustments are triggered hereunder). If at any time while this Note is outstanding, the Borrower’s Common Stock are not deliverable via DWAC, an additional 10% discount shall be factored into the Variable Conversion Price until this Note is no longer outstanding.


- 18 -



(ix) If the Company fails to maintain its status as “DTC Eligible” for any reason, or, if the effective Conversion Price is less than $0.01 at any time, the Principal Amount of the Note shall increase by ten thousand dollars ($10,000).  In addition, the Conversion price shall be permanently redefined to equal the lesser of (a) $0.001 or (b) 50% of the lowest traded price during the twenty five (25) consecutive Trading Days immediately preceding the applicable Conversion Date on which the Holder elects to convert all or part of this Note, subject to adjustment as provided in this Note.


(x) In the event that shares of the Borrower’s Common Stock are not deliverable via DWAC following the conversion of any amount hereunder, an additional ten percent (10%) discount shall be factored into the Variable Conversion Price until this Note is no longer outstanding (resulting in a discount rate of 55% assuming no other adjustments are triggered hereunder). Additionally, if the Borrower fails to comply with the reporting requirements of the Exchange Act (including but not limited to becoming late or delinquent in its filings, even if the Borrower subsequently cures such delinquency) at any time while after the Issue Date, and/or the Borrower shall cease to be subject to the reporting requirements of the exchange Act, an additional fifteen percent (15%) discount shall be factored into the Variable Conversion Price until this Note is no longer outstanding (resulting in a discount rate of 60% assuming no other adjustments are triggered hereunder).


(xi) If the Borrower’s Common stock is chilled for deposit at DTC, becomes chilled at any point while this Note remains outstanding or deposit or other additional fees are payable due to a Yield Sign, Stop Sign or other trading restrictions, or if the closing price at any time falls below $0.01 (as appropriately and equitably adjusted for stock splits, stock dividends, stock contributions and similar events), then an additional 15% discount will be attributed to the Conversion Price for any and all Conversions submitted thereafter.


The Company had accrued interest payable of $203,377 and $703,270 on the notes at October 31, 2020 and January 31, 2020, respectively.


The Company analyzed the conversion option for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that some instruments should be classified as liabilities due to there being a variable number of shares to be delivered upon settlement of the above conversion options. The instruments are measured at fair value at the end of each reporting period or termination of the instrument with the change in fair value recorded to earnings. The fair value of the embedded conversion option resulted in a discount to the note on the debt modification date. For the three months ended October 31, 2020 and 2019, the Company recorded amortization of debt discount expense of $67,357 and $212,004, respectively. For the nine months ended October 31, 2020 and 2019, the Company recorded amortization of debt discount expense of $694,168 and $462,175, respectively See more information in Note 8.


During the nine months ended October 31, 2020 and October 31, 2019 the Company added $3,394 and $294,978 in penalty interest to the loan, respectively.


On February 26, 2020 a lender exchanged $1,070,035 in convertible notes and $175,421 in accrued interest (as denoted by X in the above schedule) as well as $122,000 in short-term debt and $22,076 in accrued interest (as described in Note 6), and the associated derivative liability of $792,218 all totaling $2,181,750 in exchange for 250 Class C shares having a fair-value of $9,105. A gain of $2,172,646 was recorded.


On August 28, 2020 a lender exchanged $1,692,690 in convertible notes and $571,454 in accrued interest (as denoted by Y in the above schedule) as well as the associated derivative liability of $2,177,794 all totaling $4,441,938 in exchange for a promissory note of $1,200,000 bearing interest at 12% and maturing August 28, 2022 (see Note 6), 950,000 Warrants with a 3 year maturity and an exercise price of $0.40 having a fair value of $351,500 (see Note 9) and 150 Class C shares having a fair-value of $20,290. A gain of $2,820,147 was recorded.


On August 25, 2020 a lender exchanged $40,939 in a convertible note (as denoted by Z in the above schedule), and the associated derivative liability of $31,320 all totaling $72,259 in exchange for a cash payment of $14,329. On September 14, 2020 the same lender exchanged $20,111 in accrued interest and default interest (from that note) for a cash payment of $52,446. A total gain of $25,595 on the two transactions was recorded.


On October 12, 2020 the Company entered into a new convertible note for $250,000 with a one year maturity, interest rate of 12%, the Company received $210,250 in cash proceeds, recorded an original issue discount of $25,000, a derivative discount of $132,613, and transaction fees of $14,750. The first year’s interest of $28,000 is guaranteed and has been accrued. As part of the loan the Company paid a commitment fee of $ 50,000 through the issuance of 19,685 shares.


During the nine months ended October 31, 2020, the Company converted a total of $9,303 of the convertible notes and $6,509 accrued interest into 578,495 common shares.


- 19 -



As of October 31, 2020, the Company had $166,500 of aggregate debt in default. The agreements provide legal remedies for satisfaction of defaults, none of the lenders to this point have pursued their legal remedies. The Company continues to accrue interest at the listed rates, and plans to seek their conversion or payoff within the next twelve months.


NOTE 8 – DERIVATIVE LIABILITIES


As of October 31, 2020 and January 31, 2020, the Company had derivative liabilities of $229,895 and $2,611,125, respectively. During the three months ended October 31, 2020 and 2019, the Company recorded a loss of $939,873 and $196,303 from the change in the fair value of derivative liabilities, respectively. During the nine months ended October 31, 2020 and 2019, the Company recorded a loss of $507,674 and $107,953 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 following table presents changes in Level 3 liabilities measured at fair value for the nine months ended October 31, 2020. Both observable and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long- dated volatilities) inputs.


 

 

Level 3

 

 

 

Derivatives

 

Balance, January 31, 2020

 

$

2,611,125

 

Change due to Settlement of Debt

 

 

(3,001,332

)

Changes due to Conversion of Notes Payable

 

 

(20,185

)

Changes due to issuance of New Convertible Notes

 

 

132,613

 

Mark to Market Change in Derivatives

 

 

507,674

 

Balance, October 31, 2020

 

$

229,895

 


The derivatives arise from convertible debt where the debt is convertible into common stock at variable conversion prices which are linked to the trading and/or bid prices of the Company’s common stock as traded on the OTC market.


As the price of the common stock varies it triggers a gain or loss based upon the discount to market assuming the debt was converted at the balance sheet date.


The fair value of the derivative liability is determined using the lattice model, is re-measured on the Company’s reporting dates, and is affected by changes in inputs to that model including our stock price, expected stock price volatility, the expected term, and the risk-free interest rate. A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s warrant liabilities and embedded conversion feature that are categorized within Level 3 of the fair value hierarchy as of October 31, 2020 is as follows:


 

 

Embedded

 

 

 

Derivative Liability

 

 

 

As of
October 31, 2020

 

Strike price

 

$

0.37 - 4.30

 

Contractual term (years)

 

 

0.25 - 0.95 years

 

Volatility (annual)

 

 

352.1% - 557.3%

 

High yield cash rate

 

 

26.55% - 37.72%

 

Underlying fair market value

 

 

$0.11

 

Risk-free rate

 

 

0.09% - 0.13%

 

Dividend yield (per share)

 

 

0%

 


- 20 -



NOTE 9 – 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 October 31, 2020, and January 31, 2020 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 October 31, 2020 and January 31, 2020, 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 October 31, 2020 and January 31, 2020, there were 7,250 and 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 7,250 Series C preferred shares authorized and issued with a par-value of $0.001 per share. On February 26, 2020 the Company issued 250 Class C preferred shares and on August 28, 2020 the Company issued another 150 Class C preferred shares in debt exchange transactions described in Note 7. On September 1, 2020 the Company issued 100 Class C preferred share at a fair value of $11,177 to repay Accrued Expenses- Related Party.


At both October 31, 2020 and January 31, 2020, there were 870 Series D preferred shares authorized and outstanding, respectively which with a par value $.001. All shares of Series D Preferred Stock will rank subordinate and junior to all shares of Series A, B and C of Preferred Stock of the Corporation and pari passu with any of the Corporation’s preferred stock hereafter created as to distributions of assets upon dissolution or winding up of the Corporation, whether voluntary or involuntary. These shares are non-voting, do not receive dividends and are redeemable according to the terms set out as follows:


OPTIONAL REDEMPTION.


(1)  At any time, either the Corporation or the holder may redeem for cash out of funds legally available therefor, any or all of the outstanding Series D Preferred Stock (“Optional Redemption”) at $1,000 per share.


(2)  Should the Corporation exercise the right of Optional Redemption it shall provide each holder of Preferred Stock with at least 30 days’ notice of any proposed optional redemption pursuant this Section VI (an “Optional Redemption Notice”). Any optional redemption pursuant to this Section VI shall be made 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.


- 21 -



(3)  Should the holder exercise the right of Optional Redemption it shall provide the Corporation with at least 30 days’ notice of any proposed optional redemption pursuant this Section VI (an “Optional Redemption Notice”). The Optional Redemption Notice shall state the value of the Preferred Stock to be redeemed and the date on which the Optional Redemption is to occur (which shall not be less than thirty (30) or more than sixty (60) Business Days after the date of delivery of the Optional Redemption Notice) and shall be delivered by the holder to the Corporation at the address of the Corporation for the Preferred Stock. Within seven (7) business days after the date of delivery of the Optional Redemption Notice, each holder shall provide the Corporation with instructions as to the account to which payments associated with such Optional Redemption should be deposited. On the date of the Optional Redemption, provided for in the relevant Optional Redemption Notice, (A) the Corporation will deliver the redemption amount via wire transfer to the account designated by the holder, and (B) the holder will deliver the certificates relating to that number of shares of Preferred Stock being redeemed, duly executed for transfer or accompanied by executed stock powers, in either case, transferring that number of shares to be redeemed. Upon the occurrence of the wire transfer (or, in the absence of a holder designating an account to which funds should be transferred, delivery of a certified or bank cashier’s check in the amount due such holder in connection with such Optional Redemption to the address of such holder appearing on the register of the Corporation for the Preferred Stock), that number of shares of Preferred Stock redeemed pursuant to such Optional Redemption as represented by the previously issued certificates will be deemed no longer outstanding. Notwithstanding anything to the contrary in this Designation, each holder may continue to convert Preferred Stock in accordance with the terms hereof until the date such Preferred Stock is actually redeemed pursuant to an Optional Redemption.


The Series D Preferred Stock is not entitled to any pre-emptive or subscription rights in respect of any securities of the Corporation.


Neither the Company nor any Series D preferred stockholders has given notice to exercise the redemption as of October 31, 2020 on the date of the financial statements.


Because the holders of the Series D preferred stock have the right to demand cash redemption, the cumulative amount of the redemption feature is included in Temporary Equity as of October 31, 2020 and January 31, 2020.


Common Stock


The Company is authorized to issue 15,000,000 common shares at a par value of $0.000001 per share (see Note 12). These shares have full voting rights. On June 4, 2020 the Company amended its articles decreasing authorized common shares from 20,000,000,000 to 1,000,000,000 and again on September 8, 2020 the Company further decreased authorized common shares to 15,000,000. On March 29, 2019 the Company undertook a 6000:1 reverse stock. On February 25, 2020, the Company undertook a 4000:1 reverse stock split. The share capital has been retrospectively adjusted accordingly to reflect these reverse stock splits.  At October 31, 2020 and January 31, 2020 there were 1,181,644 and 538,464 shares outstanding and issuable , respectively.  No dividends were paid in the nine months ended October 31, 2020 or 2019. The Company’s articles of incorporation include a provision that the Company is not allowed to issue fractional shares.  As a result, as part of the reverse split described above, the Company issued an additional 1,699 shares in March 2020 and these shares were included in the shares outstanding as of January 31, 2020 as issuable.


The Company issued the following shares of common stock in the nine months ended October 31, 2020:


Conversion of $9,303 Notes Payable and $6,509 Interest to 578,495 shares of Common Stock.


Issuance of 19,685 shares with a fair value of $50,000 as commitment fee for convertible note in Note 7.


Issuance of $45,000 shares with a value of $18,900 to the CEO as repayment of Accrued Expenses-Related Party.


Options and Warrants:


The Company recorded option and warrant expense of $0 and $0 for the three months ended October 31, 2020 and 2019, respectively.


For the three months ended October 31, 2020, the Company issued a warrant to acquire 950,000 shares of stock as part of a debt settlement transaction describe in Note 7. The Warrant gives the holder the right to cash settle the warrants if a fundamental transaction as defined in the warrants occurs. However, a member of management and shareholder of the Company who controls approximately 60% of all voting shares would decide if a fundamental transaction would occur. The Company currently is not considering any fundamental transactions. Based on the above the Company used a Black Scholes model to record the value of the warrant. The warrants having a fair value of $351,500 with a corresponding increase in additional paid-in capital valued using the Black-Scholes option pricing model according to the following assumptions:


- 22 -



Expected volatility

506.8%

Exercise price

$0.40

Stock price

$0.37

Expected life

3 years

Risk-free interest rate

0.19%

Dividend yield

0%


The Company had the following options and warrants outstanding at October 31, 2020:


Issued To

# Warrants

Dated

Expire

Strike Price

Expired

Exercised

Lender

1.4

01/08/2018

01/08/2021

$1,800 per share

N

N

Lender

950,000

08/28/2020

08/28/2023

$0.40 per share

N

N


 

 

Options

 

Weighted Average
Exercise Price

 

Warrants

 

Weighted Average
Exercise Price

 

Outstanding at January 31, 2020

 

 

$

 

1.4

 

$

1,800

 

Granted

 

 

 

 

950,000

 

 

0.40

 

Exercised

 

 

 

 

 

 

 

Forfeited and canceled

 

 

 

 

 

 

 

Outstanding at October 31, 2020

 

 

$

 

950,001

 

$

0.40

 


NOTE 10 – RELATED PARTY TRANSACTIONS


As of October 31, 2020 and January 31, 2020, the Company had $125,673 and $155,750, respectively of related party accrued expenses related to accrued compensation for employees and consultants. During the quarter ended October 31, 2020 the Company issued 45,000 shares of common stock for a fair value of $18,900 as payment towards these accrued expenses. On September 1, 2020 the Company issued 100 Class C preferred share at a fair value of $11,177 to repay Accrued Expenses- Related Party.


In February 2020, a shareholder and landlord of 4Less, agreed to renegotiate a loan (as described in Note 5) by providing $25,700 in rent concessions over a 4 month period which increased the loan and prepaid rent by that amount. As of both October 31, 2020, and January 31, 2020 the balance of prepaid rent totaled $0.


NOTE 11 – 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 9 – 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.


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. On October 23, 2020 the Company and landlord terminated this lease effective February 29, 2020. There were no costs associated with the termination. The Company eliminated the operating lease asset and operating lease liability at termination which was $45,032.


In October 2019 the Company entered into an operating lease for a vehicle with an annual cost of $9,067 and a three year term. The company paid initial fees of $17,744 and will pay fees on lease termination of $395. On a straight-line basis these costs amount to $1,259 per month.


- 23 -



Maturity of Lease Liabilities

Operating
Leases

 

October 31 2021

$

121,917

 

October 31, 2022

 

120,657

 

October 31, 2023

 

81,203

 

October 31, 2024

 

31,203

 

October 31, 2025

 

30,003

 

After October 31, 2025

 

40,005

 

Total lease payments

 

424,988

 

Less: Interest

 

(67,972

)

Present value of lease liabilities

$

357,016

 


The Company had total operating lease and rent expense of $23,279 and $30,360 for the three months ended October 31, 2020 and 2019 respectively. The Company had total operating lease and rent expense of $91,437 and $83,762 for the nine months ended October 31, 2020 and 2019 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 12 – EARNINGS (LOSS) PER SHARE


The net income (loss) per common share amounts were determined as follows:


 

 

For the Three Months Ended

 

 

 

October 31,

 

 

 

2020

 

2019

 

Numerator:

 

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$

1,100,073

 

$

(994,960

)

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

Weighted average shares – basic

 

 

1,067,074

 

 

20,683

 

 

 

 

 

 

 

 

 

Net income (loss) per share – basic

 

$

1.03

 

$

(48.11

)

 

 

 

 

 

 

 

 

Effect of common stock equivalents

 

 

 

 

 

 

 

Add: interest expense on convertible debt

 

 

44,110

 

 

88,911

 

Add: amortization of debt discount

 

 

67,357

 

 

212,004

 

Less: gain on settlement of debt on convertible notes

 

 

(2,845,742

)

 

 

Add (Less): loss (gain) on change of derivative liabilities

 

 

939,873

 

 

196,303

 

Net income (loss) adjusted for common stock equivalents

 

 

(694,329

)

 

(497,742

)

 

 

 

 

 

 

 

 

Dilutive effect of common stock equivalents:

 

 

 

 

 

 

 

Convertible notes and accrued interest

 

 

144,158

 

 

 

Convertible Class C Preferred shares

 

 

3,107,724

 

 

 

Warrants (1)

 

 

950,001

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

Weighted average shares – diluted

 

 

5,268,957

 

 

20,683

 

 

 

 

 

 

 

 

 

Net income (loss) per share – diluted

 

$

(0.13

)

$

(48.11

)


- 24 -



 

 

For the Nine Months Ended

 

 

 

October 31,

 

 

 

2020

 

2019

 

Numerator:

 

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$

2,681,933

 

$

(2,554,510

)

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

Weighted average shares – basic

 

 

797,126

 

 

7,613

 

 

 

 

 

 

 

 

 

Net income (loss) per share – basic

 

$

3.36

 

$

(335.55

)

 

 

 

 

 

 

 

 

Effect of common stock equivalents

 

 

 

 

 

 

 

Add: interest expense on convertible debt

 

 

253,691

 

 

340,367

 

Add: amortization of debt discount

 

 

694,168

 

 

462,175

 

Less: gain on settlement of debt on convertible notes

 

 

(4,793,113

)

 

(67,622

)

Add (Less): loss (gain) on change of derivative liabilities

 

 

507,674

 

 

107,953

 

Net income (loss) adjusted for common stock equivalents

 

 

(655,647

)

 

(1,711,368

)

 

 

 

 

 

 

 

 

Dilutive effect of common stock equivalents:

 

 

 

 

 

 

 

Convertible notes and accrued interest

 

 

144,158

 

 

 

Convertible Class C Preferred shares

 

 

3,107,724

 

 

 

Warrants (1)

 

 

950,001

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

Weighted average shares – diluted

 

 

4,999,009

 

 

7,613

 

 

 

 

 

 

 

 

 

Net income (loss) per share – diluted

 

$

(0.13

)

$

(335.55

)


The anti-dilutive shares of common stock equivalents for the nine months ended October 31, 2020 and October 31, 2019 were as follows:


 

 

October 31,

 

 

 

2020

 

2019

 

Convertible notes and accrued interest

 

 

 

 

756,759

 

Convertible Class C Preferred shares

 

 

 

 

174,490

 

Warrants

 

 

 

 

1

 

Total

 

 

 

 

931,250

 


NOTE 13 – SUBSEQUENT EVENTS


On November 16, 2020 the Company entered into a convertible promissory note with a lender for $100,000 with cash proceeds of $80,000 and original issue discount of $12,000, interest payable at 12% per annum with the first twelve months interest of $12,000 guaranteed, with a one year maturity. The note, accrued interest, and any default penalty are convertible into common stock of the Company at a conversion price equal to the closing bid price on the trading day immediately preceding the conversion date.  On November 17, 2020 the Company issued 6,667 shares of common stock at a fair value of $20,668 as a commitment fee for this loan.


On November 23, 2020 the Company entered into a convertible promissory note with a lender for $165,000 with cash proceeds of $150,000 and original issue discount of $15,000, interest payable at 12% per annum with the first twelve months interest of $19,800 guaranteed, with a one year maturity. The note, accrued interest, and any default penalty are convertible into common stock of the Company at a conversion price equal to the closing bid price on the trading day immediately preceding the conversion date.  On November 24, 2020 the Company issued 17,500 shares of common stock at a fair value of $36,750 as a commitment fee for this loan.


On December 11, 2020 the Company filed a Form 1-A statement indicating its intention to issue a public offering of shares of voting Common Stock pursuant to Regulation A, par value $0.00001 at an offering price range of $2.00 up to a maximum offering amount of $15,000,000 or 7,500,000 shares. There is a minimum investment of $500. During the Offering, the Company may, in its sole discretion, increase the per share price, subject to filing an offering circular supplement or post qualification amendment.


- 25 -



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 – The 4LESS Group, Inc., formerly known as MedCareers Group, Inc. (the “Company”, “MCGI”), was incorporated under the laws of the State of Nevada on December 5, 2007. The Company formally operated a website for nurses, nursing schools and nurses’ organizations designed for better communication between nurses and the nursing profession.


On November 29, 2018, the Company entered into a transaction (the “Share Exchange”), pursuant to which the Company acquired 100% of the issued and outstanding equity securities of The 4Less Corp. (“4LESS”), in exchange for the issuance of (i) nineteen thousand (19,000) shares of Series B Preferred Stock, (ii) six thousand seven hundred fifty (6,750) shares of Series C Preferred Stock, and (iii) 870 shares of Series D Preferred Stock. The Series C Preferred Shares have a right to convert into common stock of the Company by multiplying the number of issued and outstanding shares of common stock by 2.63 on the conversion date. The Share Exchange closed on November 29, 2018.  As a result of the Share Exchange, the former shareholders of 4LESS became the controlling shareholders of the Company. The Share Exchange was accounted for as a reverse takeover/recapitalization effected by a share exchange, wherein 4LESS is considered the acquirer for accounting and financial reporting purposes. The capital, share price, and earnings per share amount in these consolidated financial statements for the period prior to the reverse merger were restated to reflect the recapitalization in accordance with the shares issued as a result of the reverse merger except otherwise noted.


Like many small businesses Auto Parts 4Less (“4LESS” previously named The 4less Corp., the wholly owned subsidiary of The 4Less Group, Inc.) was born from humble beginnings; in 2013 Christopher Davenport, the founder of 4LESS, began selling auto parts on eBay and shipping those items out of his garage.  But, what started out as a hobby, quickly grew into a fully functioning ecommerce aftermarket auto parts company that required a significant technical staff and facilities to support their growth. In June of 2015, they leased their first office.


Originally the company outsourced much of their operations to 3rd party companies to list their auto parts in the different marketplaces such as Amazon, eBay, Walmart and Jet.  However, using these 3rd party companies was inefficient, cumbersome, slow and very expensive.


Since 2016 the company has invested heavily to become their own listing platform that allows their auto parts to be direct listed across marketplace and social media sites.  We have completed multiple technical achievements including CRM system, warehouse integration API, warehouse inventory software to name a few.


- 26 -



Presently, 4LESS operates 3 branded websites: LiftKits4LESS.com, Bumpers4LESS.com and TruckBedCovers4LESS.com. In total, these sites represent products from over approximately 250 manufacturers.


In 2019, with technology upgrades in place, 4Less began successfully moving majority of sales from third party marketplaces direct to their proprietary web sites. By doing so the company saves 8%-10% in fees charged by the market place as well as further building the 4less brand as a leading marketplace for auto parts.


On November 19, 2019 The 4Less Group acquired the URL Autoparts4Less.com and changed the name of their wholly owned subsidiary from the 4Less Corp. to Auto Parts 4Less, Inc. With the acquisition of the URL AutoParts4Less.com, 4Less is focusing all of their efforts and resources on building out a flagship automotive E-tailing site with the potential to list and sell literally millions of parts that will include automotive specialty equipment parts and accessories, targeted “niche” web sites and potentially a used auto parts exchange one day as well.


Our niche web sites are unique in the market place and currently we do not see any other competitors managing multiple web sites in the aftermarket auto parts.  We directly compete for buyers to use our web sites over current e-commerce giants that we sell through such as Amazon and eBay.  However, our web sites offer substantial value-added content including installation guides, install videos, high impact photos, order customization and live chat with a technical expert.  We believe all these value-adds give our web sites significant advantages over large “all things to all people” online market places.  While there are several other small ecommerce sellers in the marketplace, their sites presently do not offer the technical flexibility to sell across all marketplaces seamlessly. Presently we do not see them as a significant threat to market share. 4Less management believes that the 4Less proprietary web sites 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 expect all of these decisions to help The 4Less Corp achieve growth goals for 2021.


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 2021.


Results of Operations for the Nine Months Ended October 31, 2020 Compared to the Nine Months Ended October 31, 2019


The following table shows our results of operations for the nine months ended October 31, 2020 and 2019. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.


 

 

 

 

 

 

Change

 

 

 

2020

 

2019

 

$

 

%

 

Total Revenues

 

$

7,262,106

 

$

6,218,386

 

$

1,043,720

 

17%

 

Gross Profit

 

 

1,971,080

 

 

1,525,471

 

 

445,609

 

29%

 

Total Operating Expenses

 

 

2,608,240

 

 

2,777,010

 

 

(168,770

)

(6%

)

Total Other Income (Expense)

 

 

3,319,093

 

 

(1,302,971

)

 

4,622,064

 

355%

 

Net Income (Loss)

 

$

2,681,933

 

$

(2,554,510

)

$

5,236,443

 

205%

 


Revenue


The following table shows revenue split between proprietary and third-party website revenue for the nine months ended October 31, 2020 and 2019:


 

 

 

 

 

 

Change

 

 

 

2020

 

2019

 

$

 

%

 

Proprietary website revenue

 

$

3,704,215

 

$

2,572,137

 

$

1,132,078

 

44%

 

Third party website revenue

 

 

3,557,891

 

 

3,646,249

 

 

(88,358

)

(2%

)

Total revenue

 

$

7,262,106

 

$

6,218,386

 

$

1,043,720

 

17%

 


- 27 -



We had total revenue of $7,262,106 for the nine months ended October 31, 2020, compared to $6,218,386 for the nine months ended October 31, 2019. Sales increased by $1,043,720 due to strong second and third quarter sales where consumer purchases shifted towards online consumption as a result of the economic shutdown and social distancing measures due to the recent Cobid-19 pandemic. The Company’s focus continues in growing its proprietary website revenues and the Company was successful in that, increasing its proprietary website revenue by 44%. The company believes this strategy will lead to higher revenues and lower overall costs in the future.


Gross Profit


We had gross profit of $1,971,080 for the nine months ended October 31, 2020, compared to gross profit of $1,525,471 for the nine months ended October 31, 2019. Gross profit increased by $445,609 as a result of the increased revenues explained above and partly offset by an increase in cost of revenue due to a the Company having to purchase goods at higher product costs from distributers rather than the usual manufacturers due to higher than anticipated demand which manufacturers were not able to meet.


Operating Expenses


The following table shows our operating expenses for the nine months ended October 31, 2020 and 2019:


 

 

 

 

 

 

Change

 

Operating Expenses

 

2020

 

2019

 

$

 

%

 

Depreciation

 

$

18,897

 

$

26,021

 

$

(7,124

)

(27%

)

Postage, Shipping and Freight

 

 

378,595

 

 

342,370

 

 

36,225

 

11%

 

Marketing and Advertising

 

 

49,347

 

 

145,206

 

 

(95,859

)

(66%

)

E Commerce Services, Commissions and Fees

 

 

641,692

 

 

551,943

 

 

89,749

 

16%

 

Operating lease cost

 

 

91,437

 

 

83,762

 

 

7,675

 

9%

 

Personnel Costs

 

 

829,788

 

 

902,592

 

 

(72,804

)

(8%

)

General and Administrative

 

 

598,485

 

 

725,116

 

 

(126,631

)

(17%

)

Total Operating Expenses

 

$

2,608,240

 

$

2,777,010

 

$

(168,770

)

(6%

)


•   Depreciation decreased by $7,124 due to asset disposals in fiscal 2020, thus a lower asset value is being depreciated.


•   Postage shipping and freight increased slightly by $36,225 due to higher sales.


•   Marketing and advertising decreased by $95,859 due to greater promotional efforts in 2019 to drive sales to our proprietary websites. The Company also made efforts to curtail spending since the seconds quarter on non-essential expenditures as a result of the economic uncertainty presented by the global Covid-19 pandemic.


•   E Commerce Services, Commissions and Fees increased by $89,749 due to higher sales.


•   Operating Lease Cost increased by $7,675 due to one new operating leases.


•   Personnel Costs decreased by $72,804 due to a temporary layoffs commencing in March 2020 as a result of the Covid-19 pandemic.


•   General and Administrative decreased by $126,631 mainly due a tightening on expenditures as a result of the Covid-19 pandemic.


Other Income (Expense)


The following table shows our other income and expenses for the nine months ended October 31, 2020 and 2019:


 

 

 

 

 

 

Change

 

Other Income (Expense)

 

2020

 

2019

 

$

 

%

 

Gain (Loss) on Sale of Property and Equipment

 

$

464

 

$

4,436

 

$

(3,972

)

(90%

)

Gain (Loss) on Derivatives

 

 

(507,674

)

 

(107,953

)

 

(399,721

)

370%

 

Gain on Settlement of Debt

 

 

5,018,388

 

 

67,623

 

 

4,950,766

 

7321%

 

Amortization of Debt Discount

 

 

(694,168

)

 

(462,175

)

 

(231,993

)

50%

 

Interest Expense

 

 

(497,917

)

 

(804,902

)

 

306,984

 

(38%

)

Total Other Income (Expense)

 

$

3,319,093

 

$

(1,302,971

)

$

4,622,064

 

355%

 


- 28 -



As a result of the debt exchanges described in Note 7 of the financial statements, this resulted in the gain on settlement of debt and reductions in amortization expense and interest expense due to the lower debt. The higher loss on derivatives is a function of the market factors in the valuation of the derivative liability described in Note 8.


We had net income of 2,681,933 for the nine months ended October 31, 2020, compared to a net loss of $2,554,510 for the nine months ended October 31, 2019. The increase in net income was mainly due to the sales increase and the gain on settlement of debt as explained in the discussion above.


Results of Operations for the Three Months Ended October 31, 2020 Compared to the Three Months ended October 31, 2019


The following table shows our results of operations for the three months ended October 31, 2020 and 2019. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.


 

 

 

 

 

 

Change

 

 

 

2020

 

2019

 

$

 

%

 

Total Revenues

 

$

2,334,826

 

$

1,890,461

 

$

444,365

 

24%

 

Gross Profit

 

 

473,696

 

 

347,625

 

 

126,071

 

36%

 

Total Operating Expenses

 

 

985,005

 

 

817,113

 

 

167,892

 

21%

 

Total Other Income (Expense)

 

 

1,611,382

 

 

(525,472

)

 

2,136,854

 

407%

 

Net Income (Loss)

 

$

1,100,073

 

$

(994,960

)

$

2,095,033

 

211%

 


Revenue


The following table shows revenue split between proprietary and third- party website revenue for the three months ended October 31, 2020 and 2019:


 

 

 

 

 

 

Change

 

 

 

2020

 

2019

 

$

 

%

 

Proprietary website revenue

 

$

1,081,758

 

$

924,637

 

$

157,121

 

17%

 

Third party website revenue

 

 

1,253,068

 

 

965,824

 

 

287,244

 

30%

 

Total revenue

 

$

2,334,826

 

$

1,890,461

 

$

444,365

 

24%

 


We had total revenue of $2,334,826 for the three months ended October 31, 2020, compared to $1,890,461 for the three months ended October 31, 2019. Sales increased by $444,365 due to strong sales where consumer purchases shifted towards online consumption as a result of the economic shutdown and social distancing measures due to the recent Cobid-19 pandemic. This quarter’s increase represents a 24% growth over the prior year’s quarter.


Gross Profit


We had gross profit of $473,696 for the three months ended October 31, 2020, compared to gross profit of $347,625 for the three months ended October 31, 2019. Gross profit increased by $126,071 as a result of the increased revenues explained above and partly offset by an increase in cost of revenue due to a the Company having to purchase goods at higher product costs from distributers rather than the usual manufacturers due to higher than anticipated demand which manufacturers were not able to meet.


The following table shows our operating expenses for the three months ended October 31, 2020 and 2019:


 

 

 

 

 

 

Change

 

Operating Expenses

 

2020

 

2019

 

$

 

%

 

Depreciation

 

$

6,299

 

$

7,033

 

$

(734

)

(10%

)

Postage, Shipping and Freight

 

 

113,702

 

 

110,385

 

 

3,317

 

3%

 

Marketing and Advertising

 

 

25,497

 

 

23,827

 

 

1,670

 

7%

 

E Commerce Services, Commissions and Fees

 

 

222,425

 

 

163,002

 

 

59,423

 

36%

 

Operating lease cost

 

 

23,279

 

 

30,360

 

 

(7,081

)

(23%

)

Personnel Costs

 

 

330,184

 

 

251,923

 

 

78,261

 

31%

 

General and Administrative

 

 

263,620

 

 

230,583

 

 

33,037

 

14%

 

Total Operating Expenses

 

$

985,005

 

$

817,113

 

$

167,892

 

21%

 


- 29 -



•   Depreciation decreased by $734 due to asset disposals in fiscal 2020, thus a lower asset value is being depreciated.


•   Postage shipping and freight increased slightly by $3,317 due to higher sales this quarter.


•   Marketing and advertising increased slightly by $1,670.


•   E Commerce Services, Commissions and Fees increased by $59,423 due to higher sales.


•   Operating Lease Cost increased by $7,081 due to the lease termination.


•   Personnel Costs increased by $78,261 due to a re-hirings of those temporary layoffs in March 2020 as a result of the Covid-19 pandemic.


•   General and Administrative increased by $33,037 mainly due to higher professional fees associated with Reg A filing and investor relations.


Other Income (Expense)


The following table shows our other income and expenses for the three months ended October 31, 2020 and 2019:


 

 

 

 

 

 

Change

 

Other Income (Expense)

 

2020

 

2019

 

$

 

%

 

Gain (Loss) on Sale of Property and Equipment

 

$

 

$

4,436

 

$

(4,436

)

(100%

)

Gain on Settlement of Debt

 

 

2,845,742

 

 

 

 

2,845,742

 

 

Gain (Loss) on Derivatives

 

 

(939,873

)

 

(196,303

)

 

(743,570

)

379%

 

Amortization of Debt Discount

 

 

(67,357

)

 

(212,004

)

 

144,647

 

(68%

)

Interest Expense

 

 

(227,130

)

 

(121,601

)

 

(105,529

)

87%

 

Total Other Income (Expense)

 

$

1,611,382

 

$

(525,472

)

$

2,136,854

 

407%

 


The $2,136,855 increase in total other income was due to the gain on settlement of debt as a result of the debt settlements described in Note 7 of the financial statements this resulted in reductions in amortization expense. Interest expense increased due to the higher new short and long term debt. The higher loss on derivatives is a function of the market factors in the valuation of the derivative liability described in Note 8.


We had net income of $1,100,073 for the three months ended October 31, 2020, compared to net loss of $994,960 for the three months ended October 31, 2019. The increase in net income was mainly due to the sales increase and the gain on sale of debt as explained in the discussion 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 nine months ended October 31, 2020, we have generated revenue and are working to achieve positive cash flows from operations.


As of October 31, 2020, we had a cash balance of $261,072, inventory of $299,628 and $3,742,149 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.


- 30 -



Capital Resources


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


 

 

October 31, 2020

 

January 31, 2020

 

Current assets

 

$

581,345

 

$

543,185

 

Current liabilities

 

 

3,742,149

 

 

8,013,651

 

Working capital (deficits)

 

$

(3,160,804

)

$

(7,470,466

)


Net cash used in operations for the nine months ended October 31, 2020 was $577,490 as compared to net cash used in operations of $856,121 for the nine months ended October 31, 2019. Net cash provided by investing activities for the nine months ended October 31, 2020 was $9,750 as compared to $133,087 for the same period in 2019. Net cash provided by financing activities for the nine months ended October 31, 2020 was $666,688 as compared to $791,661 for the nine months ended October 31, 2019.


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 can become 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 October 31, 2020 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.


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


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 2. Unregistered Sales of Equity Securities and Use of Proceeds


Recent Sales of Unregistered Securities


None.


- 31 -



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.



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: December 15, 2020



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

 

 

 

101**

 

XBRL data files of Financial Statement and Notes contained in this Quarterly Report on Form 10-Q.

__________

*   Filed herewith.

 

**   In accordance with Regulation S-T, the Interactive Data Files in Exhibit 101 to the Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed.”

 

- 32 -


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