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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 July 31, 2021

 

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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock FLES OTCQB

 

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 September 10, 2021, there were 3,326,914 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.

24

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosure About Market Risk

30

 

 

 

ITEM 4.

Controls and Procedures

30

 

 

 

PART II.

OTHER INFORMATION

30

 

 

 

ITEM 1.

Legal Proceedings

30

 

 

 

ITEM 1A.

Risk Factors

30

 

 

 

ITEM 2.

Unregistered Sales of Securities and Use of Proceeds

30

 

 

 

ITEM 3.

Default Upon Senior Securities

31

 

 

 

ITEM 4.

Mine Safety Disclosures

31

 

 

 

ITEM 5.

Other Information

31

 

 

 

ITEM 6.

Exhibits

31

 

- 2 -


 

PART 1: FINANCIAL INFORMATION

 

ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

THE 4LESS GROUP, INC.

Condensed Consolidated Balance Sheets

           
    July 31, 2021   January 31, 2021  
    Unaudited   (*)  
Assets              
Current Assets              
Cash and Cash Equivalents   $ 382,491   $ 277,664  
Share Subscriptions Receivable     4,195     100,000  
Inventory     318,107     323,411  
Prepaid Expenses     10,881     11,859  
Other Current Assets     8,063     2,149  
Total Current Assets     723,737     715,083  
Operating Lease Assets     295,819     344,413  
Deferred Offering Costs     600,000      
Property and Equipment, net of accumulated depreciation of $96,989, and $88,823     238,188     80,027  
               
Total Assets   $ 1,857,744   $ 1,139,523  
               
Liabilities and Stockholders’ Deficit              
Current Liabilities              
Accounts Payable   $ 708,274   $ 869,765  
Accrued Expenses     505,922     1,382,839  
Accrued Expenses – Related Party     71,173     106,173  
Customer Deposits     164,900     188,385  
Deferred Revenue     298,711     687,766  
Short-Term Debt     1,500,473     716,142  
Current Operating Lease Liability     77,570     90,286  
Short-Term Convertible Debt, net of debt discount of $484,665 and $309,317     639,860     336,683  
Derivative Liabilities     415,177     213,741  
PPP Loan-current portion     104,198     43,294  
Current Portion – Long-Term Debt     444,724     424,064  
Total Current Liabilities     4,930,982     5,059,138  
               
Non-Current Lease Liability     211,195     244,049  
PPP Loan -long term portion     105,249     166,153  
Long-Term Debt     911,272     890,373  
               
Total Liabilities     6,158,698     6,359,713  
               
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 7,250 shares issued and outstanding     7     7  
Common Stock, $0.000001 par value, 15,000,000 shares authorized, 2,800,973 and 1,427,163 shares issued, issuable and outstanding     3     1  
Additional Paid In Capital     17,530,799     14,291,759  
Accumulated Deficit     (22,701,783 )   (20,381,977 )
Total Stockholders’ Deficit     (5,170,954 )   (6,090,190 )
               
Total Liabilities and Stockholders’ Deficit   $ 1,857,744   $ 1,139,523  

 

* Derived from audited information

 

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

 

- 3 -


 

THE 4LESS GROUP, INC.

Condensed Consolidated Statements of Operations

For the Three and Six Months Ended July 31, 2021 and July 31, 2020

(Unaudited)

                           
    Three Months Ended   Six Months Ended  
    July 31, 2021   July 31, 2020   July 31, 2021   July 31, 2020  
                           
Revenue   $ 2,586,673   $ 2,927,209   $ 6,315,457   $ 4,927,280  
                           
Cost of Revenue     1,933,984     2,001,592     4,700,562     3,429,896  
                           
Gross Profit     652,689     925,617     1,614,895     1,497,384  
                           
Operating Expenses:                          
Depreciation     12,716     5,951     23,451     12,598  
Postage, Shipping and Freight     142,562     151,755     335,749     264,893  
Marketing and Advertising     659,290     5,782     1,267,324     23,850  
E Commerce Services, Commissions and Fees     309,610     252,848     725,737     419,267  
Operating lease cost     30,480     34,079     60,959     68,158  
Personnel Costs     461,700     232,869     759,193     499,604  
General and Administrative     464,636     159,223     1,113,145     334,865  
Total Operating Expenses     2,080,994     842,507     4,285,558     1,623,235  
                           
Net Operating Income (Loss)     (1,428,305 )   83,110     (2,670,663 )   (125,851 )
                           
Other Income (Expense)                          
Gain (Loss) on Sale of Property and Equipment     20,345     464     20,345     464  
Gain (Loss) on Derivatives     (16,294 )   506,979     (12,107 )   432,199  
Gain on Settlement of Debt     49,317         963,366     2,172,646  
Amortization of Debt Discount     (183,408 )   (47,898 )   (311,936 )   (626,811 )
Interest Expense     (193,904 )   (147,693 )   (308,811 )   (270,787 )
Total Other Income (Expense)     (323,944 )   311,852     350,857     1,707,711  
                           
Net Income (Loss)   $ (1,752,249 ) $ 394,962   $ (2,319,806 ) $ 1,581,860  
                           
Basic Weighted Average Shares Outstanding;     2,614,311     763,214     2,282,792     660,668  
Basic Income (Loss) per Share   $ (0.67 ) $ 0.52   $ (1.02 ) $ 2.39  
                           
Diluted Average Shares Outstanding;     2,614,311     51,179,725     2,282,792     51,077,179  
Diluted Income (Loss) per Share   $ (0.67 ) $ 0.00   $ (1.02 ) $ 0.00  

 

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

 

- 4 -


 

THE 4LESS GROUP, INC.

Condensed Consolidated Statement of Changes in Stockholders’ Deficit

For the Six Months Ended July 31, 2021 and July 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  
                                                           
Balance at 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 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                               1,186,898     1,186,898  
                                                           
Balance at 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 to Common Stock                   284,187         7,656         7,656  
                                                           
Derivative Liability Reclassified as Equity Upon Conversion of notes                           12,081         12,081  
                                                           
Net Income                               394,962     394,962  
                                                           
Balance at July 31, 2020   $   20,000   $ 20   7,000   $ 7   904,972   $ 1   $ 13,489,681   $ (19,987,293 ) $ (6,497,584 )

 

- 5 -


 

                                                     
  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  
                                                           
Balance at January 31, 2021       20,000     20   7,250     7   1,427,163     1     14,291,759     (20,381,977 )   (6,090,190 )
                                                           
Common Stock Issued as Payment for Fees                   50,000         107,500         107,500  
                                                           
Issuance of Common Stock as Part of REG A Subscription                   1,097,250     1     2,194,499         2,194,500  
                                                           
Rounding                       1             1  
                                                           
Net (Loss)                               (567,557 )   (567,557 )
                                                           
Balance at April 30, 2021   $   20,000   $ 20   7,250   $ 7   2,574,413   $ 3   $ 16,593,758   $ (20,949,534 ) $ (4,355,746 )
                                                           
Conversion of Notes Payable and Accrued Interest and Fees to Common Stock                   30,000         59,100         59,100  
                                                           
Derivative Liability Reclassified as Equity Upon Conversion of notes                           17,640         17,640  
                                                           
Issuance of shares                   104,750         200,500         200,500  
                                                           
Relative fair value of equity issued with debt                   91,810         59,801         59,801  
                                                           
Issuance of warrants                           600,000         600,000  
                                                           
Net (Loss)                               (1,752,249 )   (1,752,249 )
                                                           
Balance at July 31, 2021   $   20,000   $ 20   7,250   $ 7   2,800,973   $ 3   $ 17,530,799   $ (22,701,783 ) $ (5,170,954 )

 

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

 

- 6 -


 

THE 4LESS GROUP, INC.

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended July 31, 2021 and July 31, 2020

(Unaudited)

 

    2021   2020  
CASH FLOWS FROM OPERATING ACTIVITIES              
Net Income (Loss)   $ (2,319,806 ) $ 1,581,860  
Adjustments to reconcile net income (loss) to cash used by operating activities:              
Depreciation     23,451     12,598  
(Gain) loss in Fair Value on Derivative Liabilities     12,107     (432,199 )
Amortization of Debt Discount     311,936     626,811  
Loan Penalties Capitalized to Loan and Accrued Interest     28,000     3,394  
Stock Based Payment of Consulting Fees and Shares     273,500      
Gain on Sale of Property and Equipment     (20,345 )   (464 )
Gain on Settlement of Debt     (963,366 )   (2,172,646 )
Change in Operating Assets and Liabilities:              
Decrease in Inventory     5,305     81,322  
Decrease in Prepaid Rent and Expenses     4,001     20,870  
(Increase) Decrease in Other Current Assets     (5,914 )   2,271  
Decrease in Accounts Payable     (156,368 )   (115,251 )
Increase (Decrease) in Accrued Expenses     (31,292 )   231,207  
Decrease in Accrued Expenses -Related Party     (35,000 )    
Decrease in Customer Deposits     (23,485 )    
Decrease in Deferred Revenue     (389,055 )    
CASH FLOWS (USED IN) OPERATING ACTIVITIES     (3,286,331 )   (160,227 )
               
CASH FLOWS FROM INVESTING ACTIVITIES              
Proceeds of Sales of Property and Equipment     25,060     9,750  
Purchase of Property and Equipment     (35,000 )    
CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES     (9,940 )   9,750  
               
CASH FLOWS FROM FINANCING ACTIVITIES              
Proceeds from Issuance of Common Shares     2,324,805      
Proceeds from Short Term Debt     1,000,000     205,000  
Proceeds from Convertible Notes Payable     699,525      
Payments on Short Term Debt     (313,009 )   (302,913 )
Proceeds from PPP Loan         209,447  
Payments on Long Term Debt     (9,223 )   (1,891 )
Payments on Convertible Notes Payable     (301,000 )    
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES     3,401,098     109,643  
               
NET INCREASE IN CASH     104,827     (40,834 )
               
CASH AT BEGINNING OF PERIOD     277,664     162,124  
               
CASH AT END OF PERIOD   $ 382,491   $ 121,290  
               
Supplemental Disclosure of Cash Flows Information:              
Cash Paid for Interest   $ 132,085   $ 29,358  
Convertible Notes Interest and Derivatives Converted to Common Stock   $ 76,740   $ 31,240  
Short Term Debt and Interest Extinguished Through Issuance of Series C Preferred Stock   $   $ 144,076  
Convertible Notes and Interest Extinguished Through Issuance of Series C Preferred Stock   $   $ 1,245,456  
Fair Value of Instruments Issued With Debt   $ 487,284   $  
Issuance of Warrants to Deferred Offering Costs   $ 600,000   $  
Issuance of Common Shares for Share Subscription Receivable   $ 10,488   $  
Loans to acquire Fixed Assets   $ 151,327   $  

 

The Accompanying Notes are an Integral Part of these Unaudited 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, 2021 and notes thereto contained in the Company’s Annual Report on Form 10-K filed on May 14, 2021.

 

Principles of Consolidation:

 

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

 

- 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 six months ended July 31, 2021 the Company purchased approximately 61% of its inventory and items available for sale from third parties from three vendors. As of July 31, 2021, the net amount due to the vendors included in accounts payable was $389,868. For the six months ended July 31, 2020 the Company purchased approximately 55% of its inventory and items available for sale from third parties from three vendors. As of July 31, 2020, the net amount due to those vendors included in accounts payable was $171,928. 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.

 

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.

 

- 9 -


 

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 July 31, 2021:

 

    July 31, 2021   Quoted Prices in
Active Markets
For Identical
Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 
Liabilities:                          
Derivative Liabilities – embedded redemption feature   $ 415,177   $   $   $ 415,177  
Totals   $ 415,177   $   $   $ 415,177  

 

 

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.

 

- 10 -


 

The fair value of the derivative liability is determined using a lattice model, is re-measured on the Company’s reporting dates, and is affected by changes in inputs to that model including our stock price, historical stock price volatility, the expected term, and both high risk and the risk-free interest rate. The most sensitive inputs to the model are for expected time for the holder to convert or be repaid and the estimated historical volatility of the Company’s common stock.  However, because the historical volatility of the Company’s common stock is so high (see Note 10), the sensitivity required to change the liability by 1% as of July 31, 2021 is greater than 25% change in historical volatility as of that date.  The other inputs, such as risk free rate, high yield cash rate and stock price all have a sensitivity for a 1% change in the input variable results in a significantly less than 1% change in the calculated derivative liability.

 

Revenue Recognition

 

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

 

Step 1: Identify the contract with the customer

Step 2: Identify the performance obligations in the contract

Step 3: Determine the transaction price

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

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

 

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

 

Disaggregation of Revenue: Channel Revenue

 

The following table shows revenue split between proprietary and third party website revenue for the six months ended July 31, 2021 and 2020:

 

            Change  
    2021   2020   $   %  
Proprietary website revenue   $ 3,946,810     2,403,120   $ 1,543,690   64%  
Third party website revenue     2,368,647     2,524,160     (155,513 ) (6% )
Total Revenue   $ 6,315,457   $ 4,927,280   $ 1,388,177   28%  

 

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.

 

- 11 -


 

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.

 

 

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 $22,701,783 as of July 31, 2021 and has a working capital deficit at July 31, 2021 of $4,207,245. As of July 31, 2021, the Company only had cash and cash equivalents of $382,491 and approximately $151,000 of short-term debt in default. The short-term debt agreements provide legal remedies for satisfaction of defaults, none of the lenders to this point have pursued their legal remedies. Our current liquidity position raises substantial doubt about the Company’s ability to continue as a going concern.

 

Management’s plan is to raise additional funds in the form of debt or equity in order to (a) grow the business through building up brand awareness and developing and launching a potentially much larger auto parts e-commerce web site, autoparts4less.com while (b) continuing to fund losses until such time as revenues can sustain the Company. However, there is no assurance that management will be successful in being able to continue to obtain additional funding. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

NOTE 3 – PROPERTY

 

The Company capitalizes all property purchases over $1,000 and depreciates the assets on a straight-line basis over their useful lives of 3 years for computers and 7 years for all other assets. Property consists of the following at July 31, 2021 and January 31, 2021:

 

    July 31, 2021   January 31, 2021  
Office furniture, fixtures and equipment   $ 85,413   $ 85,413  
Shop equipment     43,004     43,004  
Vehicles     206,760     40,433  
Sub-total     335,177     168,850  
Less: Accumulated depreciation     (96,989 )   (88,823 )
Total Property   $ 238,188   $ 80,027  

 

- 12 -


 

Additions to fixed assets for the six months ended July 31, 2021 and were $186,327 with $35,000 paid in cash and $151,327 financed through vehicle loans. Additions to fixed assets were nil for the six months ended July 31, 2020.

 

For the three months ended July 31, 2021 , vehicles having a cost of $20,000 and a net book value of $4,715 was disposed of. Proceeds received of $25,060 and a gain on sale of property and equipment of $20,345 were recorded.

 

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

 

Depreciation expense was $12,716 and $5,951 for the three months ended July 31, 2021 and July 31, 2020, respectively.

 

Depreciation expense was $23,451 and $12,598 for the six months ended July 31, 2021 and July 31, 2020, respectively

 

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 July 31, 2021 and January 31, 2021.

 

Leases   Classification   July 31, 2021   January 31, 2021  
Assets                  
Operating   Operating Lease Assets   $ 295,819   $ 344,413  
Liabilities                  
Current                  
Operating   Current Operating Lease Liability   $ 77,570   $ 90,286  
Noncurrent                  
Operating   Noncurrent Operating Lease Liabilities     211,195     244,049  
Total lease liabilities       $ 288,765   $ 334,335  

 

Note: As most of our leases do not provide an implicit rate, we use our incremental borrowing rate of 8% based on the information available at commencement date in determining the present value of lease payments.

 

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

 

Operating lease cost and rent was $30,480 and $34,079 for the three months ended July 31, 2021 and July 31, 2020, respectively.

 

Operating lease cost and rent was $60,959 and $68,158 for the six months ended July 31, 2021 and July 31, 2020, respectively.

 

NOTE 5 – CUSTOMER DEPOSITS

 

The Company receives payments from customers on orders prior to shipment. At July 31, 2021 the Company had received $164,900 (January 31, 2021- $188,385) in customer deposits for orders that were unfulfilled at July 31, 2021 and canceled subsequent to quarter end. The orders were unfulfilled at July 31, 2021 because of supply chain issues due to supplier back-orders because of the Covid-19 pandemic. The deposits were returned to the customers subsequent to July 31, 2021.

 

NOTE 6 – DEFERRED REVENUE

 

The Company receives payments from customers on orders prior to shipment. At July 31, 2021 the Company had received $298,711 (January 31, 2021- $687,766) in customer payments for orders that were unfulfilled at July 31, 2021 and delivered subsequent to July 31, 2021. The orders were unfulfilled at July 31, 2021 because of supply chain issues due to supplier back-orders because of the Covid-19 pandemic as well as processing and delivery timing.

 

- 13 -


 

NOTE 7 – PPP LOAN

 

On May 2, 2020 the Company entered into a Paycheck Protection Promissory (PPP) Note Agreement whereby the lender would advance proceeds of $209,447 at a fixed rate of 1% per annum and a May 2, 2022 maturity. The loan is repayable in monthly installments of $8,818 commencing September 2, 2021 and continuing on the second day of every month thereafter until maturity when any remaining principal and interest are due and payable. At July 31, 2021 the loan is classified as $104,198 current and $105,249 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. The Company has filed its forgiveness application and expects to have a response before the end of its third fiscal quarter. 

 

NOTE 8 – SHORT-TERM AND LONG-TERM DEBT

 

The components of the Company’s debt as of July 31, 2021 and January 31, 2021 were as follows:

 

    July 31,   January 31,  
    2021   2021  
Loan dated October 8, 2019, and revised February 29, 2020 and November 10, 2010 repayable June 30, 2022 with an additional interest payment of $20,000(3)   $ 97,340 * $ 102,168  
SFS Funding Loan, original loan of $389,980 January 8, 2020, 24% interest, weekly payments of $6,006, maturing July 28, 2021(2)     3,615 *   161,227  
Forklift Note Payable, original note of $20,433 September 26, 2018, 6.23% interest, 60 monthly payments of $394.54 ending August 2023(1)     10,255 #   12,269  
Vehicle loan original loan of $93,239 February 16, 2021, 2.90% interest. 72 monthly payments of $1,414 beginning on April 2, 2021 and ending on March 2, 2027. Secured by vehicle having net book value of $90,685.     87,989 #    
Vehicle loan original loan of $59,711 March 20,2021, 7.89% interest. 72 monthly payments of $1,048 beginning on May 4, 2021 and ending on April 4, 2027. Secured by vehicle having net book value of $84,371.     57,752 #    
Working Capital Note Payable - $500,000, dated June 4, 2021, repayment of $12,789 per week until June 4, 2022, interest rate of approximately 31%(2,3)     448,539 *    
Working Capital Note Payable - $500,000, dated June 4, 2021, repayment of $12,212 per week until June 4, 2022, interest rate of approximately 26%(2,3)     446,064 *    
Demand loan - $5,000 dated February 1, 2020, 15% interest, 5% fee on outstanding balance     5,000 *   5,000  
Demand loan - $2,500, dated March 8, 2019, 25% interest, 5% fee on outstanding balance     2,500 *   2,500  
Demand loan - $65,500 dated February 27, 2019, 25% interest, 5% fee on outstanding balance. Secured by the general assets of the Company.     12,415 *   12,415  
Promissory note - $60,000 dated September 18, 2020 maturing September 18, 2021, including $5,000 original issue discount, 15% compounded interest payable monthly     60,000 *   60,000  
Promissory note - $425,000 dated August 28, 2020, including $50,000 original issue discount, 15% compounded interest payable monthly. This note matures when the Company receives proceeds through a financing event of $825,000 plus accrued interest on the note.(4)     425,000 *   425,000  
Promissory note - $1,200,000 dated August 28, 2020, maturing August 28, 2022, 12% interest payable monthly with the first six months interest deferred until the 6th month and added to principal(5)     1,200,000 #   1,200,000  
Promissory note - $50,000 dated August 31, 2020, maturing February 28, 2021, 10% interest payable accrued monthly payable at maturity Fully repaid at April 30, 2021         50,000  
Total   $ 2,856,469   $ 2,030,579  

 

 

    July 31,   January 31,  
    2021   2021  
Short-Term Debt   $ 1,500,473   $ 716,142  
Current Portion Of Long-Term Debt     444,724     424,064  
Long-Term Debt     911,272     890,373  
 Total, Debt   $ 2,856,469   $ 2,030,579  

 

- 14 -


 

____________________

* Short-term loans
# Long-term loans of:  $10,255 including current portion of $3,812
  $ 87,989 including current portion $13,334
  $ 57,752 including current portion $7,578
  $1,200,000 including current portion of $420,000
(1) Secured by equipment having a net book value of $10,921
(2) The amounts due under the note are personally guaranteed by an officer or a director of the Company.
(3) On November 10, 2020 the Company amended the agreement extending the maturity to June 30, 2022 from April 8, 2021 and changing monthly payments to $0 from $5,705 and interest rate from 13% to a $20,000 lump sum payable at maturity.
(3) The Company has pledged a security interest on all accounts receivable and banks accounts of the Company.
(4) Financing event would be a sale or issuance of assets, debt, shares or any means of raising capital. As the Company expects to enter into such a transaction within the calendar year this loan is treated as current.
(5) Secured by all assets of the Company. Loan payable in 2 instalments, $445,200 payable August 28, 2021 and $826,800 payable August 28, 2022

 

 

NOTE 9 – SHORT-TERM CONVERTIBLE DEBT

 

The components of the Company’s debt as of July 31, 2021 and January 31, 2021 were as follows:

 

    Interest   Default Interest   Conversion   Outstanding Principal at  
Maturity Date   Rate   Rate   Price   July 31, 2021   January 31, 2021  
Nov 4, 2013(a)   12%   12%   $1,800,000   $ 100,000   $ 100,000  
Jan 31, 2014(a)   12%   18%   $2,400,000     16,000     16,000  
July 31, 2013(a)   12%   12%   $1,440,000     5,000     5,000  
Jan 31, 2014(a)   12%   12%   $2,400,000     30,000     30,000  
Oct. 12, 2021   12%   16%   (1)     28,000     230,000  
Nov. 16, 2021   12%   16%   (1)     69,400     100,000  
Nov. 23, 2021   12%   16%   (1)     66,000     165,000  
July 7, 2022   12%   16%   (2)     231,000      
July 12, 2022   12%   16%   $2.00     355,000      
July 23, 2022   10%   22%   (2)     224,125      
Sub-total                 1,124,525     646,000  
Debt Discount                 (484,665 )   (309,317 )
                $ 639,860   $ 336,683  

____________________

(a) In default
(1) Closing bid price on the day preceding the conversion date.
(2) Closing bid price on the day preceding the conversion date in the event of default.

 

On July 7, 2021 the Company entered into a convertible note for $231,000 with a one year maturity, interest rate of 12%, the Company received $199,500 in cash proceeds, recorded an original issue discount of $21,000, a derivative discount of $39,261 related to a conversion feature, and transaction fees of $10,500. As part of the loan the Company issued 30,960 shares as a commitment fee and recognized $31,005 based on a relative fair value calculation as debt discount with a corresponding adjustment to paid-in capital. The discount is amortized over the term of the loan.

 

On July 12, 2021 the Company entered into a convertible note for $355,000 with a one year maturity, interest rate of 12%, the Company received $300,025 in cash proceeds, recorded an original issue discount of $35,500, a derivative discount of $171,250 related to a conversion feature, and transaction fees of $19,475. As part of the loan the Company issued 60,850 shares as a commitment fee and recognized $28,795 based on a relative fair value calculation as debt discount with a corresponding adjustment to paid-in capital. The discount is amortized over the term of the loan.

 

On July 20, 2021 the Company entered into a new convertible note for $224,125 with a one year maturity, interest rate of 10%, the Company received $200,000 in cash proceeds, recorded an original issue discount of $20,375, a derivative discount of $106,364 related to a conversion feature, and transaction fees of $3,750. The discount is amortized over the term of the loan.

 

- 15 -


 

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 six months ended July 31, 2021 and 2020, the Company recorded amortization of debt discount expense of $311,936 and $626,811, respectively. For the three months ended July 31, 2021 and 2020, the Company recorded amortization of debt discount expense of $183,407 and $47,898, respectively.

 

During the three and six months ended July 31, 2021, the Company converted a total of $56,600 of the convertible notes and $3,500 of fees into 30,000 common shares.

 

During the three months ended July 31, 2021 and July 31, 2020 the Company added $nil and $3,394 in penalty interest to the loan, respectively. During the six months ended July 31, 2021 and July 31, 2020 the Company added $28,000 and $3,394 in penalty interest to the loan, respectively.

 

The Company had accrued interest payable of $210,124 and $240,713 on the notes at July 31, 2021 and January 31, 2021, respectively.

 

As of July 31, 2021, the Company had $151,000 of aggregate debt in default. The agreements provide legal remedies for satisfaction of defaults, none of the lenders to this point have pursued their legal remedies. The Company continues to accrue interest at the listed rates, and plans to seek their conversion or payoff within the next twelve months.

 

NOTE 10 – DERIVATIVE LIABILITIES

 

As of July 31, 2021 and January 31, 2021, the Company had derivative liabilities of $415,177 and $213,741, respectively. During the three months ended July 31, 2021 and 2020, the Company recorded a loss of $16,294 and a gain of $506,979, respectively, from the change in the fair value of derivative liabilities. During the six months ended July 31, 2021 and 2020, the Company recorded a loss of $12,107 and a gain of $432,199, respectively, from the change in the fair value of derivative liabilities. Any liabilities resulting from the warrants outstanding are immaterial.

 

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

 

The following table presents changes in Level 3 liabilities measured at fair value for the three months ended July 31, 2021. Both observable and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long- dated volatilities) inputs.

 

    Level 3  
    Derivatives  
Balance, January 31, 2021   $ 213,741  
Settlement due to Repayment of Debt     (109,914 )
Changes due to Issuance of New Convertible Notes     316,883  
Changes due to Conversion of Notes Payable     (17,640 )
Mark to Market Change in Derivatives     12,107  
Balance, July 31, 2021   $ 415,177  

 

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.

 

- 16 -


 

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 July 31, 2021 is as follows:

 

    Embedded
Derivative Liability
As of
July 31, 2021
 
Strike price   $2.00 - $2.11  
Contractual term (years)   0.25 - 0.97 years  
Volatility (annual)   56.4% - 200.0%  
High yield cash rate   24.90% - 29.42%  
Underlying fair market value   $2.11  
Risk-free rate   0.11% - 0.18%  
Dividend yield (per share)   0%  

 

 

NOTE 11 – STOCKHOLDERS’ DEFICIT

 

Preferred Stock:

 

The Series A Preferred Stock has an automatic forced conversion into common stock upon the completion of the repurchase or extinguishing of all “toxic” debt (notes having conversion features tied to the Company’s common stock), the extinguishing of all other existing dilutive debt or equity structures, and total recapitalization of the Company. As of both July 31, 2021, and January 31, 2021 the Company had 0 shares of Series A Preferred issued and outstanding and 330,000 authorized with a par value of $0.001 per share.

 

At both July 31, 2021 and January 31, 2021, there were 20,000 and 20,000 Series B preferred shares outstanding, respectively. The Series B Preferred Stock have voting rights equal to 51% of the total voting rights at any time. There are no conversion rights granted holders of Series B Preferred shares, they are not entitled to dividends, and the Company does not have the right of redemption. Currently, there are 20,000 Series B preferred shares authorized and issued of the Series B Preferred Stock with a par-value of $0.001 per share.

 

At both July 31, 2021 and January 31, 2021, there were 7,250 and 7,250 Series C preferred shares outstanding, respectively. The Series C Preferred Stock have the right to convert into the common stock of the Company by multiplying the number of issued and outstanding shares of common stock by 2.63 on the conversion date. The holders of Series C Preferred shares are not entitled to dividends, and the Company does not have the right of redemption. Currently, there are 7,250 Series C preferred shares authorized and issued with a par-value of $0.001 per share. The Series C Preferred Stock shall eventually convert on December 31, 2024.

 

At both July 31, 2021 and January 31, 2021, there were 870 Series D preferred shares authorized and outstanding, respectively which with a par value $.001. All shares of Series D Preferred Stock will rank subordinate and junior to all shares of Series A, B and C of Preferred Stock of the Corporation and pari passu with any of the Corporation’s preferred stock hereafter created as to distributions of assets upon dissolution or winding up of the Corporation, whether voluntary or involuntary. These shares are non-voting, do not receive dividends and are redeemable according to the terms set out as follows:

 

OPTIONAL REDEMPTION.

 

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

 

- 17 -


 

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

 

(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 July 31, 2021 on the date of the financial statements.

 

Because the holders of the Series D preferred stock have the right to demand cash redemption, the cumulative amount of the redemption feature is included in Temporary Equity as of July 31, 2021 and January 31, 2021.

 

Common Stock

 

The Company is authorized to issue 15,000,000 common shares at a par value of $0.000001 per share. These shares have full voting rights. The share capital has been retrospectively adjusted accordingly to reflect these reverse stock splits.  At July 31, 2021 and January 31, 2021 there were 2,800,973 and 1,427,163 shares outstanding and issuable, respectively.  No dividends were paid in the six months ended July 31, 2021 or 2020. The Company’s articles of incorporation include a provision that the Company is not allowed to issue fractional shares.

 

- 18 -


 

The Company issued the following shares of common stock in the six months ended July 31, 2021:

 

The Company issued 1,202,000 shares for $2,229,000. The company received $2,224,805 in cash proceeds with the remaining $4,195 recorded as share proceeds receivable. A lender converted $56,600 of convertible notes and $3,500 of fees into 30,000 common shares. The Company issued 50,000 shares with a fair value of $107,500 as payment for fees to a consultant. The Company issued 91,810 shares to lenders as commitment fee with a relative fair value of $59,801.

 

Options and Warrants:

 

The Company has no options outstanding as of July 31, 2021 or January 31, 2021.

 

The Company recorded option and warrant expense of $0 and $0 for the three and six months ended July 31, 2021 and 2020, respectively.

 

For the three and six months ended July 31 ,2021 the Company issued the following warrants:

 

In the three months ended July 31, 2021, the Company issued a warrant to Triton Funds LP (“Triton”) to acquire 300,000 shares of the Company’s common stock as part of the Common Stock Purchase Agreement with Triton which allows Triton to purchase shares of our common stock and which was included in the Registration Statement on Form S-1 the Company filed on August 5, 2021 and which went effective on August 18, 2021 (see Note 16). The table A below provides the significant estimates used that resulted in the Company determining the fair value of the warrant at $600,000, which has been recorded as of July 31, 2021 as a deferred offering cost. In the event that Triton requests purchases of the Company’s common stock that total less than $600,000, the deferred offering costs will be expenses as professional fees.

 

Table A

 

Expected volatility 2181%
Exercise price $2.11
Stock price $2.00
Expected life 3 years
Risk-free interest rate 0.37%
Dividend yield 0%

 

The Company issued no warrants in the three and six months ended July 31, 2020.

 

The Company had the following fully vested warrants outstanding at July 31,2021:

 

Issued To # Warrants Dated Expire Strike Price   Expired Exercised
Lender 950,000 08/28/2020 08/28/2023 $0.40 per share   N N
Broker 2,500 10/11/2020 10/11/2025 $4.50 per share   N N
Broker 3,000 11/25/2020 11/25/2025 $3.00 per share   N N
Triton 300,000 07/27/2021 07/27/2024 $2.11 per share   N N

 

 Summary of warrants outstanding

    Options   Weighted Average
Exercise Price
  Warrants   Weighted Average
Exercise Price
 
Outstanding at January 31, 2021     $   955,500   $ 0.42  
Granted         300,000     2.11  
Exercised              
Forfeited and canceled              
Outstanding at July 31, 2021     $   1,255,500   $ 0.73  

 

 

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NOTE 12 – RELATED PARTY TRANSACTIONS

 

As of July 31, 2021 and January 31, 2021, the Company had $71,173 and $106,173, respectively of related party accrued expenses related to accrued compensation for employees and consultants.

 

NOTE 13 – COMMITMENTS AND CONTINGENCIES

 

On August 30, 2016, the Company entered into a 60-month lease agreement for its 3,554 sf warehouse facility starting in December 2016 with a minimum base rent of $2,132 and estimated monthly CAM charges of $1,017 per month. This lease is with a shareholder.

 

On July 1, 2018, the Company entered into a 60-month lease agreement with its minority shareholder for its 8,800 sf warehouse facility with a minimum base rent of $6,400 per month.

 

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

       
Maturity of Lease Liabilities Operating
Leases
 
July 31 2022 $ 121,917  
July 31, 2023   102,922  
July 31, 2024   30,003  
July 31, 2025   30,003  
July 31, 2026   30,003  
After July 31, 2026   10,002  
Total lease payments   324,850  
Less: Interest   (36,085 )
Present value of lease liabilities $ 288,765  

 

The Company had total operating lease and rent expense of $30,480 and $34,079 for the three months ended July 31, 2021 and 2020 respectively. The Company had total operating lease and rent expense of $60,959 and $68,158 for the six months ended July 31, 2021 and 2020 respectively.

 

There is pending litigation initiated by the Company around the validity of a $100,000 note which the Company signed based upon representations of funding from the maker which were never received. The Company initiated litigation to dispute the note and the 1,692 shares that have been issued. There was no consideration for the issuance of the shares and the shares have been accounted for as if they were returned and cancelled although they have not been returned.

 

- 20 -


 

NOTE 14 – EARNINGS (LOSS) PER SHARE

 

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

               
    For the Three Months Ended  
    July 31,  
    2021   2020  
Numerator:              
Net income (loss) available to common shareholders   $ (1,752,249 ) $ 394,962  
               
Denominator:              
Weighted average shares – basic     2,614,311     763,214  
               
Net income (loss) per share – basic   $ (0.67 ) $ 0.52  
               
Effect of common stock equivalents              
Add: interest expense on convertible debt     9,397     132,142  
Add: amortization of debt discount     183,407     47,898  
Less: gain on settlement of debt on convertible notes     (49,317 )    
Add (Less): loss (gain) on change of derivative liabilities     16,294     (506,979 )
Net income (loss) adjusted for common stock equivalents     (1,592,468 )   68,023  
               
Dilutive effect of common stock equivalents:              
Convertible notes and accrued interest         48,036,434  
Convertible Class C Preferred shares         2,380,076  
Warrants (1)         1  
               
Denominator:              
Weighted average shares – diluted     2,614,311     51,179,725  
               
Net income (loss) per share – diluted   $ (0.67 ) $ 0.00  

 

The anti-dilutive shares of common stock equivalents for the three months ended July 31, 2021 and July 31, 2020 were as follows:

 

    For the Three Months Ended  
    July 31,  
    2021   2020  
               
Convertible notes and accrued interest     632,535      
Convertible Class C Preferred shares     7,366,086      
Warrants     1,255,500      
Total     9,254,121      

 

- 21 -


 

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

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

               
    For the Six Months Ended  
    July 31,  
    2021   2020  
Numerator:              
Net income (loss) available to common shareholders   $ (2,319,806 ) $ 1,581,860  
               
Denominator:              
Weighted average shares – basic     2,282,792     660,668  
               
Net income (loss) per share – basic   $ (1.02 ) $ 2.39  
               
Effect of common stock equivalents              
Add: interest expense on convertible debt     15,949     235,682  
Add: amortization of debt discount     308,811     626,811  
Less: gain on settlement of debt on convertible notes     (963,366 )   (1,947,372 )
Add (Less): loss (gain) on change of derivative liabilities     12,107     (432,199 )
Net income (loss) adjusted for common stock equivalents     (2,946,305 )   64,782  
               
Dilutive effect of common stock equivalents:              
Convertible notes and accrued interest         48,036,434  
Convertible Class C Preferred shares         2,380,076  
Warrants         1  
               
Denominator:              
Weighted average shares – diluted     2,282,792     51,077,179  
               
Net income (loss) per share – diluted   $ (1.02 ) $ 0.00  

 

The anti-dilutive shares of common stock equivalents for the six months ended July 31, 2021 and July 31, 2020 were as follows:

 

    For the Six Months Ended  
    July 31,  
    2021   2020  
               
Convertible notes and accrued interest     632,535      
Convertible Class C Preferred shares     7,366,086      
Warrants (1)     1,255,500      
Total     9,254,121      

  

 

NOTE 15 – GAIN ON SETTLEMENT OF DEBT

 

For the three months ended  July 31, 2021 the gain on settlement of debt of $49,317 (2020-$0) which resulted from the reduction in the derivative liability due to cash repayments on convertible debt.

 

For the six months ended July 31, 2021 the gain on settlement of debt of $963,366 consisted of a $853,452 gain that resulted from the settlement of accounts payable totaling $950,151 that was settled for $96,699, and a $109,914 gain that resulted from the reduction in the derivative liability due to cash repayments on convertible debt. For the three months ended July 31, 2020 the gain on settlement of debt of $2,172,646 consisted of a gain that resulted from the settlement of $1,070,035 in convertible notes, and $175,422 in accrued interest, as well as $122,000 in short-term debt and $22,076 in accrued interest, and the associated derivative liability of $792,218 all totaling $2,181,751 in exchange for 250 Class C shares having a fair-value of $9,105.

 

- 22 -


 

NOTE 16 – SUBSEQUENT EVENTS

 

Subsequent to quarter year end up to September 10, 2021:

 

a lender converted $76,500 in principal for 40,000 shares of common stock.
   
the Company issued 320,000 common shares for gross proceeds of $ 489,600 under a share purchase agreement with Triton (see below).
   
the Company issued 87,500 common shares for gross proceeds of $175,000.
   
the Company issued 15,480 common shares to a lender as compliance for piggy back registration requirements.
   
the Company issued 13,011 common shares to a broker as compensation.

 

On July 29, 2021, the Company entered into a Common Stock Purchase Agreement (“CSPA”) with Triton Triton Funds LP (“Triton”). The CSPA allows Triton to purchase up to $1 million of common stock of the Company, in tranches ranging between $25,000 and $500,000, as determined by Triton. The sales price for each tranche requires the company to price the sale of the shares at ninety percent (90%) of the lowest traded price of the common stock ten business days prior to the closing. On August 18, 2021, a registration statement filed on Form S-1 covering up to 600,000 shares went effective at which time the CSPA became effective. As part of the CSPA, the Company may not enter into any agreement with similar terms so long as the CSPA remains active, Triton is limited such that purchases of the CSPA may not cause Triton to have an ownership level greater than 9.99% of the Company’s issued and outstanding common stock and Triton may not engage in any short selling of the Company’s common stock. The company has issued 320,000 common shares for gross proceeds of $ 489,600 under this agreement.

 

On June 4, 2021 the Company’s shareholders consented to an amendment to the Articles of Incorporation of the Company wherein the name of the Company will be changed to “Auto Parts 4Less Group, Inc.”. The Company expects this name change to become effective in the third quarter of 2021.

 

- 23 -


 

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 106 W Mayflower, Las Vegas, Nevada 89030. Our phone number is (702) 267-7100.

 

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.

 

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.

 

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.

 

Our Business

 

Along with our website currently under development, autoparts4less.com (as described below), that we are developing into our flagship website, we operate 3 niche websites through which we sell auto parts that are direct listed across marketplace and social media sites, including marketing products through online marketplaces and social media platforms, such as Facebook, Instagram, YouTube and Google:

 

  LiftKits4LESS.com*
  Bumpers4LESS.com*
  TruckBedCovers4LESS.com*

 

- 24 -


 

We target online consumers’ buying habits by shifting away from “all things to all people” web sites to highly targeted niche websites to quickly respond to market forces.

 

Our LiftKit4Less.com web site, represents:

 

  Approximately 179,000 Parts
  From 46 Manufacturers

 

Can Search Products Listed

 

  9 Categories Including Lights & Exterior Accessories
  66 Subcategories Including Wheels, Electronics & Interior Parts

 

Select Parts for Over

 

  28 Makes of Vehicles Such as Ford, Chevy and Land Rover
  100 Models Including Trucks, SUVs and Jeeps

 

AutoParts4Less.com Launch Expected Timeline

 

4Less plans to finish development and beta testing with goal to launch AutoParts4Less.com for aftermarket auto parts manufacturers to sell their parts direct to the public.

 

  Development Team
    March 2020 India Development Team was hired.
     
  Platform
    Amazon Web Services (AWS) cloud computing platform chosen to operate AutoParts4Less.com 

 

  Marketing
    Began marketing marketplace services to aftermarket manufacturers in December 2020
     
  Data Input
    Manufacturers started loading their parts info 1st quarter 2021

 

Auto Parts 4less Marketplace Functionality for Manufacturers

 

Our Auto Parts 4less website will have the following elements:

 

  Manufacturers create an account allowing easy onboarding of products.
  Offer premium placement in search results.
  Ratings and reviews can be responded to.
  Ability to answer basic questions from purchasers.
  How-to video galleries.
  Keyword advertising.
  Promote discounts on products.
  4Less can push product lines to other marketplaces such as eBay and Amazon.

 

Distribution

 

Our distribution is accomplished as follows:

 

  Direct drop ship from manufacturers to consumers – Approximately 80%
  Direct drop ship from Warehouse Inventory Companies to consumers – Approximately 15%
  Consumer Purchases directly through our own warehouses – Approximately 5%

 

Company has launched website in Q3 2021.

 

- 25 -


 

Sales

 

Our sales are derived from the following:

 

  Proprietary websites. 62% of our sales are currently generated through our own websites. We intend to build and launch additional niche websites
     
  Third Party Websites (such as eBay and Walmart)– We sell our products on third party websites and pay fees to these websites in connection with each sale.

 

Business Strategies

 

  Continually develop best in class technological modules to increase visitor conversions.
     
  Work to develop and launch the website www.autoparts4less.com by approximately mid-to-late FY2022 into what we believe will be the first standalone multi-vendor automotive parts marketplace.

 

Results of Operations For the Six Months Ended July 31, 2021 compared to the six months ended July 31, 2020

 

The following table shows our results of operations for the six months ended July 31, 2021 and 2020. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

 

            Change  
    2021   2020   $   %  
Total Revenues   $ 6,315,457     4,927,280   $ 1,388,177   28%  
Gross Profit     1,614,895     1,497,384     117,511   8%  
Total Operating Expenses     4,285,558     1,623,235     2,662,323   164%  
Total Other Income (Expense)     350,857     1,707,711     (1,356,854 ) (79% )
Net Income (Loss)   $ (2,319,806 ) $ 1,581,860   $ (3,901,666 ) (247% )

 

Revenue

 

The following table shows revenue split between proprietary and third party website revenue for the six months ended July 31, 2021 and 2020:

 

            Change  
    2021   2020   $   %  
Proprietary website revenues   $ 3,946,810     2,403,120   $ 1,543,690   64%  
Third party website revenues     2,368,647     2,524,160     (155,513 ) (6% )
Total Revenues   $ 6,315,457   $ 4,927,280   $ 1,388,177   28%  

 

We had total revenue of $6,315,457 for the six months ended July 31, 2021, compared to $4,927,280 for the six months ended July 31, 2020. Sales increased by $1,388,177 due to due to aggressive advertising and increased consumer demand, mostly experienced in the first quarter ended April 30, 2021. The Company also recorded $298,711 in deferred revenue, which will be recognized as revenue next quarter and recognized $687,666 of deferred revenue recorded January 31, 2021. The deferred revenue represents orders paid by customers this period but delivered in the following period due to back orders and processing and delivery times. The Company also recorded $164,900 in customer deposits and recognized $188,385 recorded January 31, 2021. The customer deposits are orders paid by customers and canceled in the following period due to back orders or other reasons. There was neither deferred revenue nor customer deposits for the six months ended July 31, 2020.

 

The Company’s focus continues in growing its proprietary website revenues and the Company was successful in that, increasing its proprietary website revenue by 64%. The company believes this strategy will lead to higher revenues and lower overall costs in the future. Third party website revenue fell by 6% due to listing removals which were a result of unfulfilled orders due to manufacturers failure to provide products in a timely basis.

 

- 26 -


 

Gross Profit

 

We had gross profit of $1,614,895 for the six months ended July 31, 2021, compared to gross profit of $1,497,384 for the six months ended July 31, 2020. Gross profit increased by $117,511 as a result of the increased revenues explained above and partly offset by an increase in cost of revenue due to a change in product mix.

 

Operating Expenses

 

The following table shows our operating expenses for the six months ended July 31, 2021 and 2020:

 

            Change  
Operating expenses   2021   2020   $   %  
Depreciation   $ 23,451   $ 12,598     10,853   86%  
Postage, Shipping and Freight     335,749     264,893     70,856   27%  
Marketing and Advertising     1,267,324     23,850     1,243,474   5214%  
E Commerce Services, Commissions and Fees     725,737     419,267     306,470   73%  
Operating lease cost     60,959     68,158     (7,199 ) (11% )
Personnel Costs     759,193     499,604     259,589   52%  
General and Administrative     1,113,145     334,865     778,280   232%  
Total Operating Expenses   $ 4,285,558   $ 1,623,235     2,662,323   164%  

 

•   Depreciation increased by $10,853 due to asset additions in 2021, thus a higher asset value is being depreciated.

 

•   Postage shipping and freight increased slightly by $70,856 due to higher sales.

 

•   Marketing and advertising increased by $1,243,474 due to aggressive promotional efforts in 2021 to drive sales to our proprietary websites and build our brands. The Company also made efforts to reduce spending in 2020 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 $306,470 due to higher sales and website development for new website. (AutoParts4Less.com)

 

•   Operating Lease Cost decreased by $7,199 due to one fewer lease in 2021.

 

•   Personnel Costs increased by $259,589 mostly due to the lower costs in 2020 which were a result of temporary layoffs because of the Covid-19 pandemic which began in March 2020 and three new employees in 2021. .

 

•   General and Administrative increased by $778,280 mainly due to higher professional fees , investor relations because of REG A filings and stock based compensation in 2021. In addition in the prior year’s period, the Company reduced expenditures as a result of the Covid-19 pandemic.

 

Other Income (Expense)

 

The following table shows our other income and expenses for the six months ended July 31, 2021 and 2020:

 

            Change  
Other Income (Expense)   2021   2020   $   %  
Gain (Loss) on Sale of Property and Equipment   $ 20,345   $ 464     19,881   4285%  
Gain (Loss) on Derivatives     (12,107 )   432,199     (444,306 ) (103% )
Gain on Settlement of Debt     963,366     2,172,646     (1,209,280 ) (56% )
Amortization of Debt Discount     (311,936 )   (626,811 )   314,875   (50% )
Interest Expense     (308,811 )   (270,787 )   (38,024 ) 14%  
Total Other Income (Expense)   $ 350,857   $ 1,707,711     (1,356,854 ) (79% )

 

The changes above can be explained by the reduction in convertible debt that started in the prior year’s quarter ended July 31,2020. As a result of the debt exchanges and settlements, the gain on settlement of debt was higher and there were reductions in amortization expense and due to the lower debt. Interest expense increased as a result of new loans in the current year’s quarter. The higher loss on derivatives in 2020 is a function of the market factors in the valuation of the derivative liability described in Note 10.

 

- 27 -


 

We had net loss of $2,319,806 for the six months ended July 31, 2021, compared to net income of $1,581,860 for the six months ended July 31, 2020. The decrease in net income was mainly due to the gain on settlement of debt as well as the large increase in operating expenses as explained in the discussion above.

 

Results of Operations for the Three Months Ended July 31, 2021 Compared to the Three Months Ended July 31, 2020

 

The following table shows our results of operations for the three months ended July 31, 2021 and 2020. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

 

            Change  
    2021   2020   $   %  
Total Revenues   $ 2,586,673     2,927,209   $ (340,536 ) (12% )
Gross Profit     652,689     925,617     (272,928 ) (29% )
Total Operating Expenses     2,080,994     842,507     1,238,487   147%  
Total Other Income (Expense)     (323,944 )   311,852     (635,796 ) (204% )
Net Income (Loss)   $ (1,752,249 ) $ 394,962   $ (2,147,211 ) (544% )

 

Revenue

 

The following table shows revenue split between proprietary and third-party website revenue for the three months ended July 31, 2021 and 2020:

 

            Change  
    2021   2020   $   %  
Proprietary website revenues   $ 1,823,709     1,294,014   $ 529,695   41%  
Third party website revenues     762,964     1,633,195     (870,231 ) (53% )
Total Revenues   $ 2,586,673   $ 2,927,209   $ (340,536 ) (12% )

 

We had total revenue of $2,586,673 for the three months ended July 31, 2021, compared to $2,927,209 for the three months ended July 31, 2020. Sales decreased by $340,536 due to lower than expected third party revenues. The Company also recorded $298,711 in deferred revenue, which will be recognized as revenue next quarter and recognized $981,830 from last quarter. The deferred revenue represents orders paid by customers this period but delivered in the following period due to back orders and processing and delivery times. The Company also recorded $164,900 in customer deposits for the three months ended July 31, 2021 and recognized $268,932 from the prior quarter. The customer deposits are orders paid by customers and canceled in the following period due to back orders or other reasons.

 

The Company’s focus continues in growing its proprietary website revenues and the Company was successful in that, increasing its proprietary website revenue by 41%. Third party website revenue fell by 53% due to listing removals which were a result of unfulfilled orders due to manufacturers failure to provide products in a timely basis.

 

Gross Profit

 

We had gross profit of $652,689 for the three months ended July 31, 2021, compared to gross profit of $925,617 for the three months ended July 31, 2020. Gross profit decreased by $272,928 as a result of the decreased revenues explained above.

 

Operating Expenses

 

The following table shows our operating expenses for the three months ended July 31, 2021 and 2020:

 

            Change  
Operating expenses   2021   2020   $   %  
Depreciation   $ 12,716   $ 5,951     6,765   114%  
Postage, Shipping and Freight     142,562     151,755     (9,193 ) (6% )
Marketing and Advertising     659,290     5,782     653,508   11302%  
E Commerce Services, Commissions and Fees     309,610     252,848     56,762   22%  
Operating lease cost     30,480     34,079     (3,599 ) (11% )
Personnel Costs     461,700     232,869     228,831   98%  
General and Administrative     464,636     159,223     305,413   192%  
Total Operating Expenses   $ 2,080,994   $ 842,507     1,238,487   147%  

 

- 28 -


 

•   Depreciation increased by $6,765 due to two new vehicles acquired last quarter.

 

•   Postage shipping and freight decreased by $9,193 due to lower sales.

 

•   Marketing and advertising increased by $653,308 due to aggressive promotional efforts in 2021 to drive sales to our proprietary websites and build our brands. Note for the three months ended July 31, 2020 the Company had reduced spending due to the Covid 19 pandemic.

 

•   E Commerce Services, Commissions and Fees increased by $56,762 due to website development for new website. (AutoParts4Less.com)

 

•   Operating Lease Cost decreased by $3,599 due to one less operating lease in 2021.

 

•   Personnel Costs increased by $228,831 due to temporary layoffs in the prior year’s quarter commencing March 2020 as a result of the Covid-19 pandemic.

 

•   General and Administrative in increased by $305,413 due to increases in investor relations costs as a result of the REG A subscription offering, professional fees due to reporting and business requirements, and stock based compensation on warrants issued this current quarter. Note for the three months ended July 31, 2020, the Company had reduced spending significantly due to the Covid 19 pandemic.

 

Other Income (Expense)

 

The following table shows our other income and expenses for the three months ended July 31, 2021 and 2020:

 

            Change  
Other Income (Expense)   2021   2020   $   %  
Gain (Loss) on Sale of Property and Equipment   $ 20,345   $ 464     19,881   4285%  
Gain on Settlement of Debt     49,317         49,317    
Gain (Loss) on Derivatives     (16,294 )   506,979     (523,273 ) (103% )
Amortization of Debt Discount     (183,408 )   (47,898 )   (135,510 ) 283%  
Interest Expense     (193,904 )   (147,693 )   (46,211 ) 31%  
Total Other Income (Expense)   $ (323,944 ) $ 311,852     (635,796 ) (204% )

 

The higher loss on derivatives is a function of the market factors in the valuation of the derivative liability described in Note 10. Amortization expense and interest increased due to new notes this current quarter.

 

We had a net loss of $1,752,249 for three months ended July 31, 2021, compared to net income of $394,962 for three months ended July 31, 2021. The decrease in net income was mainly due to the gain on derivatives that occurred in the three months ended July 31, 2020 and the higher operating expenses, specifically marketing, investor relations and professional fees in the three months ended July 31, 2021.

 

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 any adjustments relating to the recovery of assets or the classification of liabilities that may be necessary should we be unable to continue as a going concern. For the three months ended July 31, 2021, we have increased revenue and are working to achieve positive cash flows from operations.

 

As of July 31, 2021, we had a cash balance of $382,491, share subscription receivable of $4,195, inventory of $318,107 and $4,930,982 in current liabilities. At the current cash consumption rate, we will 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.

 

- 29 -


 

Capital Resources

 

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

 

    July 31, 2021   January 31, 2021  
Current assets   $ 723,737   $ 715,083  
Current liabilities     4,930,982     5,059,138  
Working capital (deficits)   $ (4,207,245 ) $ (4,344,055 )

 

Net cash used in operations for the six months ended July 31, 2021 was $3,286,331 as compared to net cash used in operations of $160,227 for the six months ended July 31, 2020. Net cash used in investing activities for the six months ended July 31, 2021 was $9,940 as compared to cash flows provided in investing activities of $9,750 for the same period in 2020. Net cash provided by financing activities for the six months ended July 31, 2021 was $3,401,098 as compared to $109,643 for the six months ended July 31, 2020.

 

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 July 31, 2021 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.

 

- 30 -


 

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: September 14, 2021

 

- 31 -


 

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.INS

 

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. **

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document **

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document **

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document **

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document **

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document **

 

 

 

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) **

__________

*   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.”

 

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