The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements.
Notes to Consolidated Financial Statements
January 31, 2021 and 2020
Note 1 – Description of Business and Summary
of Significant Accounting Policies
Nature of Business – Auto Parts
4Less Group, Inc. formerly 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 Company is now a holding company operating through
4LESS and offers products including exhaust systems, suspension systems, wheels, tires, stereo systems, truck bed covers, and shocks.
On December 30, 2019 4LESS changed its name to Auto Parts 4Less, Inc. On April 28, 2022 The 4Less Group , Inc changed its name to Auto
Parts 4less Group, Inc.
The financial statements have been adjusted to reflect
a 10-1 reverse stock split effective April 28, 2022.
Significant Accounting Policies
The Company’s management selects accounting
principles generally accepted in the United States of America (“U.S. GAAP”) and adopts methods for their application. The
application of accounting principles requires the estimating, matching and timing of revenue and expense. The accounting policies used
conform to generally accepted accounting principles which have been consistently applied in the preparation of these financial statements.
Basis of Presentation
The Company prepares its financial statements on the
accrual basis of accounting in conformity with U.S. GAAP.
Principles of Consolidation
The financial statements include the accounts of
Auto Parts 4Less Group, Inc. (formerly The 4Less Group, Inc.) as well as Auto Parts 4Less, Inc. (formerly The 4LESS Corp.) and JBJ
Wholesale LLC. All significant inter-company transactions have been eliminated. All amounts are presented in U.S.
Dollars unless otherwise stated.
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 estimate deferred revenue and customer deposits
and value derivative liabilities, options and warrants.
F-9
Reclassifications
Certain amounts in the Company’s 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 year ended January 31, 2022 the Company purchased
approximately 54% of its inventory and items available for sale from third parties from three vendors. As of January 31, 2021, the net
amount due to the vendors included in accounts payable was $349,839. For the year ended January 31, 2021 the Company purchased approximately
57% of its inventory and items available for sale from third parties from three vendors. As of January 31, 2021, the net amount due to
the vendors included in accounts payable was $599,072. The Company believes there are numerous other suppliers that could be substituted
should the 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.
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.
F-10
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.
As of January 31, 2022 and 2021, the Company’s
derivative liabilities were measured at fair value using Level 3 inputs. See Note 10.
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 January
31, 2022 and January 31, 2021:
| |
|
January 31, 2022 |
|
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 |
|
$ |
1,263,442 |
|
$ |
— |
|
$ |
— |
|
$ |
1,263,442 |
|
| Totals |
|
$ |
1,263,442 |
|
$ |
— |
|
$ |
— |
|
$ |
1,263,442 |
|
| |
|
January 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 |
|
$ |
213,741 |
|
$ |
— |
|
$ |
— |
|
$ |
213,741 |
|
| Totals |
|
$ |
213,741 |
|
$ |
— |
|
$ |
— |
|
$ |
213,741 |
|
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. 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.
F-11
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 January 31, 2022 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 years ended January 31, 2022 and 2021:
| |
|
|
|
|
|
Change |
|
| |
|
2022 |
|
2021 |
|
$ |
|
% |
|
| Proprietary website revenue |
|
$ |
7,576,068 |
|
$ |
4,200,624 |
|
$ |
3,375,444 |
|
80% |
|
| Third party website revenue |
|
|
3,442,683 |
|
|
3,970,731 |
|
|
(528,048 |
) |
(13% |
) |
| Total Revenue |
|
$ |
11,018,751 |
|
$ |
8,171,355 |
|
$ |
2,847,396 |
|
35% |
|
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 (delivery of product). The Company
primarily receives fixed consideration for sales of product with variability entering into consideration due to returns on shipped products.
Shipping and handling amounts paid by customers are primarily for online orders and are included in revenue. Sales tax and other similar
taxes are excluded from revenue.
Revenue is recorded net of provisions for discounts
and promotion allowances, which are typically agreed to upfront with the customer and do not represent variable consideration. Discounts
and promotional allowances vary the consideration the Company is entitled to in exchange for the sale of products to customers. The Company
recognizes these discounts and promotional allowances in the same period that the revenue is recognized for products sales to customers.
The amount of revenue recognized represents the amount that will not be subject to a significant future reversal of revenue. The customer
pays the Company by credit card prior to delivery.
The Company offers a 30 day satisfaction guaranteed
return policy however the customer must pay for the return shipment. The return must be previously authorized, cannot be either damaged
or previously installed and must be in saleable condition. In the Company’s experience this amount is immaterial and therefore no
provision has been recorded on the Company’s books. Any defective merchandise falls under the manufacturer’s limited warranty
and is subject to the manufacturer’s inspection. The manufacturer has the option to repair or replace the item.
F-12
Stock-Based Compensation
The Company accounts for stock options at fair value.
The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model and provides
for expense recognition over the service period, if any, of the stock option.
Earnings (Loss) per Common Share
Basic earnings (loss) per share (“EPS”)
is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding
(denominator) during the period. Diluted EPS give effect to all dilutive potential common shares outstanding during the period using the
treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price
for the period is used to determine the number of shares assumed to be purchased from the exercise of stock options and/or warrants. Diluted
EPS excluded all dilutive potential shares if their effect is anti-dilutive.
Basic loss per common share is computed based on the
weighted average number of shares outstanding during the period. Diluted loss per share is computed in a manner similar to the basic loss
per share, except the weighted-average number of shares outstanding is increased to include all common shares, including those with the
potential to be issued by virtue of convertible debt and other such convertible instruments. Diluted loss per share contemplates a complete
conversion to common shares of all convertible instruments only if they are dilutive in nature with regards to earnings per share.
Recently Issued Accounting Standards
In January 2017, the FASB issued ASU 2017-04, Intangibles
- Goodwill and Other (Topic 350) which simplifies goodwill impairment testing by requiring that such periodic testing be performed by
comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the
carrying amount exceeds the reporting unit’s fair value. The policy is effective for fiscal years, including interim periods, beginning
after December 15, 2019. We adopted on February 1, 2020 and the adoption had no impact.
Fair Value Measurement: In 2018, the FASB issued
amended guidance to remove, modify and add disclosure requirements for fair value measurements. This amendment is effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted for any removed
or modified disclosure requirements. Transition is on a prospective basis for the new and modified disclosures, and on a retrospective
basis for disclosures that have been eliminated. The adoption of this guidance on February 1, 2020 did not have a material impact on our
consolidated financial statements.
In 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.
In
December 2019, the Financial Accounting Standards Board (FASB) issued amended guidance on the accounting and reporting of income taxes.
The guidance is intended to simplify the accounting for income taxes by removing exceptions related to certain intra-period tax allocations
and deferred tax liabilities; clarifying guidance primarily related to evaluating the step-up tax basis for goodwill in a business combination;
and reflecting enacted changes in tax laws or rates in the annual effective tax rate. The Company adopted the new guidance effective February
1, 2021. There was no impact to the Company’s consolidated financial statements upon adoption.
In January 2020,
the FASB issued new guidance intended to clarify certain interactions between accounting standards related to equity securities, equity
method investments and certain derivatives. The guidance addresses accounting for the transition into and out of the equity method of
accounting and measuring certain purchased options and forward contracts to acquire investments. The Company adopted the new guidance
effective February 1, 2021. There was no impact to the Company’s consolidated financial statements upon adoption.
In August 2020,
the FASB issued amended guidance on the accounting for convertible instruments and contracts in an entity’s own equity. The guidance
removes the separation model for convertible debt instruments and preferred stock, amends requirements for conversion options to be classified
in equity as well as amends diluted earnings per share (EPS) calculations for certain convertible debt instruments. The amended guidance
is effective for interim and annual periods in 2022. The application of the amendments in the new guidance are to be applied either on
a modified retrospective or a retrospective basis. We are currently assessing the effect that the adoption of this standard will have
on the Company’s consolidated financial statements upon adoption.
F-13
Recently
Issued Accounting Standards Not Yet Adopted
In March 2020,
the FASB issued optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform
on financial reporting and subsequently issued clarifying amendments. The guidance provides optional expedients and exceptions for accounting
for contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (LIBOR) or another reference
rate expected to be discontinued because of reference rate reform. The optional guidance is effective upon issuance and can be applied
on a prospective basis at any time between January 1, 2020 through December 31, 2022. The Company is currently evaluating the impact
of adoption on its consolidated financial statements.
In October 2021,
the FASB issued amended guidance that requires acquiring entities to recognize and measure contract assets and liabilities in a business
combination in accordance with existing revenue recognition guidance. The amended guidance is effective for interim and annual periods
in 2023 and is to be applied prospectively. Early adoption is permitted on a retrospective basis to the beginning of the fiscal year of
adoption. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements for prior
acquisitions; however, the impact in future periods will be dependent upon the contract assets and contract liabilities acquired in future
business combinations.
In November 2021, the FASB
issued new guidance to increase the transparency of transactions with a government that are accounted for by applying a grant or contribution
accounting model by analogy. The guidance requires annual disclosures of such transactions to include the nature of the transactions and
the significant terms and conditions, the accounting treatment and the impact to the company’s financial statements. The guidance
is effective for annual periods beginning in 2022 and is to be applied on either a prospective or retrospective basis. The Company is
currently evaluating the impact of adoption on its consolidated financial statements.
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 $28,451,733 as of January 31, 2022 and has a working capital deficit at January 31, 2022 of
$8,325,847. As of January 31, 2022, the Company only had cash and cash equivalents of $77,498 and approximately $571,000 of short-term
debt in default. The short-term debt agreements provide legal remedies for satisfaction of defaults, none of the lenders to this point
have pursued their legal remedies. While the Company has continued to grow its revenues, at this time, our current liquidity position
raises substantial doubt about the Company’s ability to continue as a going concern.
Management’s plan is to raise additional funds
in the form of debt or equity in order to continue to fund losses until such time as revenues can sustain the Company. However, there
is no assurance that management will be successful in being able to continue to obtain additional funding. The financial statements do
not include any adjustments that might result from the outcome of this uncertainty.
NOTE 3 – PROPERTY
The Company capitalizes all property purchases over
$1,000 and depreciates the assets on a straight-line basis over their useful lives of 3 years for computers and 7 years for all other
assets. Property consists of the following at January 31, 2022 and 2021:
| |
|
2022 |
|
2021 |
|
| Office furniture, fixtures and equipment |
|
$ |
94,041 |
|
$ |
85,413 |
|
| Shop equipment |
|
|
43,004 |
|
|
43,004 |
|
| Vehicles |
|
|
206,760 |
|
|
40,433 |
|
| Sub-total |
|
|
343,805 |
|
|
168,850 |
|
| Less: Accumulated depreciation |
|
|
(122,469 |
) |
|
(88,823 |
) |
| Total Property |
|
$ |
221,336 |
|
$ |
80,027 |
|
Additions to fixed assets for the year ended January 31, 2022 were $196,578
with $35,000 paid in cash and $152,950 financed through vehicle loans for vehicles and an additional $8,628 acquired in equipment. Additions
to fixed assets were $0 for the year ended January 31, 2021.
F-14
For the year ended January 31, 2022, 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 year ended
January 31, 2021. Proceeds received of $9,750 and a gain on sale of property and equipment of $464 were recorded.
Depreciation expense was $48,931 and $25,196 for the
twelve months ended January 31, 2022 and January 2021, respectively.
NOTE 4 – LEASES
We lease certain warehouses, vehicles 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 January 31, 2022 and January 31, 2021.
| Leases |
|
Classification |
|
January 31, 2022 |
|
January 31, 2021 |
|
| Assets |
|
|
|
|
|
|
|
|
|
| Operating |
|
Operating Lease Assets |
|
$ |
242,583 |
|
$ |
344,413 |
|
| Liabilities |
|
|
|
|
|
|
|
|
|
| Current |
|
|
|
|
|
|
|
|
|
| Operating |
|
Current Operating Lease Liability |
|
$ |
100,001 |
|
$ |
90,286 |
|
| Noncurrent |
|
|
|
|
|
|
|
|
|
| Operating |
|
Noncurrent Operating Lease Liabilities |
|
|
138,551 |
|
|
244,049 |
|
| Total lease liabilities |
|
|
|
$ |
238,552 |
|
$ |
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. We compare against loans we obtain to acquire physical assets and not loans we obtain for financing. The loans we obtain
for financing are generally at significantly higher rates and we believe that physical space or vehicle rental agreements are in line
with physical asset financing agreements. CAM charges were not included in operating lease expense and were expensed in general and administrative
expenses as incurred.
Effective February 29 ,2020 the Company and landlord
terminated the September 2019 lease with an annual rent of $15,480, a 3 year term an 1 year renewal. There were no costs associated with
the termination. The Company eliminated the operating lease asset and operating lease liability at termination which was $45,032. (see
Note 13)
Operating lease cost was $121,917 and $121,917 for
both the twelve months ended January 31, 2022 and January 31, 2021, respectively.
NOTE 5 – CUSTOMER DEPOSITS
The Company receives payments from customers on orders
prior to shipment. At January 31, 2022 the Company had received $530,900 (January 31, 2021- $188,385) in customer deposits for orders
that were unfulfilled at January 31, 2022 and either canceled subsequent to year end or still awaiting shipment. The deposits on cancelled
orders were either returned to the customers subsequent to January 31, 2022 or will remain as deposits until the item is either delivered
and recorded as revenue or cancelled and refunded.
NOTE 6 – DEFERRED REVENUE
The Company receives payments from customers on orders
prior to shipment. At January 31, 2022 the Company had received $665,143 (January 31, 2021- $687,766) in customer payments for orders
that were unfulfilled at January 31, 2022 and delivered subsequent to year end. The orders were unfulfilled at January 31, 2022 because
of both normal order processing and fulfillment requirements, and back orders.
F-15
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 was 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. On September 22, 2021 the
loan was forgiven and $209,447 was recorded as a gain and is included in operating expenses.
NOTE 8 – SHORT-TERM AND LONG-TERM DEBT
The components of the Company’s short-term and
long term debt as of January 31, 2022 and 2021 were as follows:
| |
|
January 31, 2022 |
|
January 31, 2021 |
|
| Loan dated October 8, 2019, and revised February 29, 2020 and November 10, 2020 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), fully repaid |
|
|
— |
|
|
161,227 |
|
| Forklift Note Payable, original note of $20,433 Sept 26, 2018, 6.23% interest, 60 monthly payments of $394.54
ending August 2023(1) |
|
|
8,183 |
# |
|
12,269 |
|
| Vehicle loan original loan of $93,239 February 16, 2021, 2.90 % interest. 72 monthly payments of $1,414 beginning
on April 2, 2021 and ending on March 2, 2027. Secured by vehicle having net book value of $94,316. |
|
|
81,346 |
# |
|
|
|
| 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 $76,164. |
|
|
54,108 |
# |
|
|
|
| Working Capital Note Payable - $700,000, dated October 29, 2021, repayment of $17,904 per week until Oct 29,
2022, interest rate of approximately 31%(2,4,7) |
|
|
635,831 |
* |
|
|
|
| Working Capital Note Payable - $650,000, dated October 25, 2021, repayment of $15,875 per week
until October 25, 2022, interest rate of approximately 26%(2,4,8) |
|
|
596,047 |
* |
|
|
|
| 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 April
30, 2022(10), 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. (5) |
|
|
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 .(6) |
|
|
1,200,000 |
* |
|
1,200,000 |
|
| Promissory note - $420,000
dated December
27, 2021, including $20,000
original issue discount, maturing January
27, 2022, non-interest bearing (9)† |
|
|
420,000 |
* |
|
|
|
| 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 |
|
$ |
3,597,770 |
|
$ |
2,030,579 |
|
| |
|
January 31, 2022 |
|
January 31, 2021 |
|
| Short-Term Debt |
|
$ |
3,454,133 |
|
$ |
716,142 |
|
| Current Portion of Long-Term Debt |
|
|
27,737 |
|
|
424,064 |
|
| Long-Term Debt |
|
|
115,900 |
|
|
890,373 |
|
| Total |
|
$ |
3,597,770 |
|
$ |
2,030,579 |
|
F-16
__________
| † |
In default |
| * |
Short-term loans |
| # |
Long-term loans of $8,183 including current portion of $4,325 |
| |
$54,108
including current portion $8,632 |
| |
$81,346
including current portion $14,780 |
| (1) |
Secured by equipment having a net book value of $10,242 |
| (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. |
| (4) |
The Company has pledged a security interest on all accounts receivable and banks accounts of the Company. |
| (5) |
Financing event would be a sale or issuance of assets, debt, shares or any means of raising capital. As the
Company has entered into such a transaction the loan has reached maturity and is treated as current. An extension was granted on December
13, 2021 amending the maturity date to April 30, 2022. The April 30, 2022 payment has not been made and the Company is working on another
extension with the lender. |
| (6) |
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. On December 13, 2021 the parties amended the maturity date for the first instalment to be April 30,
2022 with ethe second instalment date unchanged. The April 30, 2022 payment has not been made and the Company is working on another extension
with the lender. |
| (7) |
This loan replaces $500,000 loan dated June 4, 2021, $422,009 proceeds were used to repay this loan , net
cash received was $253,491 after payment of $26,500 in fees. |
| (8) |
This loan replaces $500,000 loan dated June 4, 2021, $359,919 proceeds were used to repay this loan , net
cash received was $267,606 after payment of $22,475 in fees. |
| (9) |
Penalty
of 10% of principal amount and 30,000 3 year warrants with an exercise price of $15.00 on initial default and 2% of principal amount
and 15,000 3 year warrants with an exercise price of $15.00 for every 30 day default period thereafter. Initial default has been
recorded at January 31, 2022 with an interest charge of $42,000 and another $276,000 which was the fair value of the warrants (see
Note 11). The Company has defaulted on the March 2, 2022, April 1, 2022 and will issue an additional 15,000 warrants for
each of those defaults. |
| (10) |
The April 30, 2022 payment has not been made and the Company is working on another extension with the lender. |
The following are the minimum amounts due on the notes as of January 31,
2022:
| Year Ended |
|
Amount |
|
| January 31, 2023 |
|
$ |
3,481,870 |
|
| January 31, 2024 |
|
|
28,427 |
|
| January 31, 2025 |
|
|
25,798 |
|
| January 31, 2026 |
|
|
27,107 |
|
| January 31, 2027 |
|
|
28,498 |
|
| January 31, 2028 |
|
|
6,070 |
|
| Total |
|
$ |
3,597,770 |
|
NOTE 9 – SHORT-TERM CONVERTIBLE DEBT
The components of the Company’s convertible
debt as of January 31, 2022 and 2021 were as follows:
| |
Interest |
Default Interest |
Conversion |
Outstanding Principal at |
|
| Maturity Date |
Rate |
Rate |
Price |
January 31, 2022 |
|
January 31, 2021 |
|
| Nov
4, 2013* |
12% |
12% |
$1,800,000 |
$ |
100,000 |
|
$ |
100,000 |
|
| Jan
31, 2014* |
12% |
18% |
$2,400,000 |
|
16,000 |
|
|
16,000 |
|
| July
31, 2013* |
12% |
12% |
$1,440,000 |
|
5,000 |
|
|
5,000 |
|
| Jan
31, 2014* |
12% |
12% |
$2,400,000 |
|
30,000 |
|
|
30,000 |
|
| Oct. 12, 2021 |
12% |
16% |
(3) |
|
— |
|
|
230,000 |
|
| Nov.
16, 2021 |
12% |
16% |
(3) |
|
— |
|
|
100,000 |
|
| Nov. 23, 2021 |
12% |
16% |
(3) |
|
— |
|
|
165,000 |
|
| Nov 12, 2022 |
8% |
12% |
(1) |
|
2,400,000 |
|
|
— |
|
| Jan. 13, 2023 |
12% |
22% |
(2) |
|
228,000 |
|
|
— |
|
| Sub-total |
|
|
|
|
2,779,000 |
|
|
646,000 |
|
| Debt Discount |
|
|
|
|
(2,131,034 |
) |
|
(309,317 |
) |
| |
|
|
|
$ |
647,966 |
|
$ |
336,683 |
|
F-17
__________
| * |
In default |
| (1) |
lesser of $ 1.25 or 75 % of offering price if there is an uplisting to a national securities exchange. |
| (2) |
75% of closing bid price on day preceding conversion date in event of default |
| (3) |
closing bid price on the day preceding the conversion date in the event of default |
The Company had accrued interest payable of $231,412
and $240,713 on the notes at January 31, 2022 and January 31, 2021, respectively.
The Company analyzed the conversion option for derivative
accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that certain features in 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 derivative features 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 and attached warrants resulted in a discount
to the note on the debt modification date. For the years ended January 31, 2022 and 2021, the Company recorded amortization expense of
$918,463 and $335,004, respectively. See more information in Note 8.
During the years ended January 31, 2022 and 2021 the
Company added $28,000 and $3,394 in penalty interest to the loans, respectively.
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 3.096 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. The loan has been fully
repaid.
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 6,085 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. The loan has been fully
repaid.
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.The loan has been fully repaid.
On
November 12, 2021 the Company entered into a new convertible note for $2,400,000
with a one year maturity, interest rate of 8%,
with a warrant (Warrant 1) to purchase 90,000 common shares with a five year maturity and an exercise price of $15.00, and an additional
warrant (Warrant 2) to purchase 90,000
common shares with a five
year maturity and an exercise price of $15.00
to be cancelled and extinguished if the note
is repaid on or prior to maturity. The Company received $1,966,000
in cash proceeds, recorded an original issue
discount of $240,000,
a derivative discount of $1,589,617 for the conversion feature, recognized $174,436
based on a relative fair value calculation as
debt discount with a corresponding adjustment to paid-in capital for the attached warrants, and transaction fees of $194,000.
The discount is amortized over the term of the loan. The note is repayable in six monthly instalments of $432,000
commencing on June 10, 2022. This note is senior
to all existing and future indebtedness of the Company. The Company has pledged a security interest on all the assets of the Company.
The note has certain default provisions such as failure to pay any principal or interest when due, failure to uplist to a national stock
exchange by May 12, 2022, and failure to issue shares upon conversion. In the event of these or any other default provisions, the note
becomes due and payable at 125% and Warrant 2 is no longer cancellable for any circumstance.
On January 13, 2021 the Company entered into an
unsecured convertible note for $228,000
with a one year maturity, interest rate of 12%,
the Company received $200,000
in cash proceeds, recorded an original issue discount of $24,250
and a derivative discount of $26,843, and transaction fees of $3,750.
The discount is amortized over the term of the loan. The note is repayable in 10 monthly instalments of $25,536 commencing March 1,
2022. The March, April and May instalments have been paid. The note has certain default provisions such as failure to pay any
principal or interest when due, and if the Company is in default of any of its other agreements. In the event of these or any other
default provisions, the note becomes due and payable at 150%.
During the year ended January 31, 2022, the Company
converted a total of $125,000 of the convertible notes, $27,691 of accrued interest and $8,750 of fees into 89,771 common shares.
F-18
As of January 31, 2022, 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 January 31, 2022 and January 31, 2021, the Company
had derivative liabilities of $1,263,442 and $213,741, respectively. During the years ended January 31, 2022 and 2021 the Company recorded
a gain of $235,703 and a loss of $828,614 from the change in the fair value of derivative liabilities, respectively.
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 years ended January 31, 2022 and January 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 (in thousands).
| |
|
Level 3 |
| |
|
Derivatives |
| Balance, January 31, 2020 |
|
$ |
2,611,125 |
|
| Changes due to Issuance of New Convertible Notes |
|
|
264,487 |
|
| Reduction of derivative due to extinguishment or repayment |
|
|
(3,470,300 |
) |
| Changes due to Conversion of Notes Payable |
|
|
(20,185 |
) |
| Mark to Market Change in Derivatives |
|
|
828,614 |
|
| |
|
|
|
|
| Balance, January 31, 2021 |
|
|
213,741 |
|
| Changes due to Issuance of New Convertible Notes |
|
|
1,933,343 |
|
| Reduction of derivative due to extinguishment or repayment |
|
|
(556,661 |
) |
| Reinstatement of Derivative to Equity |
|
|
(15,134 |
) |
| Changes due to Conversion of Notes Payable |
|
|
(76,144 |
) |
| Mark to Market Change in Derivatives |
|
|
(235,703 |
) |
| Balance, January 31, 2022 |
|
$ |
1,263,442 |
|
The derivatives arise from convertible debt where
the debt is convertible into common stock at variable conversion prices which are linked to the trading and/or bid prices of the Company’s
common stock as traded on the OTC market.
As the price of the common stock varies it triggers
a gain or loss based upon the discount to market assuming the debt was converted at the balance sheet date.
The fair value of the derivative liability is determined
using the lattice model, is re-measured on the Company’s reporting dates, and is affected by changes in inputs to that model including
our stock price, expected stock price volatility, the expected term, and the risk-free interest rate. A summary of the weighted average
(in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s embedded conversion features that
are categorized within Level 3 of the fair value hierarchy as of January 31, 2022 is as follows:
| |
|
Embedded |
|
| |
|
Derivative Liability |
|
| |
|
As of
January 31, 2022 |
|
| Strike price |
|
|
$9.00 - $17.80 |
|
| Contractual term (years) |
|
|
0.24 - 1.0 years |
|
| Volatility (annual) |
|
|
99.70% - 126.9% |
|
| High yield cash rate |
|
|
17.3% - 27.63% |
|
| Underlying fair market value |
|
|
0.85 |
|
| Risk-free rate |
|
|
0.41% - 0.72% |
|
| Dividend yield (per share) |
|
|
0% |
|
F-19
NOTE 11 – STOCKHOLDERS’ DEFICIT
Preferred Stock
The Company is authorized to issue 20,000,000 shares
of Preferred Stock, having a par value of $0.001 per share.
Series A 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 January 31, 2022, 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 January 31, 2022 and January 31, 2021, respectively,
there were 20,000 and 20,000 Series B preferred shares outstanding. The Series B Preferred Stock have voting rights equal to 66.7% 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 January 31, 2022 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 7,250 shares issued with a par-value of $0.001 per share. The Series C Preferred
Stock will convert before December 31, 2022.
At both January 31, 2022 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 below:
OPTIONAL REDEMPTION.
(1) At any time, either the Corporation
or the holder may redeem for cash out of funds legally available therefore, any or all of the outstanding Series D Preferred Stock (“Optional
Redemption”) at $1,000 per share.
(2) Should the Corporation exercise the
right of Optional Redemption it shall provide each holder of Preferred Stock with at least 30 days’ notice of any proposed optional
redemption pursuant this Section VI (an “Optional Redemption Notice”). Any optional redemption pursuant to this Section VI
shall be made ratably among holders in proportion to the Liquidation Value of Preferred Stock then outstanding and held by such holders.
The Optional Redemption Notice shall state the Liquidation Value of Preferred Stock to be redeemed and the date on which the Optional
Redemption is to occur (which shall not be less than thirty (30) or more than sixty (60) Business Days after the date of delivery of the
Optional Redemption Notice) and shall be delivered by the Corporation to the holders at the address of such holder appearing on the register
of the Corporation for the Preferred Stock. Within seven (7) business days after the date of delivery of the Optional Redemption Notice,
each holder shall provide the Corporation with instructions as to the account to which payments associated with such Optional Redemption
should be deposited. On the date of the Optional Redemption, provided for in the relevant Optional Redemption Notice, (A) the Corporation
will deliver the redemption amount via wire transfer to the account designated by the holders, and (B) the holders will deliver the certificates
relating to that number of shares of Preferred Stock being redeemed, duly executed for transfer or accompanied by executed stock powers,
in either case, transferring that number of shares to be redeemed. Upon the occurrence of the wire transfer (or, in the absence of a holder
designating an account to which funds should be transferred, delivery of a certified or bank cashier’s check in the amount due such
holder in connection with such Optional Redemption to the address of such holder appearing on the register of the Corporation for the
Preferred Stock), that number of shares of Preferred Stock redeemed pursuant to such Optional Redemption as represented by the previously
issued certificates will be deemed no longer outstanding. Notwithstanding anything to the contrary in this Designation, each holder may
continue to convert Preferred Stock in accordance with the terms hereof until the date such Preferred Stock is actually redeemed pursuant
to an Optional Redemption.
F-20
(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 January 31, 2022 or by the date the financial statements were issued.
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 January
31, 2022 and 2021.
Common Stock
The Company is authorized to issue 75,000,000 common
shares at a par value of $0.000001 per share. These shares have full voting rights. The Company undertook a 10-1 reverse stock split on
April 28, 2022. The share capital has been retrospectively adjusted accordingly to reflect these reverse stock splits. At January 31,
2022 and January 31, 2021 there were 341,023 and 142,716 shares outstanding and issuable, respectively. No dividends were paid in
the years ended January 31, 2022 or 2021. The Company’s articles of incorporation include a provision that the Company is not allowed
to issue fractional shares. Included in the shares outstanding at January 31, 2022 are 1,875 issuable shares.
The Company issued the following shares of common
stock in the year ended January 31, 2022:
● Conversion of $125,000 notes payable, $27,691
accrued interest, $8,750 of fees and $76,144 of derivative liability to 8,977 shares of common stock.
● The Company issued 172,300 shares for gross
proceeds $3,039,925.
● The Company issued 6,301 shares with a fair
value of $137,555 as payment for fees to consultants.
● The Company issued 10,729 shares to lenders
as commitment fee with a relative fair value of $234.237.
The Company issued the following shares of common
stock in the year ended January 31, 2021:
● Conversion of $24,803 notes payable, $19,933
accrued interest and $20,185 of derivative liability to 62,485 shares of common stock.
● The Company issued 17,500 shares for $350,000
as part of Regulation A filing. The company received $250,000 in cash proceeds with the remaining $100,000 recorded as share proceeds
receivable.
● The Company issued 4,500 shares for fair value
of $18,900 to repay accrued expenses related party.
● The Company issued 4,385 shares to various
lenders for fees with a $35,060 charge to debt discount and a corresponding charge to paid-in capital.
F-21
Options and Warrants:
The Company has 75,000 options outstanding as of January
31, 2022 and nil as of January 31, 2021.
The Company recorded option and warrant expense of
$1,263,500 and $0 for the years ended January 31, 2022 and January 31, 2021, respectively.
For the year ended January 31 ,2021 the Company issued
the following warrants:
On July 27, 2021, the Company issued a warrant to
Triton Funds LP (“Triton”) to acquire 30,000 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. 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 a deferred
offering cost. At January 31,2022 the Company recorded $530,370 of the deferred offering costs against the total net proceeds received
in paid -in capital, with the remaining $69,630 charged as interest expense.
At January 31, 2022 deferred offering cost are $23,000,
related to an upcoming registration statement.
Table A
| Expected volatility |
2181% |
| Exercise price |
$21.10 |
| Stock price |
$20.00 |
| Expected life |
3 years |
| Risk-free interest rate |
0.37% |
| Dividend yield |
0% |
On August 26, 2021, the Company issued an option to
a consultant to acquire 25,000 shares of the Company’s common stock. The table B-1 below provides the significant estimates used
that resulted in the Company determining the fair value of the option at $512,500, which has been recorded as consulting fees.
Table B-1
| Expected volatility |
2,174% |
| Exercise price |
$15.00 |
| Stock price |
$20.50 |
| Expected life |
3 years |
| Risk-free interest rate |
0.46% |
| Dividend yield |
0% |
On October 14, 2021, the Company issued an option
to the CEO to acquire 50,000 shares of the Company’s common stock. The table B-2 below provides the significant estimates used that
resulted in the Company determining the fair value of the option at $585,000, which has been recorded as consulting fees.
Table B-2
| Expected volatility |
2,644% |
| Exercise price |
$15.00 |
| Stock price |
$11.70 |
| Expected life |
2 years |
| Risk-free interest rate |
0.36% |
| Dividend yield |
0% |
On January 27,2022, the Company issued a warrant to
a lender to acquire 30,000 shares of the Company’s common stock. The table C below provides the significant estimates used that
resulted in the Company determining the fair value of the warrant at $276,000, which has been recorded as interest.
F-22
Table C
| Expected volatility |
1,885% |
| Exercise price |
$15.00 |
| Stock price |
$9.20 |
| Expected life |
3 years |
| Risk-free interest rate |
1.43% |
| Dividend yield |
0% |
On November 12, 2021 as part of a loan agreement referred
to in Note 9 issued warrant to purchase 90,000 common shares with a five year maturity and an exercise price of $15.00, and an additional
warrant to purchase 90,000 common shares with a five year maturity and an exercise price of $15.00 to be cancelled and extinguished if
the note is repaid on or prior to maturity.
The table D below provides the significant estimates
used that resulted in the Company determining the fair value of the warrant at $2,073,053.
Table D
| Expected volatility |
304% - 311% |
| Exercise price |
$15.00 |
| Stock price |
$9.00 - $18.80 |
| Expected life |
5 years |
| Risk-free interest rate |
1.43% |
| Dividend yield |
0% |
For the year ended January 31 ,2021 the Company issued
the following warrants:
● a warrant to acquire 95,000 shares of stock
as part of a debt settlement transaction. The Warrant gives the holder the right to cash settle the warrants if a fundamental transaction
as defined in the warrants occurs. However, a member of management and shareholder of the Company who controls approximately 60% of all
voting shares would decide if a fundamental transaction would occur. The Company currently is not considering any fundamental transactions.
Based on the above the Company used a Black Scholes model to record the value of the warrant. The warrants having a fair value of $351,500
was included as part of the consideration in the above mentioned debt settlement transaction with a corresponding increase in additional
paid-in capital valued using the Black-Scholes option pricing model according to the following assumptions in the Table A below:
● warrants to a broker to acquire 550 common
shares for a fair value of $13,470 recorded as general and administrative expenses with a corresponding increase in additional paid-in
capital valued using the Black-Scholes option pricing model according to the following assumptions in the Table A below:
Table A
| Expected volatility |
415.5% - 506.8% |
| Exercise price |
$4.00 - $45.00 |
| Stock price |
$3.70 - $27.00 |
| Expected life |
3 - 5 years |
| Risk-free interest rate |
0.19% - 0.39% |
| Dividend yield |
0% |
The Company had the following options and warrants
outstanding at January 31, 2022:
| Issued To |
# Warrants |
Dated |
Expire |
Strike Price |
Expired |
Exercised |
| Lender |
95,000 |
08/28/2020 |
08/28/2023 |
$4.00 per share |
N |
N |
| Broker |
250 |
10/11/2020 |
10/11/2025 |
$45.00 per share |
N |
N |
| Broker |
300 |
11/25/2020 |
11/25/2025 |
$30.00 per share |
N |
N |
| Triton |
30,000 |
07/27/2021 |
07/27/2024 |
$21.10 per share |
N |
N |
| Consultant |
25,000 |
08/26/2021 |
08/26/2024 |
$15.00 per share |
N |
N |
| Lender |
90,000 |
11/12/2021 |
11/12/2026 |
$15.00 per share |
N |
N |
| Lender |
90,000* |
11/12/2021 |
11/12/2026 |
$15.00 per share |
N |
N |
| Lender |
30,000 |
1/27/2022 |
1/27/2025 |
$15.00 per share |
N |
N |
| * | | These warrants are extinguished if Company repays note by 11/12/2022 maturity. |
F-23
The Company had the following fully vested options
outstanding at January 31, 2022:
| Issued To |
# Options |
Dated |
Expire |
Strike Price |
|
Expired |
Exercised |
| Consultant |
25,000 |
8/26/2021 |
8/26/2024 |
$15.00 per share |
|
N |
N |
| T. Armes |
50,000 |
10/14/2021 |
10/14/2023 |
$15.00 per share |
|
N |
N |
Schedule of warrants outstanding
The following table summarizes the activity of options and warrants issued
and outstanding as of and for the year ended January 31, 2022 and 2021:
| |
|
Options |
|
Weighted Average
Exercise Price |
|
Warrants |
|
Weighted Average
Exercise Price |
|
| Outstanding at January 31, 2020 |
|
— |
|
$ |
— |
|
0.14 |
|
$ |
2252.200 |
|
| Granted |
|
— |
|
|
— |
|
95,550 |
|
|
4.20 |
|
| Exercised |
|
— |
|
|
— |
|
— |
|
|
— |
|
| Forfeited and canceled |
|
— |
|
|
— |
|
(0.14 |
) |
|
(2252.200 |
) |
| Outstanding at January 31, 2021 |
|
— |
|
$ |
— |
|
95,550 |
|
$ |
4.20 |
|
| Granted |
|
75,000 |
|
|
15.00 |
|
265,000 |
|
|
15.70 |
|
| Exercised |
|
— |
|
|
— |
|
— |
|
|
— |
|
| Forfeited and canceled |
|
— |
|
|
— |
|
— |
|
|
— |
|
| Outstanding at January 31, 2022 |
|
75,000 |
|
$ |
15.00 |
|
360,550 |
|
$ |
12.64 |
|
NOTE 12 – INCOME TAXES
The Company has adopted ASC 740-10, “Income
Taxes”, which requires the use of the liability method in the computation of income tax expense and the current and deferred
income taxes payable (deferred tax liability) or benefit (deferred tax asset). Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized.
The income tax expense (benefit) consisted of the
following for the fiscal year ended January 31, 2022 and 2021:
Schedule of income tax expense (benefit)
| |
|
January 31, 2022 |
|
|
January 31, 2021 |
|
| Total current |
|
$ |
— |
|
|
$ |
— |
|
| Total deferred |
|
|
— |
|
|
|
— |
|
| Income tax expense (benefit) |
|
$ |
— |
|
|
$ |
— |
|
Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes.
The following is a reconciliation of the expected
statutory federal income tax provision to the actual income tax benefit for the fiscal year ended January 31, 2022(in thousands):
Schedule of statutory federal income tax provision
| |
|
January 31, 2022 |
|
| Federal statutory (benefit) |
|
$ |
(1,694,649 |
) |
| Permanent timing differences |
|
|
533,949 |
|
| Other |
|
|
239,700 |
|
| Change in valuation allowance |
|
|
921,000 |
|
| Total |
|
$ |
— |
|
For the year ended January 31, 2022, the expected
tax benefit is calculated at the 2019 statutory rate of 21%.
For the year ended January 31, 2021, the expected
tax benefit, temporary timing differences and long-term timing differences are calculated at the 21% statutory rate.
F-24
Significant components of the Company’s deferred
tax assets and liabilities were as follows for the fiscal year ended January 31, 2022 and 2021:
Schedule of deferred tax asset
| |
|
January 31, 2021 |
|
|
January 31, 2021 |
|
| Deferred tax assets: |
|
|
|
|
|
|
|
|
| Net operating loss carryforwards |
|
$ |
1,860,000 |
|
|
$ |
939,000 |
|
| Total deferred tax assets |
|
|
1,860,000 |
|
|
|
939,000 |
|
| |
|
|
|
|
|
|
|
|
| Deferred tax liabilities: |
|
|
|
|
|
|
|
|
| Depreciation |
|
|
— |
|
|
|
— |
|
| Deferred revenue |
|
|
— |
|
|
|
— |
|
| Total deferred tax liabilities |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
| Net deferred tax assets: |
|
|
|
|
|
|
|
|
| Less valuation allowance |
|
|
(1,860,000 |
) |
|
|
(939,000 |
) |
| Net deferred tax assets (liabilities) |
|
$ |
— |
|
|
$ |
— |
|
The Company has incurred losses since inception, therefore,
the Company has no federal tax liability. Additionally there are limitations imposed by certain transactions which are deemed to
be ownership changes which occurred in the Company on November 29, 2018. The net deferred tax asset generated by the loss carryforward
has been fully reserved. The cumulative net operating loss carryforward was approximately $8,860,000 at January 31, 2022. The
net operating loss carryforward that is available for carryforward for federal income tax purposes and begin to expire in 2039.
Although the Company has tax loss carry-forwards,
there is uncertainty as to utilization prior to their expiration. Accordingly, the future income tax asset amounts have been fully
reserved by a valuation allowance.
The Company has maintained a full valuation allowance
against its deferred tax assets at January 31, 2022 and 2021. A valuation allowance is required to be recorded when it is more likely
than not that some portion or all of the net deferred tax assets will not be realized. Since the Company cannot be assured of realizing
the net deferred tax asset, a full valuation allowance has been provided.
The Company does not have any uncertain tax positions
at January 31, 2022 and 2021 that would affect its effective tax rate. The Company does not anticipate a significant change in the amount
of unrecognized tax benefits over the next twelve months. Because the Company is in a loss carryforward position, the Company is generally
subject to US federal and state income tax examinations by tax authorities for all years for which a loss carryforward is available. If
and when applicable, the Company will recognize interest and penalties as part of income tax expense.
During the fiscal year ended January 31, 2022 and
2021, the Company recognized no amounts related to tax interest or penalties related to uncertain tax positions. The Company is subject
to taxation in the United States and various state jurisdictions. The Company currently has no years under examination by any jurisdiction.
On November 29, 2018, the Company consummated a share
exchange agreement whereby there was a change of control and any net operating losses up to the date of the transaction were forfeited.
The Company’s tax returns for the years ended
January 31, 2022, 2021, and 2020 are open for examination under Federal statute of limitations.
F-25
NOTE 13 – COMMITMENTS AND CONTINGENCIES
On June 1, 2015, the Company entered into a 36-month
lease agreement for its 2,590 sf office facility with a minimum base rent of $2,720 per month. The Company paid base rent and their share
of maintenance expense of $0 and $43,200 related to this lease for the periods ended January 31, 2022 and 2021, respectively. The
lease was on a month to month basis since the lease has not been renewed and the Company records the payments as rent expense.
This lease has been terminated on December 31, 2020
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 September 2019 the Company entered into an operating
lease for premises with an annual rent of $15,480, a three year term commencing September 1, 2019 to August 31, 2022 and a one year renewal
option. On October 23, 2020 the Company and landlord terminated this lease effective February 29, 2020. There were no costs associated
with the termination. The Company eliminated the operating lease asset and operating lease liability at termination which was $45,032.
In October 2019 the Company entered into an operating
lease for a vehicle with an annual cost of $9,067 and a three year term. The company paid initial fees of $17,744 and will pay fees on
lease termination of $395. On a straight-line basis these costs amount to $1,259 per month.
Schedule of minimum lease obligations
| Maturity of Lease Liabilities |
Operating
Leases |
|
| January 31, 2023 |
$ |
116,879 |
|
| January 31, 2024 |
|
62,003 |
|
| January 31, 2025 |
|
30,003 |
|
| January 31, 2026 |
|
30,003 |
|
| January 31, 2027 |
|
25,003 |
|
| After January 31, 2027 |
|
— |
|
| Total lease payments |
|
263,891 |
|
| Less: Interest |
|
(25,339 |
) |
| Present value of lease liabilities |
$ |
238,552 |
|
The Company had total rent expense and operating lease
cost of $133,562 and $164,095 for the years ended January 31, 2022 and 2021, respectively.
F-26
NOTE 14 – EARNINGS (LOSS) PER SHARE
The net income (loss) per common share amounts for
the years ended January 31, 2022 and January 31, 2021 were determined as follows:
| |
|
|
|
|
|
|
|
| |
|
For the Years Ended |
|
| |
|
January 31, |
|
| |
|
2022 |
|
2021 |
|
| Numerator: |
|
|
|
|
|
|
|
| Net income (loss) available to common shareholders |
|
$ |
(8,069,756 |
) |
$ |
1,187,176 |
|
| |
|
|
|
|
|
|
|
| Denominator: |
|
|
|
|
|
|
|
| Weighted average shares – basic |
|
|
279,745 |
|
|
108,432 |
|
| |
|
|
|
|
|
|
|
| Net income (loss) per share – basic |
|
$ |
(28.85 |
) |
$ |
10.95 |
|
| |
|
|
|
|
|
|
|
| Effect of common stock equivalents |
|
|
|
|
|
|
|
| Add: interest expense on convertible debt |
|
|
83,502 |
|
|
259,086 |
|
| Add: amortization of debt discount |
|
|
918,462 |
|
|
326,238 |
|
| Less: gain on settlement of debt on convertible notes |
|
|
(556,661 |
) |
|
(4,835,429 |
) |
| Add (Less): loss (gain) on change of derivative liabilities |
|
|
(235,703 |
) |
|
845,586 |
|
| Net income (loss) adjusted for common stock equivalents |
|
|
(7,860,156 |
) |
|
(2,217,343 |
) |
| |
|
|
|
|
|
|
|
| Dilutive effect of common stock equivalents: |
|
|
|
|
|
|
|
| Convertible notes and accrued interest |
|
|
— |
|
|
40,417 |
|
| Convertible Class C Preferred shares |
|
|
— |
|
|
363,154 |
|
| Warrants and options |
|
|
— |
|
|
95,000 |
|
| |
|
|
|
|
|
|
|
| Denominator: |
|
|
|
|
|
|
|
| Weighted average shares – diluted |
|
|
279,745 |
|
|
607,003 |
|
| |
|
|
|
|
|
|
|
| Net income (loss) per share – diluted |
|
$ |
(28.85 |
) |
$ |
(3.65 |
) |
The anti-dilutive shares of common stock equivalents
for the years ended January 31, 2022 and January 31, 2021 were as follows:
| |
|
For the Years Ended |
|
| |
|
January 31, |
|
| |
|
2022 |
|
2021 |
|
| Convertible notes and accrued interest |
|
|
290,374 |
|
|
— |
|
| Convertible Class C Preferred shares |
|
|
896,892 |
|
|
— |
|
| Options |
|
|
75,000 |
|
|
— |
|
| Warrants |
|
|
320,550 |
|
|
— |
|
| Total |
|
|
1,582,816 |
|
|
— |
|
NOTE 15 – RELATED PARTY TRANSACTIONS
As of January 31, 2022 and 2021, the Company had $46,173
and $106,173, respectively, of related party accrued expenses related to accrued compensation for employees and consultants. During the
year ended January 31, 2022 shareholders loaned $119,476 to the Company. The loans are non-interest-bearing and have no specified repayment
terms. During the year ended January 31, 2021 the Company issued 4,500 shares of common stock for a fair value of $18,900 and 100 Class
C preferred share at a fair value of $11,177 to repay Accrued Expenses- Related Party.
F-27
NOTE 16 – SUBSEQUENT EVENTS
Subsequent to January 31, 2022 through to May 9,
2022 the Company entered into the following transactions:
| ● |
On February 1, 2022 Series C Preferred shareholders converted all of the outstanding Series C
Preferred shares totaling 7,250 Series C Preferred shares in exchange for 905,111 common shares. The conversion is based on 2.63 multiplied
by the outstanding shares per the transfer agent at the conversion date. |
| |
|
| ● |
On February 14, 2022 the Company issued a convertible note for $,200,000, maturing August 14, 2022 an interest
rate of 12%. The Company received $979,000 in cash proceeds, recorded an original issue discount of $120,000 and transaction fees of $101,000.
As part of the loan the Company issued 115,000 shares with a fair value of $782,000 and with a warrant to purchase 120,000 common shares
with a five year maturity and an exercise price of $15.00, having a fair value of $816,000. The discount will be amortized over the term
of the loan. The note is convertible only in the event of default, including if the loan is not repaid at maturity. The conversion price
is the lower of the lowest trading price i) previous 20 trading days before issuance date or ii) previous 20 trading days before
conversion date. The loan maturity may be extended by an additional six months at the Company’s option. If the loan is not extended,
then 60,000 out of the 115,000 shares issued will be cancelled. |
| |
|
| ● |
On February 25, 2022, the Company issued a convertible note for $350,000, maturing August 25, 2022 an interest
rate of 12%. The Company received $294,000 in cash proceeds, recorded an original issue discount of $35,000 and transaction fees of $21,000.
As part of the loan the Company issued 33,542 shares with a fair value of $181,125 and with a warrant to purchase 35,000 common shares
with a five year maturity and an exercise price of $15.00, having a fair value of $189,000. The discount will be amortized over the term
of the loan. The note is convertible only in the event of default, including if the loan is not repaid at maturity. The conversion price
is the lower of the lowest trading price i) previous 20 trading days before issuance date or ii) previous 20 trading days before conversion
date. The loan maturity may be extended by an additional six months at the Company’s option. If the loan is not extended, then 17,500
out of the 33,542 shares issued will be cancelled. |
| |
|
| ● |
On February 25, 2022, the Company issued a convertible note for $150,000, maturing August 25, 2022 an interest
rate of 12%. The Company received $119,250 in cash proceeds, recorded an original issue discount of $15,000 and transaction fees of $15,750.
As part of the loan the Company issued 14,400 shares with a fair value of $77,760 and with a warrant to purchase 15,000 common shares
with a five year maturity and an exercise price of $15.00, having a fair value of $81,000. The discount will be amortized over the term
of the loan. The note is convertible only in the event of default, including if the loan is not repaid at maturity. The conversion price
is the lower of the lowest trading price i) previous 20 trading days before issuance date or ii) previous 20 trading days before conversion
date. The loan maturity may be extended by an additional six months at the Company’s option. If the loan is not extended, then 7,500
out of the 14,400 shares issued will be cancelled. |
| |
|
| ● |
On March 9, 2022, the Company issued a convertible note for $200,000, maturing October 9, 2022 an interest
rate of 12%. The Company received $168,000 in cash proceeds, recorded an original issue discount of $20,000 and transaction fees of $12,000.
As part of the loan the Company issued 19,200 shares with a fair value of $138,240 and with a warrant to purchase 20,000 common shares
with a five year maturity and an exercise price of $15.00, having a fair value of $144,000. The discount will be amortized over the term
of the loan. The note is convertible only in the event of default, including if the loan is not repaid at maturity. The conversion price
is the lower of the lowest trading price i) previous 20 trading days before issuance date or ii) previous 20 trading days before conversion
date. The loan maturity may be extended by an additional six months at the Company’s option. If the loan is not extended, then 10,000
out of the 19,200 shares issued will be cancelled. |
| |
|
| ● |
On March 9, 2022, the Company issued another convertible note for $200,000, maturing October 9, 2022 an interest
rate of 12%. The Company received $168,000 in cash proceeds, recorded an original issue discount of $20,000 and transaction fees of $12,000.
As part of the loan the Company issued 19,200 shares with a fair value of $138,240 and with a warrant to purchase 20,000 common shares
with a five year maturity and an exercise price of $15.00, having a fair value of $144,000. The discount will be amortized over the term
of the loan. The note is convertible only in the event of default, including if the loan is not repaid at maturity. The conversion price
is the lower of the lowest trading price i) previous 20 trading days before issuance date or ii) previous 20 trading days before conversion
date. The loan maturity may be extended by an additional six months at the Company’s option. If the loan is not extended, then 10,000
out of the 19,200 shares issued will be cancelled. |
The Company changed it’s name to Auto Parts
4Less Group, Inc. and has done a reverse stock split exchanging 10 common shares for 1 common share, both effective April 28, 2022.
F-28