During the quarter ended September 30, 2020, we increased a Right of Use Asset and corresponding lease liability in the amount of $34,798
Notes to Financial Statements
NOTE A - SUMMARY OF ACCOUNTING POLICIES
The interim consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles ("GAAP") have been condensed or omitted as allowed by such rules and regulations. The Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements dated June 30, 2021, and as contained in the amendment of the Company's annual report on Form 10-K/A, as filed with the Securities and Exchange Commission on November 12, 2021, and which contain certain restatements to the June 30, 2021 financial statements. The results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.
Management of the Company has prepared the accompanying unaudited condensed consolidated financial statements prepared in conformity with generally accepted accounting principles, which require the use of management estimates, contain all adjustments (including normal recurring adjustments) necessary to present fairly the operations and cash flows for the period presented and to make the financial statements not misleading.
STOCK-BASED COMPENSATION
Stock based compensation is accounted for in accordance with Topic 718 - Compensation - Stock Compensation in the Accounting Standards Codification. Pursuant to Topic 718, all share-based payments to employees, including grants of employee stock options, are to be recognized in the statement of operations based upon their fair values. Topic 718 rescinds the acceptance of pro forma disclosure. In December 2009, our shareholders approved the adoption of a new stock option plan, providing the Company a continued means of offering stock-based compensation.
On September 30, 2021, there were 65,000 outstanding options to purchase shares of our common stock granted under our prior 2009 Stock Option Plan. There were 50,000 outstanding options to purchase shares of our common stock granted under our 2020 Stock Option Plan.
The fair value of a stock option is determined using the Black-Scholes option-pricing model, which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, the expected dividend payments, and the risk-free interest rate over the life of the option. There were no options granted during the quarter ended September 30, 2021.
The Black-Scholes option valuation model was developed for estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because option valuation models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value of the options. Our options do not have the characteristics of traded options, therefore, the option valuation models do not necessarily provide a reliable measure of the fair value of our options.
EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that would occur if dilutive securities such as stock options and other contracts to issue Common Stock were exercised or converted into Common Stock or resulted in the issuance of Common Stock that then shared in earnings. We use the treasury stock method to compute potential common shares from stock options and the as-if-converted method to compute potential common shares from Preferred Stock.
For the three months ended September 30, 2021, and 2020, the potential dilutive effects of the preferred stock and stock options were included in the weighted-average shares outstanding.
NOTE B - INVENTORIES
Inventories consisted of the following:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2021
|
|
|
2021
|
|
|
|
|
|
|
|
|
|
|
Finished Goods
|
|
$
|
764,589
|
|
|
$
|
683,771
|
|
Raw Materials
|
|
|
211,981
|
|
|
|
170,567
|
|
|
|
$
|
976,570
|
|
|
$
|
854,338
|
|
At September 30, 2021 and June 30, 2021, respectively, $263,770 and $263,280 of our inventory was considered non-current as it will not be used within a one year period.
NOTE C - STOCKHOLDERS' EQUITY
During January 1995, the Company's Board of Directors authorized the issuance of up to 4,000,000 shares of Series A Cumulative Convertible Preferred Stock ("Series A Preferred Stock"). The preferred stockholders are entitled to receive, as and if declared by the board of directors, quarterly dividends at an annual rate of $.10 per share of Series A Preferred Stock per annum. Dividends will accrue without interest and will be cumulative from the date of issuance of the Series A Preferred Stock and will be payable quarterly in arrears in cash or publicly traded common stock when and if declared by the Board of Directors. As of September 30, 2021, no dividends have been declared. Dividends in arrears on the outstanding preferred shares total $408,694 as of September 30, 2021.
Holders of the Preferred Stock have the right to convert their shares of Preferred Stock into an equal number of shares of Common Stock of the Company. In addition, Preferred Stock holders have the right to vote the number of shares into which their shares are convertible into Common Stock. Such preferred shares will automatically convert into one share of Common Stock at the close of a public offering of Common Stock by the Company provided the Company receives gross proceeds of at least $1,000,000, and the initial offering price of the Common Stock sold in such offering is equal to or in excess of $1 per share. The Company is obligated to reserve an adequate number of shares of its common stock to satisfy the conversion of all the outstanding Series A Preferred Stock. There were no shares converted during the reporting period. So long as any share of Series A Preferred Stock is outstanding, the Company is prohibited from declaring dividends or other distributions related to its Common Stock or purchasing, redeeming or otherwise acquiring any of the Common Stock.
NOTE D - INCOME TAXES AND AVAILABLE CARRYFORWARD
As of September 30, 2021, the Company had consolidated income tax net operating loss ("NOL") carryforwards for federal income tax purposes of approximately $449,000. The NOL will expire in various years ending through the year 2035. The utilization of certain loss carryforwards are limited under Section 382 of the Internal Revenue Code.
The components of the provision for income tax (expense) attributable to continuing operations are as follows:
|
|
Three Months 9/30/2021
|
|
|
Three Months 9/30/2020
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
0
|
|
|
$
|
0
|
|
State
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(19,698
|
)
|
|
$
|
1,876
|
|
State
|
|
|
(4,075
|
)
|
|
|
388
|
|
|
|
$
|
(23,773
|
)
|
|
$
|
2,264
|
|
|
|
|
|
|
|
|
|
|
Total Income Tax Benefit / (Expense)
|
|
$
|
(23,773
|
)
|
|
$
|
2,264
|
|
Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
|
|
Non-Current
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
NOL and contribution carryforwards
|
|
$
|
113,759
|
|
Share based payments
|
|
|
4,988
|
|
Lease liabilities - operating leases
|
|
|
195,152
|
|
Accrued compensated absences
|
|
|
5,019
|
|
Accrued bonus
|
|
|
24,862
|
|
Allowance for doubtful accounts
|
|
|
2,384
|
|
Total deferred tax assets
|
|
|
346,164
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax (liabilities)
|
|
|
|
|
Right-of-use-assets - operating leases
|
|
|
(212,584
|
)
|
Excess of tax over book depreciation
|
|
|
(30,635
|
)
|
Total deferred tax (liabilities)
|
|
|
(243,219
|
)
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset
|
|
|
102,945
|
|
Valuation Allowance
|
|
|
(6,288
|
)
|
Net Deferred Tax Asset
|
|
$
|
96,657
|
|
|
|
|
|
|
|
|
|
|
|
The change in the valuation allowance is as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
$
|
-
|
|
September 30, 2021
|
|
$
|
6,288
|
|
|
|
$
|
6,288
|
|
Income taxes for the three months ended September 30, 2021 and 2020 differ from the amounts computed by applying the effective income tax rate of 25.35%, to income before income taxes as a result of the following:
|
|
Three Months
|
|
|
Three Months
|
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
Expected (provision) at US statutory rate
|
|
$
|
(14,024
|
)
|
|
$
|
(45,535
|
)
|
State income tax net of federal (provision)
|
|
|
(2,902
|
)
|
|
|
(9,421
|
)
|
Nondeductible Expense
|
|
|
(559
|
)
|
|
|
(952
|
)
|
Change in estimates of loss carryforward
|
|
|
-
|
|
|
|
1,534
|
|
Change in valuation allowance
|
|
|
(6,288
|
)
|
|
$
|
56,638
|
|
Income Tax (Expense)
|
|
$
|
(23,773
|
)
|
|
$
|
2,264
|
|
The earliest tax year still subject to examination by a major taxing jurisdiction is fiscal year end June 30, 2018.
The Company performed a review of its uncertain tax positions in accordance with Accounting Standards Codification ASC 740-10 "Uncertainty in Income Taxes". In this regard, an uncertain tax position represents the Company's expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. As a result of this review, the Company concluded that at this time there are no uncertain tax positions, and there has been no cumulative effect on retained earnings.
NOTE E - LINE OF CREDIT
A new line of credit was procured in June 2021, with a new bank. The limit for this line of credit is $250,000 as well. Terms of the Line of credit include and an interest rate that fluctuates at prime plus a half of point, interest only. The line of credit matures on June 30, 2022.
Interest expense for the years ended June 30, 2021 and the period ending September 30, 2021, was $0 and $0, respectively.
The line of credit is guaranteed by Justice W. Anderson, President and Chief Executive Officer.
NOTE F - PAYCHECK PROTECTION PROGRAM LOAN
The Company applied for a loan with the Small Business Administration (the "SBA") Paycheck Protection Program ("PPP") of the Coronavirus Aid, Relief and Economic Security Act of 2020 (the "CARES Act") in the amount of $201,000 (the "Loan"). The Loan was funded on April 13, 2020. The Company used the proceeds of the Loan for covered payroll costs, rent and utilities in accordance with the relevant terms and conditions of the CARES Act.
The Loan, which is evidenced by a promissory note (the "Note"), has a two-year term, matures on April 13, 2022, and bear interests at a rate of 1.00% per annum. Monthly principal and interest payments, less the amount of any potential forgiveness (discussed below), will commence seven months from the date the Note was signed and funded. The Company did not provide any collateral or guarantees for the Loan, nor did they pay any facility charge to obtain the Loan. The Note provides for customary events of default, including, among others, those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. The Company may prepay the principal of the Loan at any time without incurring any prepayment charges.
The Loan may be forgiven partially or fully if the Loan proceeds are used for covered payroll costs, rent and utilities, provided that such amounts are incurred during the eight-week period that commenced on April 13, 2020. Any forgiveness of the Loan will be subject to approval by the SBA and will require the Companies to apply for such treatment.
The loan was forgiven by the SBA in May of 2021.
NOTE G - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2016, the F ASB issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Loss (Topic 326) {44ASU 2016-13"), which updates the guidance on recognition and measurement of credit losses for financial assets. The new requirements, known as the current expected credit loss model ("CECL ") will require entities to adopt an impairment model based on expected losses rather than incurred losses. ASU 2016-13 must be adopted on a modified-retrospective approach. This update was effective for fiscal years beginning after December 15, 2020 including interim periods within those fiscal years. In October 2019, the F ASB approved an extension for all non-SEC filers, including small reporting companies, to extend the effective date to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Therefore, the effective date for this update will be July 1, 2023. The Company is currently evaluating the potential impact of the adoption of the new standard on its consolidated statements of financial condition and results of operations.
NOTE H - RIGHT-OF-USE ASSETS AND LEASE LIABILITIES
Operating leases
In June 2015, the Company entered into a lease agreement to lease certain office equipment with a lease term of 63 months. The lease contains a renewal option to extend the term for successive one year periods. Initial rent amount was $1,079 per month, with increases each year no more than 3%. In applying ASC 842, the Company used a lease term of 63 months and an incremental borrowing rate of 5.5% which was the borrowing rate on the Company’s line of credit with a financial institution with all accounts and general intangibles. This lease expired in September 2020. As such, the right-of-use asset has been fully amortized and its related lease liability extinguished at September 30, 2020.
In February 2018, the Company entered in a lease agreement to lease warehouse space with a lease term of 39 months. The Company paid no rent for the first three months of the lease, pays $2,936 per month for the next 12 months, $3,024 per month for the next 8 months, $3,019 per month for the next 4 months, and $3,109 for the last 12 months. In applying ASC 842, the Company uses a lease term of 39 months and an incremental borrowing rate of 5.5% which was the borrowing rate on the Company’s line of credit with a financial institution.
In August 2020, the Company entered into a lease agreement to lease certain office equipment with a lease term of 63 months. The lease renews on a month-to-month basis and contains an option to purchase the equipment at fair market value or return the equipment. Historically, the Company has not exercised the option to purchase at the end of the initial lease term for similar leases and simply returned the equipment at the end of the initial lease term. Initial rent amount was $574 per month. In applying ASC 842, the Company uses a lease term of 63 months and an incremental borrowing rate of 4.25% which was the borrowing rate on the Company’s line of credit with a financial institution.
In January 2021, the Company entered in a lease agreement to lease warehouse space with a lease term of 64 months. The Company paid no rent for the first four months of the lease and pays $4,792.50 per month beginning the 5th month of the lease. Rent will increase each succeeding year by no less than 2% but not more than 5%. The rent amount includes common area maintenance charges which are considered nonlease components. In applying ASC 842, the Company is electing to account for nonlease components as being related to the lease component. In addition, the Company uses a lease term of 64 months and an incremental borrowing rate at prime rate of 3.25% which was the borrowing rate on the Company’s recent line of credit with a financial institution.
In January 2021, the Company entered in a lease agreement to lease office space with a lease term of 64 months. The Company paid no rent for the first four months of the lease and pays $9,372 per month beginning the 5th month of the lease. Rent will increase each succeeding year by no less than 2% but not more than 5%. The rent amount includes common area maintenance charges which are considered nonlease components. In applying ASC 842, the Company is electing to account for nonlease components as being related to the lease component. The Company also incurred initial direct cost of $114,083 related to existing improvements in the leased space. This initial direct cost has been included in determining the initial ROU asset and liability amounts. In addition, the Company uses a lease term of 64 months and an incremental borrowing rate at prime rate of 3.25% which was the borrowing rate on the Company’s recent line of credit with a financial institution.
The following is information related to the Company’s right-of-use assets and liabilities for its operating leases:
ROU assets - operating leases obtained in exchange for lease liabilities - operating leases
|
|
$
|
973,081
|
|
Amortization of ROU assets since lease inception
|
|
$
|
(134,319
|
)
|
ROU assets - operating leases at September 30, 2021
|
|
$
|
838,762
|
|
|
|
|
|
|
|
|
|
|
|
Lease liabilities - operating leases on adoption date and increase in lease liabilities
|
|
$
|
973,081
|
|
Payments on lease liabilities
|
|
|
(203,099
|
)
|
Lease liabilities - operating leases on September 30, 2021
|
|
|
769,982
|
|
Lease liabilities - operating leases due in the 12 months ending September 30, 2022
|
|
|
156,126
|
|
Lease liabilities - operating leases due after September 30, 2022
|
|
$
|
613,856
|
|
Variable lease expense was $50,020 and $12,282 for the three months ended September 30, 2021 and 2020, respectively.
Weighted average remaining lease term was 4.49 years and weighted average discount rate was 3.29% at September 30, 2021.
NOTE I - CONTINGENCY
At the time of release of these financial statements, the United States is experiencing a National Emergency related to persistent health issues. Management is unable to quantify the potential duration and economic impact of mandated closures by our National, State or Local governments.
NOTE J - SUBSEQUENT EVENTS
We have evaluated subsequent events through November 17, 2021, which is the date the financial statements were available to be issued.