CCA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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Three Months Ended August 31,
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Nine Months Ended August 31,
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2018
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2017
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2018
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2017
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Revenues:
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Sales of health and beauty aid products - net
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$
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4,222,906
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$
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5,329,753
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|
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$
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12,440,242
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$
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15,706,666
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Other income
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1,926
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4,615
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8,254
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12,762
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Total Revenues
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4,224,832
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5,334,368
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12,448,496
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15,719,428
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Costs and Expenses:
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Cost of sales
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1,489,281
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1,989,572
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4,997,545
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6,043,406
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Selling, general and administrative expenses
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2,097,625
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1,720,693
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6,020,567
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5,404,245
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Advertising, cooperative and promotional expenses
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816,117
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738,635
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1,671,605
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1,681,999
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Research and development
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16,426
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16,811
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45,819
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44,143
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Bad debt (recovery) expense
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(7,974
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)
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4,812
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8,739
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(5,843
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)
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Interest expense
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86,707
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131,346
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391,422
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405,584
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Total Costs and Expenses
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4,498,182
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4,601,869
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13,135,697
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13,573,534
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(Loss) Income before (benefit from) provision for income taxes
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(273,350
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)
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732,499
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(687,201
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)
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2,145,894
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(Benefit from) Provision for income taxes
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(69,678
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)
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354,816
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3,029,451
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882,910
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Net (Loss) Income
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$
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(203,672
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)
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$
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377,683
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$
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(3,716,652
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)
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$
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1,262,984
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(Loss) Earnings per Share:
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Basic
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(Loss) Income
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$
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(0.03
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)
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$
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0.05
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$
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(0.51
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)
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$
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0.18
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Diluted
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(Loss) Income
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$
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(0.03
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)
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$
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0.05
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|
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$
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(0.51
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)
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$
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0.18
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|
|
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|
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Weighted Average Common Shares Outstanding
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Basic
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7,456,684
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7,006,684
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7,348,290
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7,006,684
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Diluted
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7,456,684
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7,165,027
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7,348,290
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7,006,684
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See Notes to Unaudited Consolidated Financial Statements.
CCA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Nine Months Ended August 31,
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2018
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2017
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Cash Flows from Operating Activities:
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Net (Loss) Income
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$
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(3,716,652
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)
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$
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1,262,984
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Adjustments to reconcile net income to cash (used in) provided by operating activities:
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Depreciation and amortization
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38,685
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66,592
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Change in allowance for bad debts
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8,739
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(5,843
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)
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Loss on write off of fixed assets
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32,823
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—
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Deferred financing fees amortization
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88,320
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94,699
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Stock-based compensation
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194,458
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126,863
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Deferred income taxes
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3,003,838
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816,846
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Change in Operating Assets & Liabilities:
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(Increase) in accounts receivable
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(41,033
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)
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(1,503,021
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)
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(Increase) Decrease in inventory
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(1,463,238
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)
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170,838
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(Increase) in prepaid expenses and other receivables
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(173,573
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)
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(179,999
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)
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Decrease (increase) in prepaid income and refundable income tax
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10,368
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(22,366
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)
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Decrease in other assets
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80
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—
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Increase (Decrease) in accounts payable and accrued liabilities
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1,157,596
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(624,013
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)
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Increase (Decrease) in income tax payable
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950
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(20,000
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)
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Net Cash (Used) Provided by Operating Activities
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(858,639
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)
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183,580
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Cash Flows from Investing Activities:
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Acquisition of plant and equipment
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(25,586
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)
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(39,507
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)
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Purchase of intangible assets
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(4,390
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)
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—
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Net Cash (Used) by Investing Activities
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(29,976
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)
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(39,507
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)
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Cash Flows from Financing Activities:
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Payment on line of credit, net
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(1,396,676
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)
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(113,585
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)
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Proceeds from notes payable, net
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1,312,500
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—
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Proceeds from exercise of warrant
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1,426,500
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—
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Payment of deferred financing fees
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(130,000
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)
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—
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Payments for capital lease obligations
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—
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(2,753
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)
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Net Cash Provided (Used) by Financing Activities
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1,212,324
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(116,338
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)
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Net Increase in Cash and Cash Equivalents
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323,709
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27,735
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Cash and Cash Equivalents at Beginning of Period
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140,243
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309,280
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Cash and Cash Equivalents at End of Period
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$
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463,952
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$
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337,015
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Supplemental Disclosures of Cash Flow Information:
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Cash paid during the period for:
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Interest
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$
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391,422
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$
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405,584
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Income taxes
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$
|
11,153
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$
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108,413
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|
See Notes to Unaudited Consolidated Financial Statements
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Operating results for the
three and nine month periods ending August 31, 2018
are not necessarily indicative of the results that may be expected for the entire year ended November 30, 2018. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended November 30, 2017. The accompanying unaudited consolidated financial statements, in the opinion of management, include all adjustments necessary for a fair presentation. All such adjustments are of a normal recurring nature.
NOTE 2 - ORGANIZATION AND DESCRIPTION OF BUSINESS
CCA Industries, Inc. (“CCA”) was incorporated in the State of Delaware on March 25, 1983.
CCA manufactures and distributes health and beauty aid products.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of CCA and its wholly-owned subsidiaries (collectively the “Company”). All significant inter-company accounts and transactions have been eliminated.
Estimates and Assumptions:
The consolidated financial statements include the use of estimates, which management believes are reasonable. The process of preparing financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”), requires management to make estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accounting estimates and assumptions are those that management considers to be most critical to the financial statements because they inherently involve significant judgment and uncertainties. All of these estimates and assumptions reflect management’s best judgment about current economic and market conditions and their effects on the information available as of the date of the consolidated financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts.
Cash and Cash Equivalents:
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable:
Accounts receivable consist of trade receivables recorded at original invoice amount, less an estimated allowance for uncollectible amounts. The accounts receivable balance is further reduced by allowance for cooperative advertising and reserves for returns which are anticipated to be taken as credits against the balances as of
August 31, 2018
. The reserve for returns may include specific reserves based on individual customer circumstances. The allowances and reserves which are anticipated to be deducted from future invoices are included in accrued liabilities. Trade credit is generally extended on a short-term basis; thus trade receivables do not bear interest, although a finance charge may be applied to receivables that are past due. Trade receivables are periodically evaluated for collectability based on past credit history with customers and their current financial condition. Changes in the estimated collectability of trade receivables are recorded in the results of operations for the period in which the estimate is revised. Trade
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
receivables that are deemed uncollectible are offset against the allowance for uncollectible accounts. The Company generally does not require collateral for trade receivables.
Inventories:
Inventories are stated at the lower of cost (weighted average) or net realizable value. Product returns deemed saleable are recorded in inventory when they are received at the lower of their original cost or net realizable value, as appropriate. Obsolete inventory is written off and its value is removed from inventory at the time its obsolescence is determined.
Property and Equipment and Depreciation and Amortization:
Property and equipment are stated at cost. The Company charges to expense repairs and maintenance items, while major improvements and betterments are capitalized.
When the Company sells or otherwise disposes of property and equipment items, the cost and related accumulated depreciation are removed from the respective accounts and any gain or loss is included in earnings.
Depreciation and amortization are provided utilizing the straight-line method over the following estimated useful lives or lease terms of the assets, whichever is shorter:
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Computer equipment
|
5 -7 Years
|
Furniture and fixtures
|
3-10 Years
|
Tools, dies and masters
|
3 Years
|
Leasehold improvements
|
Remaining life of the lease (2 years, 4 months)
|
Intangible Assets:
Intangible assets, which consist of patents and trademarks, are stated at cost. Patents are amortized on the straight-line method over a period of
17
years. Patents are reviewed for impairment when events or changes in business indicate that the carrying amount may not be recoverable. Trademarks are indefinite lived intangible assets and are reviewed for impairment annually or more frequently if impairment conditions occur.
Long-Lived Assets:
Long-lived assets are assets in which the Company has an economic benefit for longer than twelve months from the date of the financial statements. Long-lived assets include property and equipment, intangible assets, deferred financing fees, deferred income taxes and other assets. The Company evaluates impairment losses on long-lived assets used in operations when events and circumstances indicate that the asset might be impaired. If the review indicates that the carrying value of an asset will not be recoverable, based on a comparison of the carrying value of the asset to the undiscounted future cash flows, the impairment will be measured by comparing the carrying value of the asset to its fair value. Fair value will be determined based on discounted cash flows or appraisals. Impairments are recorded in the statement of operations as part of selling, general and administrative expenses.
Revenue Recognition: (See also Cooperative Advertising)
The Company recognizes sales in accordance with ASC Topic 605 “Revenue Recognition”. Revenue is recognized upon shipment of merchandise. Net sales comprise gross revenues less expected returns, trade discounts, customer allowances and various sales incentives. Included in sales incentives are coupons that the Company issues that are redeemed by its customers. Redemptions are handled by a coupon national clearing house. The Company also has estimated that there is an approximate six week lag in coupon redemptions, with the estimated cost recorded as an accrued liability. Although no legal right of return exists between the customer and the Company, returns, including return of unsold products, are accepted if it is in the best interests of the Company's relationship with the customer. The Company, therefore, records a reserve for returns based on the historical returns as a percentage of sales in the
three
preceding months and specific reserve based on customer circumstances and product circumstances. Those returns which are anticipated to be taken as credits against the balances as of
August 31, 2018
are offset against the
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
accounts receivable. The reserves which are anticipated to be deducted from future invoices are included in accrued liabilities. Changes in the estimated coupon reserve and sales return reserve are recorded to Sales of health and beauty aid products - net, in the Consolidated Statement of Operations.
Cooperative Advertising:
Cooperative advertising is accrued based on a combination of new contracts given to the customers in the current fiscal year, along with liabilities open from prior years. Specific new contracts in the current fiscal year are identified as sales incentives (see sales incentives) and those contracts reduce revenues for the current period. The balances for all years open are reduced throughout the year by either the customer advertising and submitting the proof according to the contract or by customer post audit adjustments that finalize any amount due. Any item open more than
three
years is closed unless management believes that a deduction may still be taken by the customer. The portion of cooperative advertising recorded as sales incentives was reduced by
$133,755
and
$401,350
, respectively, in the three and nine months ended
August 31, 2018
to reduce open cooperative advertising contracts for 2015 for events that have been finalized. There were reductions of
$204,527
and
$613,723
, respectively, for open cooperative advertising contracts that were finalized during the
three and nine month periods ending August 31, 2018
. The balance of the remaining open cooperative advertising is allocated between accrued liabilities and the allowance for cooperative advertising based on the customer's open accounts receivable balance.
Sales Incentives:
The Company has accounted for certain sales incentives offered to customers by charging them directly to sales as opposed to advertising and promotional expense. These accounting adjustments do not affect net income.
Shipping Costs:
The Company’s policy for financial reporting is to charge shipping costs as part of selling, general and administrative expenses as incurred. Shipping costs included for the
three months ended August 31, 2018 and August 31, 2017
were
$217,265
and
$93,566
, respectively. Shipping costs included for the
nine months ended August 31, 2018 and August 31, 2017
were
$520,650
and
$271,810
, respectively.
Advertising Costs:
The Company’s policy for financial reporting is to charge advertising cost to expense as incurred. Advertising, cooperative and promotional expenses for the
three months ended August 31, 2018 and August 31, 2017
were
$816,117
and
$738,635
, respectively. Advertising, cooperative and promotional expenses for the
nine months ended August 31, 2018 and August 31, 2017
were
$1,671,605
and
$1,681,999
, respectively.
Research and Development Costs
:
The Company's policy for financial reporting is to charge research and development costs to expense as incurred. Research and development costs for the
three months ended August 31, 2018 and August 31, 2017
were
$16,426
and
$16,811
, respectively. Research and development costs for the
nine months ended August 31, 2018 and August 31, 2017
were
$45,819
and
$44,143
, respectively.
Income Taxes:
Income taxes are accounted for under ASC Topic 740 “Income Taxes”, which utilizes the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to the temporary differences between the carrying amounts of assets and liabilities as recorded on the Company’s financial statements and the carrying amounts as reflected on the Company’s income tax return. In addition, the portion of charitable contributions that cannot be deducted in the current period and are carried forward to future periods are also reflected in the deferred tax assets. A substantial portion of the deferred tax asset is due to the losses incurred in fiscal 2015 and prior years, the benefit of which will be carried forward into future tax years. Deferred tax assets and liabilities are valued using the tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all of the deferred tax asset will not be realized. Management has
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
estimated that it will utilize the entire deferred tax asset in future years based on anticipated future profitability. However, anticipated future profitability may be impacted if the Company’s sales decrease from current levels or due to other factors discussed under Item 1A - Risk Factors in our Fiscal 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission as supplemented in this Form 10-Q. Beginning in the first quarter of fiscal 2018, in accordance with ASU 2015-17, all deferred tax assets and liabilities have been recorded as long-term. Previously, the portion that management expected to utilize in the twelve months following the end of the period was recorded as a short-term asset, and the portion that management expected to utilize in periods beyond the twelve months was recorded as a long-term asset. The Company reclassified
$2,079,988
that was originally recorded as a current asset as of November 30, 2017 to non-current in conformity with the requirement to report the changes required by ASU 2015-17 on a retrospective basis.
The Company previously adopted the provisions of ASC Subtopic 740-10-25, “Uncertain Tax Positions.” Management believes that there were no unrecognized tax benefits, or tax positions that would result in uncertainty regarding the deductions taken, as of
August 31, 2018
and
November 30, 2017
. ASC Subtopic 740-10-25 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.
(Loss) Earnings Per Common Share:
Basic (loss) earnings per share are calculated in accordance with ASC Topic 260, “Earnings Per Share”, which requires using the average number of shares of common stock outstanding during the year. Diluted (loss) earnings per share is computed on the basis of the average number of common shares outstanding plus the dilutive effect of any common stock equivalents using the “treasury stock method”. Common stock equivalents consist of stock options and warrants.
Stock Options:
ASC Topic 718, “Stock Compensation,” requires stock grants to employees to be recognized in the consolidated statement of operations based on their fair values. The Company issued stock options in fiscal 2018 and 2017; see Note 12 for details.
Recent Accounting Pronouncements:
In June 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-07, Compensation - Stock Compensation, which updated Topic 718 to include share based compensation issued to non-employees. The Company previously issued non-qualified stock option awards to its directors. The updated standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company does not believe that the implementation of ASU No. 2018-07 will have a material effect on its results of operations and financial condition.
In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. While we are still evaluating the impact of our pending adoption of the new standard on our consolidated financial statements, we expect that upon adoption we will recognize ROU assets and lease liabilities and that the amounts could be material.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This new standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The underlying principle of this new standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
goods or services. Entities may adopt this new standard either retrospectively for all periods presented in the financial statements (i.e., the full retrospective method) or as a cumulative-effect adjustment as of the date of adoption (i.e., the modified retrospective method), without applying to comparative years’ financial statements. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which changed the effective date for implementation to annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2017. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual periods. The Company does not plan to adopt ASU 2014-09 until its 2019 fiscal year which begins on December 1, 2018. The Company is currently in the process of evaluating the impact that ASU No. 2014-09 will have on the Company’s results of operations, financial condition and financial statement disclosures and will provide further updates in future periods.
Management does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements, other than any that were disclosed in prior Company filings with the SEC.
NOTE 4 - INVENTORIES
The components of inventory consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
2018
|
|
November 30,
2017
|
Raw materials
|
|
$
|
230,832
|
|
|
$
|
231,558
|
|
Finished goods
|
|
3,111,238
|
|
|
1,647,273
|
|
|
|
$
|
3,342,070
|
|
|
$
|
1,878,831
|
|
NOTE 5 - PROPERTY AND EQUIPMENT
The components of property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
2018
|
|
November 30,
2017
|
Furniture and equipment
|
|
$
|
132,228
|
|
|
$
|
163,062
|
|
Tools, dies and masters
|
|
128,861
|
|
|
127,361
|
|
Capitalized lease obligations
|
|
—
|
|
|
15,286
|
|
Leasehold improvements
|
|
2,932
|
|
|
—
|
|
|
|
$
|
264,021
|
|
|
$
|
305,709
|
|
Less: Accumulated depreciation
|
|
168,991
|
|
|
164,780
|
|
Property and Equipment—Net
|
|
$
|
95,030
|
|
|
$
|
140,929
|
|
Depreciation expense for the three months ended
August 31, 2018
and
August 31, 2017
amounted to $
11,096
and $
20,738
, respectively. Depreciation expense for the
nine months ended August 31, 2018 and August 31, 2017
amounted to
$38,356
and
$66,301
, respectively.
NOTE 6 - INTANGIBLE ASSETS
Intangible assets consist of owned trademarks and patents for
ten
product lines.
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
2018
|
|
November 30,
2017
|
Patents and trademarks
|
|
$
|
583,327
|
|
|
$
|
578,937
|
|
Less: Accumulated amortization
|
|
146,657
|
|
|
146,617
|
|
Intangible Assets - Net
|
|
$
|
436,670
|
|
|
$
|
432,320
|
|
Patents are amortized on a straight-line basis over their legal life of
17
years. Trademarks have an indefinite life and are reviewed annually for impairment or more frequently if impairment indicators occur. Amortization expense for the three months ended August 31, 2018 and
2017
amounted to $
135
and $
97
, respectively. Amortization expense for the
nine months ended August 31, 2018 and August 31, 2017
amounted to
$329
and
$291
, respectively. Estimated amortization expenses for the years ending November 30, 2019, 2020, 2021, 2022 and 2023 are
$384
,
$223
,
$223
,
$50
and
$0
, respectively.
NOTE 7 - ACCRUED EXPENSES
The following items which exceeded
5%
of total current liabilities are included in accrued expenses as of:
|
|
|
|
|
|
|
|
|
|
August 31,
2018
|
|
November 30,
2017
|
Co-operative advertising
|
$
|
933,477
|
|
|
$
|
1,122,904
|
|
Accrued bonuses *
|
$
|
—
|
|
|
$
|
400,166
|
|
* represents less than 5% as of total current liabilities
The following items which exceeded
5%
of total long-term liabilities are included in long-term accrued expenses as of:
|
|
|
|
|
|
|
|
|
|
August 31,
2018
|
|
November 30,
2017
|
Sub-lease rent differential
|
$
|
197,975
|
|
|
$
|
220,509
|
|
NOTE 8 - DEBT AGREEMENT
On December 4, 2015 (the “Closing Date”), CCA Industries, Inc., a Delaware corporation (the “Company”),
entered into the Credit and Security Agreement (the “Credit Agreement”) with SCM Specialty Finance Opportunities
Funds, L.P., an affiliate of CNH Finance, L.P. The Credit Agreement provides for a line of credit up to a maximum of
$5,500,000
(the “Revolving Loan”). The proceeds of the Revolving Loans were used to pay off the Company's existing debt with Capital Preservation Solutions, LLC and for general working capital purposes.
Pursuant to the Credit Agreement, all outstanding amounts under the Revolving Loan bore interest at the 30
day LIBOR rate plus
6%
per annum, payable monthly in arrears. The Company was also required to pay a monthly unused line fee and collateral management fee. The commitment under the Credit Agreement would have expired
three
years after the Closing Date. The Revolving Loan and all other amounts due and owing under the Credit Agreement
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
and related documents were secured by a first priority perfected security interest in, and lien on, substantially all of the assets of the Company. Amounts available for borrowing under the Line of Credit equaled the lesser of the Borrowing Base (as defined below), and
$5,500,000
, in each case, as the same is reduced by the aggregate principal amount outstanding under the Line of Credit. “Borrowing Base” under the Loan Agreement means, generally, the amount equal to (i)
85%
of the Company’s eligible accounts receivable, plus (ii)
65%
of the value of eligible inventory, less (iii) certain reserves. The Credit Agreement contained customary representations, warranties and covenants on the part of the Company, including a financial covenant requiring the Company to maintain a fixed charge coverage ratio of no less than
1.0
to 1.0. The Credit Agreement imposed an early termination fee and also provides for events of default, including failure to repay principal and interest when due and failure to perform or violation of the provisions or covenants of the agreement. The Company repaid the Revolving Loan in full on February 5, 2018 and terminated the Credit Agreement. The Company paid an early termination charge of
$55,000
as provided by the Credit Agreement.
On February 5, 2018 the Company entered into the Revolving Credit, Term Loan and Security Agreement (the “2018 Credit Agreement”) with PNC Bank, National Association ("PNC"). The 2018 Credit Agreement provides for a term loan in an amount of
$1,500,000
(the “Term Loan”) and a revolving line of credit up to a maximum of
$4,500,000
(the “2018 Revolving Loan” and together with the Term Loan, the “Loans”). The proceeds of the Loans were used to
pay off the Company's existing debt with CNH Finance Fund I, L.P., formerly known as SCM Specialty Finance Opportunities Fund, L.P. (“CNH”), and for general working capital purposes. The Term Loan is payable in consecutive monthly installments of
$31,250
commencing March 1, 2018 and bears interest, at the election of the Company, at either the PNC base rate plus
1%
or 30, 60 or 90 day LIBOR rate plus
3.50%
. All outstanding amounts under the 2018 Revolving Loan bear interest, at the election of the Company, at either the PNC base rate plus
0.25%
or 30, 60 or 90 day LIBOR rate plus
2.75%
, payable monthly in arrears. The Company is also required to pay a quarterly unused line fee and collateral management fee. The commitment under the 2018 Credit Agreement expires
three
years after the Closing Date. The Loans and all other amounts due and owing under the 2018 Credit Agreement and related documents are secured by a first priority perfected security interest in, and lien on, substantially all of the assets of the Company. Amounts available for borrowing under the Revolving Loan equal the lesser of the Borrowing Base (as defined below), and
$4,500,000
, in each case, as the same is reduced by the aggregate principal amount outstanding under the 2018 Revolving Loan. “Borrowing Base” under the Credit Agreement means, generally, the amount equal to (i)
85%
of the Company’s eligible accounts receivable, plus (ii)
65%
of the value of eligible inventory, less (iii) certain reserves. The 2018 Credit Agreement contains customary representations, warranties and covenants on the part of the Company, including a financial covenant requiring the Company to maintain a fixed charge coverage ratio of no less than
1.10
to 1.0. Due to the Company's loss in the second and third quarter of fiscal 2018, the fixed charge coverage ratio was less than the amount provided for in the covenant. PNC has waived the fixed charge ratio covenant for the second and third quarter of fiscal 2018. The 2018 Credit Agreement also provides for events of default, including failure to repay principal and interest when due and failure to perform or violation of the provisions or covenants of the agreement, as a result of which amounts due under the 2018 Credit Agreement may be accelerated. On the Closing Date, the Company borrowed the entire
$1,500,000
Term Loan. These amounts were used, in part, to pay off the total amount due under the Company's Credit and Security Agreement with CNH . The foregoing description of the Credit Agreement does not purport to be complete and is qualified in its entirety by reference to the Form 8-K filed by the Company with the SEC on February 8, 2018.
NOTE 9 - OTHER INCOME
Other income consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
Nine Months Ended August 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Royalty income
|
|
$
|
1,926
|
|
|
$
|
3,000
|
|
|
$
|
8,254
|
|
|
$
|
9,000
|
|
Miscellaneous
|
|
—
|
|
|
1,615
|
|
|
—
|
|
|
3,762
|
|
Total Other Income
|
|
$
|
1,926
|
|
|
$
|
4,615
|
|
|
$
|
8,254
|
|
|
$
|
12,762
|
|
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - 401(K) PLAN
The Company has a 401(K) Profit Sharing Plan for its employees. The plan requires
six months
of service in order to be eligible to participate. Employees must be
21
years or older to participate. Employees may make salary reduction contributions up to
25%
of compensation not to exceed the federal government limits. The Plan allows for the Company to make discretionary contributions to match employee contributions up to
3%
of compensation. The Company's matching contributions vest immediately at
100%
with the employee. The Company made the following matching contributions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
August 31, 2018
|
|
|
August 31, 2017
|
|
|
August 31, 2018
|
|
|
August 31, 2017
|
|
Company Contributions
|
$
|
9,950
|
|
|
$
|
8,925
|
|
|
$
|
36,541
|
|
|
$
|
16,568
|
|
NOTE 11 - INCOME TAXES
CCA and its subsidiaries file a consolidated federal income tax return.
The Company previously adopted the provisions of ASC Subtopic 740-10-25, Uncertain Tax Positions. Management believes that there were no unrecognized tax benefits, or tax positions that would result in uncertainty regarding the deductions taken, as of
August 31, 2018
and
August 31, 2017
. ASC Subtopic 740-10-25 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.
As a result of the enactment by the United States Government of public law 115-97, an Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 (formerly known as the Tax Cut and Jobs Act of 2017), federal corporate tax rates for periods beginning after January 1, 2018 have been reduced to 21%. The Company's federal rate was previously 34%. The Company values its deferred tax assets and liabilities using the tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The Company, prior to the enactment of public law 115-97, had valued its deferred tax assets and liabilities at a combined federal and state tax rate of
36.45%
. Due to the corporate tax rate change, the Company determined that its deferred tax assets and liabilities should be valued based on an estimated future tax rate of
24.13%
, effective in the first quarter of fiscal 2018.
The SEC issued Staff Accounting Bulletin ("SAB") 118, which provides guidance on accounting for the tax effects of public law 115-97. SAB 118 provides a measurement period that should not extend beyond one year from the enactment date for companies to complete the accounting under ASC 740. To the extent that a company’s accounting for certain income tax effects of public law 115-97 is incomplete but is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. The change in rate caused the Company to record an additional tax expense as part of the provision for income tax in the first quarter of fiscal 2018. In addition, ASU 2015-17 is effective with the first quarter of fiscal 2018 which requires that all deferred tax assets be classified as long-term. The Company as of November 30, 2017 had
$2,079,988
of deferred tax assets that were recorded as a current asset. This amount has been retrospectively reclassified as a non-current asset as of November 30, 2017.
The following chart shows the calculation of the previous tax rate and the new tax rate:
|
|
|
|
|
|
|
Previous Rate
|
New Rate
|
Federal rate
|
34.00
|
%
|
21.00
|
%
|
State rate, net of federal tax benefit
|
2.45
|
%
|
3.13
|
%
|
Total
|
36.45
|
%
|
24.13
|
%
|
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
A portion of the loss carry forward deferred tax asset was valued at a slightly higher blended rate of
25.19%
, due to the tax law taking effect on January 1, 2018.
The deferred compensation amount is from the issuance of stock options (see Note 12 - Stock-Based Compensation), and will be realized in future years if the options are exercised.
At
August 31, 2018
and
November 30, 2017
, respectively, the Company had temporary differences arising from the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2018
|
|
November 30, 2017
|
Type
|
|
Amount
|
|
Deferred Tax
|
|
Amount
|
|
Deferred Tax
|
Depreciation
|
|
$
|
(468,017
|
)
|
|
$
|
(112,925
|
)
|
|
$
|
(378,580
|
)
|
|
$
|
(137,992
|
)
|
Reserve for bad debts
|
|
15,368
|
|
|
3,708
|
|
|
6,629
|
|
|
2,416
|
|
Reserve for returns
|
|
619,185
|
|
|
149,399
|
|
|
246,513
|
|
|
89,854
|
|
Accrued returns
|
|
110,436
|
|
|
26,646
|
|
|
109,646
|
|
|
39,966
|
|
Reserve for obsolete inventory
|
|
135,164
|
|
|
32,613
|
|
|
158,269
|
|
|
57,689
|
|
Vacation accrual
|
|
52,233
|
|
|
12,603
|
|
|
70,856
|
|
|
25,827
|
|
Alternative minimum tax carry forward
|
|
—
|
|
|
103,040
|
|
|
—
|
|
|
122,360
|
|
Research and development tax credit
|
|
—
|
|
|
65,175
|
|
|
—
|
|
|
—
|
|
Deferred Compensation
|
|
491,382
|
|
|
118,563
|
|
|
487,061
|
|
|
177,534
|
|
Bonus obligation unpaid
|
|
—
|
|
|
—
|
|
|
400,166
|
|
|
145,861
|
|
Charitable contributions
|
|
242,650
|
|
|
58,548
|
|
|
305,633
|
|
|
111,403
|
|
Section 263A costs
|
|
208,120
|
|
|
50,216
|
|
|
48,317
|
|
|
17,612
|
|
Loss carry forward
|
|
24,789,723
|
|
|
5,990,894
|
|
|
24,279,259
|
|
|
8,849,789
|
|
Net deferred tax asset
|
|
$
|
26,196,244
|
|
|
$
|
6,498,480
|
|
|
$
|
25,733,769
|
|
|
$
|
9,502,319
|
|
Income tax expense (benefit) is made up of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
August 31, 2018
|
|
August 31, 2017
|
|
August 31, 2018
|
|
August 31, 2017
|
|
|
|
|
|
|
|
|
Current tax - Federal
|
$
|
—
|
|
|
$
|
43,875
|
|
|
$
|
—
|
|
|
$
|
59,875
|
|
Current tax - State & Local
|
595
|
|
|
312
|
|
|
5,944
|
|
|
6,189
|
|
Deferred tax
|
(70,273
|
)
|
|
310,629
|
|
|
3,023,507
|
|
|
816,846
|
|
Total Income Tax (Benefit) Expense
|
$
|
(69,678
|
)
|
|
$
|
354,816
|
|
|
$
|
3,029,451
|
|
|
$
|
882,910
|
|
Prepaid and refundable income taxes are made up of the following components:
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid and refundable income taxes
|
|
Federal
|
|
State &
Local
|
|
Total
|
August 31, 2018
|
|
$
|
20,335
|
|
|
$
|
7,449
|
|
|
$
|
27,784
|
|
November 30, 2017
|
|
$
|
1,015
|
|
|
$
|
37,138
|
|
|
$
|
38,153
|
|
Income taxes payable are made up of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes Payable
|
|
Federal
|
|
State &
Local
|
|
Total
|
August 31, 2018
|
|
$
|
—
|
|
|
$
|
950
|
|
|
$
|
950
|
|
A reconciliation of the provision for income taxes computed at the statutory rate to the effective rate for the three months and nine months ended
August 31, 2018
, and
August 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
August 31, 2018
|
|
August 31, 2017
|
|
|
Amount
|
|
Percent of Pretax Income
|
|
Amount
|
|
Percent of Pretax Income
|
Provision for income taxes at federal statutory rate
|
|
$
|
(57,404
|
)
|
|
21.00
|
%
|
|
$
|
249,050
|
|
|
34.00
|
%
|
Changes in provision for income taxes resulting from:
|
|
|
|
|
|
|
|
|
State income taxes, net of federal income tax benefit
|
|
(8,556
|
)
|
|
3.13
|
%
|
|
21,242
|
|
|
2.90
|
%
|
Non-deductible expenses and other adjustments
|
|
(3,718
|
)
|
|
1.36
|
%
|
|
84,524
|
|
|
11.54
|
%
|
(Benefit from) Provision for income taxes at effective rate
|
|
$
|
(69,678
|
)
|
|
25.49
|
%
|
|
$
|
354,816
|
|
|
48.44
|
%
|
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
|
August 31, 2018
|
|
August 31, 2017
|
|
|
Amount
|
|
Percent of Pretax Income
|
|
Amount
|
|
Percent of Pretax Income
|
Provision for (benefit from) income taxes at federal statutory rate
|
|
$
|
(144,312
|
)
|
|
21.00
|
%
|
|
$
|
729,604
|
|
|
34.00
|
%
|
Increases in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal income tax benefit
|
|
(21,509
|
)
|
|
3.13
|
%
|
|
62,231
|
|
|
2.90
|
%
|
Change in tax rate related to future deferred tax benefits
|
|
3,150,147
|
|
|
(458.40
|
)%
|
|
—
|
|
|
—
|
%
|
Non-deductible expenses and other adjustments
|
|
45,125
|
|
|
(6.57
|
)%
|
|
91,075
|
|
|
4.24
|
%
|
Provision for income taxes at effective rate
|
|
$
|
3,029,451
|
|
|
(440.84
|
)%
|
|
$
|
882,910
|
|
|
41.14
|
%
|
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - STOCK-BASED COMPENSATION
On June 15, 2005, the shareholders approved an amended and Restated Stock Option Plan amending the 2003 Stock Option Plan (the “2005 Plan”). The 2005 Plan authorizes the issuance of up to
one million
shares of common stock (subject to customary adjustments set forth in the plan) pursuant to equity awards, which may take the form of incentive stock options, nonqualified stock options restricted shares, stock appreciation rights and/or performance shares. The 2005 Plan expired in April, 2015, but awards made under the 2005 Plan prior to its expiration will remain in effect until such awards have been satisfied or terminated in accordance with the terms and provisions of the 2005 Plan. On August 13, 2015, the shareholders approved the 2015 CCA Industries, Inc. Incentive Plan (the "2015 Plan"). The 2015 Plan authorized the issuance of up to
700,000
shares of common stock (subject to customary adjustments set forth in the plan) pursuant to equity awards, which may take the form of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance shares and cash awards. On June 7, 2017, the shareholders approved the 2015 CCA Industries, Inc. Incentive Plan as Amended. The sole purpose of the amendment was to increase the shares available for issuance under the 2015 Plan from
700,000
to
1,400,000
.
T
he Company adheres to the provisions of ASC Topic 718, Stock Compensation, which requires an entity to recognize the grant-date fair value of stock options and other equity-based compensation issued to employees in the financial statements.
The Company recorded a charge against earnings in the amount of
$108,295
and
$48,392
, respectively, for the
three months ended August 31, 2018 and August 31, 2017
and
$194,458
and
$126,863
, respectively, for the
nine months ended August 31, 2018 and August 31, 2017
for all outstanding stock options granted.
On June 20, 2018, the Company granted incentive stock options for an aggregate of
270,000
shares to
fourteen
employees of the Company at
$2.85
per share, which was the closing price of the Company's stock on that day. The options vest in equal
20%
increments beginning one year after the date of grant, and for each of the four subsequent anniversaries of such date. The options expire on June 19, 2028. The Company had estimated the fair value of the options granted to be
$398,169
as of the grant date.
On June 20, 2018, the Company granted non-qualified stock options for an aggregate of
150,000
shares to
two
directors of the Company at
$2.85
per share, which was the closing price of the Company's stock on that day. The options vest one year after the date of grant. The options expire on June 19, 2023. The Company had estimated the fair value of the options granted to be
$153,945
as of the grant date.
On January 4, 2018, the Company granted incentive stock options for
7,500
shares to an employee of the Company at
$3.15
per share, which was the closing price of the Company's stock on that day. The options vest in equal
20%
increments beginning one year after the date of grant, and for each of the four subsequent anniversaries of such date. The options expire on January 3, 2028. The Company had estimated the fair value of the options granted to be
$11,692
as of the grant date.
The fair value of the stock options granted was estimated on the date of the grant using a Black-Scholes valuation model and the assumptions in the following table:
|
|
|
|
|
|
|
|
|
|
Assumptions:
|
Option Grant Date
|
Risk-free Interest Rate
|
Dividend Yield
|
Stock Volatility
|
Option Term (years)
|
June 20, 2018
|
2.80
|
%
|
—
|
%
|
37.14
|
%
|
10
|
June 20, 2018
|
2.36
|
%
|
—
|
%
|
37.14
|
%
|
5
|
January 4, 2018
|
1.82
|
%
|
—
|
%
|
37.63
|
%
|
10
|
As of
August 31, 2018
, there were
396,800
stock options outstanding that were exercisable. The total compensation cost of non-vested stock option awards that has not yet been recognized was
$912,691
as of
August 31,
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2018
. The weighted average period over which the unrecognized compensation is expected to be recognized is
43
months.
|
|
|
|
|
|
|
|
|
|
|
Number of Options
|
Weighted-Average Exercise Price
|
Weighted-Average Remaining Term (years)
|
Aggregate Intrinsic Value
|
Outstanding at November 30, 2016
|
564,000
|
|
$
|
3.25
|
|
5.8
|
—
|
|
Granted
|
307,500
|
|
$
|
3.30
|
|
|
|
Exercised
|
—
|
|
|
|
|
Canceled or Forfeited
|
—
|
|
|
|
|
Outstanding at November 30, 2017
|
871,500
|
|
$
|
3.27
|
|
6.0
|
—
|
|
Granted
|
7,500
|
|
$
|
3.15
|
|
|
|
Exercised
|
—
|
|
|
|
|
Canceled or Forfeited
|
82,500
|
|
$
|
3.35
|
|
|
|
Outstanding at February 28, 2018
|
796,500
|
|
$
|
3.26
|
|
6.0
|
—
|
|
Granted
|
—
|
|
|
|
|
Exercised
|
—
|
|
|
|
|
Canceled or Forfeited
|
—
|
|
|
|
|
Outstanding at May 31, 2018
|
796,500
|
|
$
|
3.26
|
|
5.8
|
—
|
|
Granted
|
420,000
|
|
$
|
2.85
|
|
|
|
Exercised
|
—
|
|
|
|
|
Canceled or Forfeited
|
20,000
|
|
$
|
3.30
|
|
|
|
Outstanding at August 31, 2018
|
1,196,500
|
|
$
|
3.09
|
|
7.3
|
—
|
|
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - (LOSS) INCOME PER SHARE
Basic earnings per share is calculated using the average number of common shares outstanding. Diluted income per share is computed on the basis of the average number of common shares outstanding plus the effect of outstanding stock options and warrants using the “treasury stock method”.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
August 31, 2018
|
|
August 31, 2017
|
|
August 31, 2018
|
|
August 31, 2017
|
Net (loss) income available for common shareholders
|
$
|
(203,672
|
)
|
|
$
|
377,683
|
|
|
$
|
(3,716,652
|
)
|
|
$
|
1,262,984
|
|
Weighted average common shares outstanding-Basic
|
7,456,684
|
|
|
7,006,684
|
|
|
7,348,290
|
|
|
7,006,684
|
|
Net effect of dilutive stock options and warrants
|
—
|
|
|
158,343
|
|
|
—
|
|
|
—
|
|
Weighted average common shares and common shares equivalents—Diluted
|
7,456,684
|
|
|
7,165,027
|
|
|
7,348,290
|
|
|
7,006,684
|
|
|
|
|
|
|
|
|
|
Earnings per Share:
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
(Loss) Earnings per Share
|
$
|
(0.03
|
)
|
|
$
|
0.05
|
|
|
$
|
(0.51
|
)
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
(Loss) Earnings per Share
|
$
|
(0.03
|
)
|
|
$
|
0.05
|
|
|
$
|
(0.51
|
)
|
|
$
|
0.18
|
|
For the
three months ended August 31, 2018 and August 31, 2017
, there were
2,639,244
and
421,500
shares, respectively, underlying previously issued stock options and warrants that were excluded from diluted loss per share because the effects of such shares were anti-dilutive. For the
nine months ended August 31, 2018 and August 31, 2017
, there were
2,639,244
and
2,689,244
shares, respectively, underlying previously issued stock options and warrants that were excluded from diluted loss per share because the effects of such shares were anti-dilutive.
NOTE 14 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 5, 2014, the Company entered into a Loan and Security Agreement (the “Agreement”) with Capital Preservation Solutions, LLC (“Capital”) for a
$5,000,000
working capital line of credit and a term loan for working capital purposes not to exceed
$1,000,000
. Capital Preservation Solutions, LLC is owned by Lance Funston, the Company's Chairman of the Board and Chief Executive Officer, and is also the managing partner of Capital Preservations Holdings, LLC which owns common stock and all of the Company's Class A common stock. Contemporaneously with the signing of the Agreement, the Company issued a Warrant to Purchase Common Stock (the “Warrant”) to Capital whereby Capital may acquire upon exercise of the Warrant
1,892,744
shares of the Company’s Common Stock. The Warrant may be exercised in whole or in part at any time during the exercise period which is
five
years from the date of the Warrant. The Warrant bears a purchase price of
$3.17
per share, subject to adjustments. The working capital line of credit and term loan principal balances were repaid on December 4, 2015 (see Note 8 - Debt Agreement for further information). On February 5, 2018, Capital Preservation Solutions, LLC exercised
450,000
of the warrants for proceeds of
$1,426,500
. The remaining balance of
1,442,744
shares underlying the Warrant remain outstanding.
The Company signed an agreement in December 2014 with Funston Media Management Services, Inc. ("FMM"), which is owned by Lance Funston, who is the Company's Chairman of the Board and Chief Executive
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Officer. The agreement provided for FMM to provide consumer advertising purchasing services and brand management for the Company. The agreement ended on November 19, 2015. The Company signed a new agreement in December 2015 with FMM. The agreement provided for FMM to provide consumer advertising purchasing services and brand management for a fee equal to
10.0%
of the advertising costs with no minimum fee or monthly management fee. The agreement automatically renews unless canceled by the Company or FMM. The Company incurred costs of
$42,725
and
$58,565
, respectively, for the
three months ended August 31, 2018 and August 31, 2017
for fees to FMM. The Company incurred costs of
$99,206
and
$123,743
, respectively, for the
nine months ended August 31, 2018 and August 31, 2017
. As of
August 31, 2018
, there were unpaid fees of
$58,833
due to FMM.
On March 23, 2017, the Company entered into a License Agreement (the “Agreement”) with Ultimark Products, Inc. (“Ultimark”) for the exclusive right to manufacture, market and sell the Porcelana brand of skin care products. The Company’s Chairman of the Board and Chief Executive Officer, Lance Funston, is also the Chairman of the Board and Chief Executive Officer of Ultimark. Porcelana is designed to reduce dark spots and brighten the skin. Under the Agreement, the Company acquired the exclusive right and license to use the Porcelana brand, formulas, packaging designs and trademarks (collectively, the “Porcelana Brand”) in connection with the design, development, manufacture, advertising, marketing, promotion, offering, sale and distribution of Porcelana products worldwide. In addition, the Company shall purchase all good and saleable inventory of Porcelana products in Ultimark’s possession or control as of April 1, 2017 at Ultimark’s cost, without markup. The Agreement has a term of
one
year, effective April 1, 2017 and ending March 31, 2018. The Agreement may be renewed, at the Company’s option, for up to
two
additional
one
-year terms. The Company renewed the Agreement for an additional
one
-year term. The Agreement requires the Company to pay Ultimark a royalty of
10%
on the gross sales of Porcelana products manufactured and sold under the Agreement. Royalties are payable quarterly, commencing the first fiscal quarter in which Porcelana products are sold pursuant to the Agreement. There is no minimum royalty for any period under the Agreement. In addition, the Company has the option to purchase the Porcelana Brand from Ultimark during the term of the Agreement for an amount not to exceed
$3.2 million
, subject to a fairness opinion. In the event of such purchase, the Agreement shall thereafter terminate and no further royalties or compensation will be due thereunder. The Company incurred an expense of
$43,081
and
$48,172
, respectively, for the three months ended May 31, 2018 and May 31, 2017 for royalties under the Agreement. The Company incurred an expense of
$134,992
and
$83,419
, respectively, for the
nine months ended August 31, 2018 and August 31, 2017
.
In June 2017, the Company rented office space at 193 Conshohocken State Road, Penn Valley, Pennsylvania. The Company paid a monthly rental of
$1,000
per month during fiscal 2017 commencing June 2017. The rent was increased to
$2,500
per month beginning December 1, 2017, and was increased further to
$6,000
per month effective March 1, 2018. The building is owned by Lance Funston, the Company's Chairman of the Board and Chief Executive Officer. The Company's Pennsylvania offices house its marketing and sales staff, as well as the office of the Chief Executive Officer. There is no written lease for the facility.
NOTE 15 - SUBSEQUENT EVENTS
The 2018 Credit Agreement contains a financial covenant requiring the Company to maintain a fixed charge coverage ratio of no less than
1.10
to 1.0 as of the end of each fiscal quarter measured on a rolling four quarter basis. Although the Company was in compliance with this covenant as of the end of the first quarter of fiscal 2018, the Company was not in compliance with this covenant as of the end of the second and third quarters of fiscal 2018 due to the Company's losses in those quarters, which constituted events of default under the 2018 Credit Agreement Under the terms of the 2018 Credit Agreement, an event of default permits PNC to, among other things, terminate the agreement and accelerate any indebtedness outstanding thereunder. PNC waived compliance with the financial covenant for the second and third quarters of fiscal 2018. In addition, on October 19, 2018, the 2018 Credit Agreement was amended to reset the commencement
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
date of the fixed charge coverage ratio covenant to begin with the fiscal quarter ending November 30, 2018. For the quarter ending November 30, 2018, the covenant will be tested only for the fiscal quarter then ending; for the quarter ending February 28, 2019, the covenant will be tested for the two fiscal quarter period then ending; and for the quarter ending May 31, 2019, the covenant will be tested for the three fiscal quarter period then ending. Thereafter, the covenant will be tested on a rolling four quarter basis.