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TABLE OF CONTENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2016
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission file number: 1-31643
CCA Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
04-2795439
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
65 Challenger Road, Suite 340
Ridgefield Park, New Jersey 07660
(Address of principal executive offices)
(201) 935-3232
(Registrant’s telephone number, including area code)


(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).
 
Large accelerated filer
 
[ ]
 
Accelerated filer
 
[ ]
Non-accelerated filer
 
[ ] (Do not check if a smaller reporting company)
 
Smaller reporting company
 
[X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of July 15, 2016 there were (i) 6,038,982 shares of the issuer’s common stock, par value $0.01, outstanding; and (ii) 967,702 shares of the issuer’s Class A common stock, par value $0.01, outstanding.


TABLE OF CONTENTS


CCA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

INDEX
 
 
 
 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



TABLE OF CONTENTS

Part I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
CCA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
 
May 31,
2016
 
November 30,
2015
ASSETS
 
(Unaudited)
 
 
Current assets:
 
 
 
 
Cash & cash equivalents
 
$
207,757

 
$
509,884

Accounts receivable, net of allowances of $645,515 and $912,688, respectively
 
1,858,078

 
2,112,055

Inventories, net of reserve for inventory obsolescence of $462,205 and $821,259, respectively
 
3,131,279

 
3,236,802

Prepaid expenses and sundry receivables
 
907,469

 
697,097

Prepaid and refundable income taxes
 
71,466

 
70,056

Deferred income taxes
 
1,944,310

 
2,254,322

        Total Current Assets
 
8,120,359

 
8,880,216

 
 
 
 
 
Property and equipment, net of accumulated depreciation
 
193,535

 
205,034

Intangible assets, net of accumulated amortization
 
433,972

 
434,166

Deferred financing fees, net of accumulated amortization
 
324,427

 

Deferred income taxes
 
9,143,787

 
9,200,599

Other
 
430,544

 
430,544

               Total Assets
 
$
18,646,624

 
$
19,150,559

 
 
 
 
 
LIABILITIES AND CAPITAL
 
 
 
 
Current Liabilities:
 
 
 
 
     Accounts payable & accrued liabilities
 
$
7,248,019

 
$
7,645,553

     Capital lease obligation - current portion
 
3,533

 
9,531

     Line of credit
 
3,790,096

 

     Line of credit - related party
 

 
2,700,000

     Term loan - related party
 

 
1,000,000

Total Current Liabilities
 
11,041,648

 
11,355,084

 
 
 
 
 
Long term accrued liabilities
 
298,051

 
1,242,282

Capitalized lease obligations
 
1,908

 
16,199

Long term - other
 
147,853

 
147,853

Total Liabilities
 
11,489,460

 
12,761,418

 
 
 
 
 
Shareholders' Equity:
 


 


Preferred stock, $1.00 par, authorized 20,000,000 none issued
 

 

Common stock, $.01 par, authorized 15,000,000 shares, issued and outstanding 6,038,982 and 6,038,982 shares, respectively
 
60,390

 
60,390

Class A common stock, $.01 par, authorized 5,000,000 shares, issued and outstanding 967,702 and 967,702 shares, respectively
 
9,677

 
9,677

Additional paid-in capital
 
4,022,858

 
3,881,882

Retained earnings
 
3,064,239

 
2,437,192

Total Shareholders' Equity
 
7,157,164

 
6,389,141

Total Liabilities and Shareholders' Equity
 
$
18,646,624

 
$
19,150,559

See Notes to Consolidated Financial Statements.

3

TABLE OF CONTENTS

CCA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
 
Three Months Ended May 31
 
 Six Months Ended May 31
 
 
 
2016
 
2015
 
2016
 
2015
 
Revenues:
 
 
 
 
 
 
 
 
 
Sales of health and beauty aid products - net
 
$
5,675,177

 
$
6,666,621

 
$
10,355,449

 
$
13,619,479

 
Other income
 
4,574

 
3,612

 
8,746

 
8,270

 
Total Revenues
 
5,679,751

 
6,670,233

 
10,364,195

 
13,627,749

 
Costs and Expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
 
2,122,059

 
2,920,313

 
3,936,853

 
5,238,800

 
Selling, general and administrative expenses
 
2,093,823

 
3,032,771

 
4,152,494

 
6,135,627

 
Advertising, cooperative and promotional expenses
 
532,327

 
1,500,875

 
848,783

 
2,449,832

 
Research and development
 
26,726

 
13,205

 
34,927

 
40,630

 
Bad debt expense
 
29,557

 
(21,495
)
 
27,299

 
(14,524
)
 
Interest expense - related party
 

 
433,260

 
3,085

 
850,296

 
Interest expense
 
197,216

 
8,452

 
341,543

 
10,617

 
Total Costs and Expenses
 
5,001,708

 
7,887,381

 
9,344,984

 
14,711,278

 
   Restructuring costs
 

 
1,462,317

 

 
1,497,340

 
Total Costs and Expenses
 
5,001,708

 
9,349,698

 
9,344,984

 
16,208,618

 
Income (loss) before provision for (benefit from) income taxes
 
678,043

 
(2,679,465
)
 
1,019,211

 
(2,580,869
)
 
Provision for (benefit from) income taxes
 
247,054

 
(902,473
)
 
379,224

 
(860,511
)
 
 Income (Loss) from Continuing Operations
 
$
430,989

 
$
(1,776,992
)
 
$
639,987

 
$
(1,720,358
)
 
   Discontinued Operations
 
 
 
 
 
 
 
 
 
(Loss) income from Discontinued Operations
 
(11,504
)
 
286,908

 
(20,600
)
 
286,908

 
(Benefit from) provision for income taxes
 
(4,192
)
 
96,634

 
(7,665
)
 
95,661

 
(Loss) Income from Discontinued Operations
 
(7,312
)
 
190,274

 
(12,935
)
 
191,247

 
Net Income (Loss)
 
$
423,677

 
$
(1,586,718
)
 
$
627,052

 
$
(1,529,111
)
 
 
 
 
 
 
 
 
 
 
 
Earnings (Losses) per Share:
 
 
 
 
 
 
 
 
 
Basic
 


 





 


 
Continuing Operations
 
$
0.06

 
$
(0.25
)
 
$
0.09

 
$
(0.25
)
 
Discontinued Operations
 
$

 
$
0.03

 
$

 
$
0.03

 
Income (Loss)
 
$
0.06

 
$
(0.22
)
 
$
0.09

 
$
(0.22
)
 
Diluted
 


 



 
 
 
 
Continuing Operations
 
$
0.06

 
$
(0.25
)
 
$
0.09

 
$
(0.25
)
 
Discontinued Operations
 
$

 
$
0.03

 
$

 
$
0.03

 
Income (Loss)
 
$
0.06

 
$
(0.22
)
 
$
0.09

 
$
(0.22
)
 
Weighted Average Common Shares Outstanding
 
 
 
 
 
 
 
Basic
 
7,006,684

 
7,006,684

 
7,006,684

 
7,006,684

 
Diluted
 
7,126,333

 
7,006,684

 
7,088,115

 
7,006,684

 
See Notes to Consolidated Financial Statements.

4

TABLE OF CONTENTS

CCA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
Six Months Ended May 31,
 
2016
 
2015
Cash Flows from Operating Activities:
 
 
 
Net Income (Loss)
$
627,052

 
$
(1,529,111
)
Adjustments to reconcile net income (loss) to cash used in operating activities:
 
 
 
Depreciation and amortization
39,113

 
104,984

Change in allowance for bad debts
27,299

 
(14,524
)
Loss on write off of fixed assets
1,575

 
843,081

Debt discount amortization

 
97,093

Deferred financing fees amortization
63,132

 
665,728

Stock based compensation
140,977

 
58,662

Deferred income taxes
366,824

 
(768,877
)
Change in Operating Assets & Liabilities:
 
 
 
Decrease (Increase) in accounts receivable
226,678

 
(904,420
)
Decrease in inventory
105,523

 
1,116,441

(Increase) in prepaid expenses and other receivables
(210,372
)
 
(664,759
)
(Increase) decrease in prepaid income and refundable income tax
(1,410
)
 
282,362

Decrease in other assets

 
(75,994
)
(Decrease) in accounts payable and accrued liabilities
(1,341,765
)
 
(1,143,122
)
Net Cash Provided by (Used in) Operating Activities
44,626

 
(1,932,456
)
Cash Flows from Investing Activities:
 
 
 
Acquisition of property, plant and equipment
(29,496
)
 
(97,129
)
Proceeds from sale of property, plant and equipment
500

 

Net Cash (Used in) Investing Activities
(28,996
)
 
(97,129
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from line of credit - related party

 
2,100,000

Payment on line of credit - related party
(2,700,000
)
 

Payments on tern loan - related party
(1,000,000
)
 


Proceeds from line of credit, net
3,790,096

 

Payment of deferred financing fees
(387,559
)
 

Payments for capital lease obligations
(20,294
)
 
(3,953
)
Net Cash (Used in) Provided by Financing Activities
(317,757
)
 
2,096,047

Net (Decrease) Increase in Cash
(302,127
)
 
66,462

Cash and Cash Equivalents at Beginning of Period
509,884

 
241,621

 
$
207,757

 
$
308,083

Supplemental Disclosures of Cash Flow Information:
 
 
 
 
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
97,030

 
$
60,302

Income taxes
$
6,146

 
$

See Notes to Consolidated Financial Statements

5

TABLE OF CONTENTS
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO 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 six month periods ending May 31, 2016 are not necessarily indicative of the results that may be expected for the entire year ended November 30, 2016. 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, 2015. 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.
CCA has two wholly-owned subsidiaries, CCA Online Industries, Inc. and CCA IND., S.A. DE C.V., a Variable Capital Corporation organized pursuant to the laws of Mexico, both of which are currently inactive.

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 May 31, 2016. 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.

6

TABLE OF CONTENTS
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



Trade 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 market. Product returns are either recorded in inventory when they are received at the lower of their original cost or market or destroyed, 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:
 
Computer equipment
3-5 Years
Furniture and fixtures
3-10 Years
Tools, dies and masters
3 Years
Leasehold improvements
Remaining life of the lease (4 years 2 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 statement. 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. No impairments were recorded in the six months ended May 31, 2016 and May 31, 2015.
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

7

TABLE OF CONTENTS
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



returns which are anticipated to be taken as credits against the balances as of May 31, 2016 are offset against the 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 $300,000 in the quarter ended May 31, 2016 to reduce open cooperative advertising contracts for 2013 for events that have been finalized. There were no reductions in the first quarter of fiscal 2016. The balance of the remaining open cooperative advertising is allocated between accrued liabilities and the allowance for cooperative advertising based 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 May 31, 2016 and May 31, 2015 were $140,657 and $163,688, respectively. Shipping costs included for the six months ended May 31, 2016 and May 31, 2015 were $254,765 and $346,679, 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 May 31, 2016 and May 31, 2015 were $532,327 and $1,500,875, respectively. Advertising, cooperative and promotional expenses for the six months ended May 31, 2016 and May 31, 2015 were $848,783 and $2,449,832, 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 May 31, 2016 and May 31, 2015 were $26,726 and $13,205, respectively. Research and development costs for the six months ended May 31, 2016 and May 31, 2015 were $34,927 and $40,630 , 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 estimated that it will utilize the entire deferred tax asset in future years based on anticipated future profitability.  However,

8

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CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



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 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 29, 2016 as supplemented in this Form 10-Q. The portion that management expects to utilize in fiscal 2016 is recorded as a short term asset, and the portion that management expects to utilize in fiscal years subsequent to fiscal 2016 is recorded as a long term asset.

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 May 31, 2016 and November 30, 2015. 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.
Tax Credits:
Tax credits, when present, are accounted for using the flow-through method as a reduction of income taxes in the years utilized.
Earnings Per Common Share:
Basic 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 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 2016 and 2015, see Note 11 for details.
Recent Accounting Pronouncements:
In March 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-09, Compensation - Stock Compensation. The update changes how the income tax benefits from stock compensation expense are reflected in the financial statements. The update requires that any income tax benefits or deficiencies as a result of stock option awards should be recognized on the income statement as an income tax expense or benefit. Excess tax benefits would be reported along with other income tax cash flows as an operating activity on the Consolidated Statement of Cash Flows. The update is effective for annual periods beginning after December 31, 2016, including interim periods within those annual periods. Early adoption is permitted for any interim or annual period. Management has elected to adopt the update effective for the quarter and year to date periods ended May 31, 2016, and the consolidated financial statements for those periods have been adjusted accordingly. The adoption did not have any material impact on the consolidated financial statements for the quarter or year to date periods ended May 31, 2016.
Management does not believe that any other 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.


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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4 - INVENTORIES
The components of inventory consist of the following:
 
 
May 31,
2016
 
November 30,
2015
Raw materials
 
$
987,567

 
$
1,022,516

Finished goods
 
2,143,712

 
2,214,286

 
 
$
3,131,279

 
$
3,236,802


At May 31, 2016 and November 30, 2015, the Company had a reserve for obsolescence of $462,205 and $821,259, respectively.

NOTE 5 - PROPERTY AND EQUIPMENT
The components of property and equipment consisted of the following:
 
 
May 31,
2016
 
November 30,
2015
Furniture and equipment
 
$
482,874

 
$
459,786

Tools, dies and masters
 
462,542

 
462,542

Capitalized lease obligations
 
15,286

 
15,286

Leasehold improvements
 
35,017

 
35,017

 
 
$
995,719

 
$
972,631

Less: Accumulated depreciation
 
802,184

 
767,597

Property and Equipment—Net
 
$
193,535

 
$
205,034


Depreciation expense for the three months ended May 31, 2016 and May 31, 2015 amounted to $18,974 and $47,483, respectively. Depreciation expense for the six months ended May 31, 2016 and May 31, 2015 amounted to $38,919 and $104,790 , respectively.


NOTE 6 - INTANGIBLE ASSETS
Intangible assets consist of owned trademarks and patents for ten product lines.
 
 
May 31,
2016
 
November 30,
2015
Patents and trademarks
 
$
580,007

 
$
580,007

Less: Accumulated amortization
 
146,035

 
145,841

Intangible Assets - Net
 
$
433,972

 
$
434,166



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 May 31, 2016 and 2015 amounted to $97 and $97, respectively. Amortization expense for the six months ended May 31, 2016 and May 31, 2015 amounted to $194 and $194 , respectively. Estimated amortization expenses for the years ending November 30, 2016, 2017, 2018, 2019 and 2020 are $388, $388, $388, $376 and $376, respectively.


NOTE 7 - ACCRUED EXPENSES
The following items which exceeded 5% of total current liabilities are included in accrued expenses as of:

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


 
 
May 31,
2016
 
November 30,
2015
Co-operative advertising
$
1,948,790

 
$
1,697,493

Restructuring Costs
$
1,164,672

 
$
1,256,781

Accrued returns
*

 
$
407,992


* represents less than 5% as of May 31, 2016


The following items which exceeded 5% of total long-term liabilities are included in long term accrued expenses as of:
 
 
May 31,
2016
 
November 30,
2015
Sub-lease rent differential
$
298,051

 
$
322,282

Media
$

 
$
500,000

Restructuring Costs
$

 
$
420,000


    



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 was 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 bear interest at the 30
day LIBOR rate plus 6% per annum (currently in the aggregate, 6.21% per annum), payable monthly in arrears. The
Company is also required to pay a monthly unused line fee and collateral management fee. The commitment under the Credit Agreement expires three years after the Closing Date. The Revolving Loan and all other amounts due and owing under the 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 Line of Credit equal 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 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 1.0 to 1.0. The Credit Agreement imposes 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.

On the Closing Date, the Company drew $4,100,000 on the Revolving Loan. Of the amount drawn, $3,721,583
was used to pay the principal amount of $3,700,000 and accrued interest of $21,583 due under the Company's Loan
Agreement with Capital Preservation Solutions, LLC entered into on September 4, 2015. Capital Preservation Solutions
is controlled by Lance T. Funston, the Chairman of the Board of the Company and Chief Executive Officer. The balance
of the funds drawn were used to pay certain fees and expenses related to entering into the Credit Agreement, with a
balance of $46,032 remitted to the Company.


11


NOTE 9 - OTHER INCOME
Other income consists of the following:
 
 
Three Months Ended May31,
 
Six Months Ended May 31,
 
 
2016
 
2015
 
2016
 
2015
Interest and dividend income
 
$

 
$
43

 
$
9

 
$
200

Royalty income
 
3,000

 
3,000

 
6,000

 
6,000

Miscellaneous
 
1,574

 
569

 
2,737

 
2,070

Total Other Income
 
$
4,574

 
$
3,612

 
$
8,746

 
$
8,270


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. For all periods to date, the Company did not make any contributions.
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 May 31, 2016 and May 31, 2015. 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.
The charitable contributions portion of the deferred tax asset and the loss carry forward has $181,203 and $9,058,074, respectively, that has been reclassified as a long-term asset, based on an estimate of the amount that will be realizable in periods greater than twelve months from May 31, 2016.


TABLE OF CONTENTS
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


At May 31, 2016 and November 30, 2015, respectively, the Company had temporary differences arising from the following:
 
 
May 31, 2016
 
 
 
 
 
 
Classified As
Type
 
Amount
 
Deferred Tax
 
Short-Term
Asset
 
Long-Term
Asset (Liability)
Depreciation
 
$
(258,756
)
 
$
(95,490
)
 
$

 
$
(95,490
)
Reserve for bad debts
 
27,625

 
10,195

 
10,195

 

Reserve for returns
 
617,890

 
228,024

 
228,024

 

Accrued returns
 
205,652

 
75,893

 
75,893

 

Reserve for obsolete inventory
 
462,205

 
170,571

 
170,571

 

Vacation accrual
 
59,799

 
22,068

 
22,068

 

Bonus obligation unpaid
 
24,000

 
8,857

 
8,857

 

Restructuring costs
 
1,164,672

 
429,807

 
429,807

 

Charitable contributions
 
731,183

 
269,833

 
88,630

 
181,203

Section 263A costs
 
64,941

 
23,965

 
23,965

 

Loss carry forward
 
26,946,846

 
9,944,374

 
886,300

 
9,058,074

Net deferred tax asset
 
 
 
$
11,088,097

 
$
1,944,310

 
$
9,143,787

 
 
 
 
 
November 30, 2015
 
 
 
 
 
 
Classified As
Type
 
Amount
 
Deferred Tax
 
Short-Term
Asset
 
Long-Term
Asset (Liability)
Depreciation
 
$
(250,811
)
 
$
(92,558
)
 
$

 
$
(92,558
)
Reserve for bad debts
 
4,911

 
1,812

 
1,812

 

Reserve for returns
 
907,777

 
335,003

 
335,003

 

Accrued Returns
 
407,992

 
150,564

 
150,564

 

Reserve for obsolete inventory
 
821,259

 
303,075

 
303,075

 

Vacation accrual
 
35,955

 
13,269

 
13,269

 

Bonus obligation unpaid
 
24,000

 
8,857

 
8,857

 

Restructuring costs
 
1,264,218

 
466,544

 
466,544

 

Charitable contributions
 
734,643

 
271,109

 
86,402

 
184,707

Section 263A costs
 
67,129

 
24,773

 
24,773

 

Loss carry forward
 
27,022,986

 
9,972,473

 
864,023

 
9,108,450

Net deferred tax asset
 
 
 
$
11,454,921

 
$
2,254,322

 
$
9,200,599














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CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



Income tax expense (benefit) is made up of the following components:
 
Three Months Ended
 
Six Months Ended
 
May 31,2016
May 31, 2015
 
May 31, 2016
May 31, 2015
Continuing Operations
 
 
 
 
 
Current tax - Federal
$

$

 
$

$

Current tax - State & Local
2,369

2,027

 
4,735

4,027

Deferred tax
244,685

(904,500
)
 
374,489

(864,538
)
Tax - Continuing Operations
$
247,054

$
(902,473
)
 
$
379,224

$
(860,511
)
Discontinued Operations
 
 
 
 
 
Current tax - Federal


 


Current tax - State & Local


 


Deferred tax
(4,192
)
96,634

 
(7,665
)
95,661

Tax - Discontinued Operations
$
(4,192
)
$
96,634

 
$
(7,665
)
$
95,661



Prepaid and refundable income taxes are made up of the following components:
Prepaid and refundable income taxes
 
Federal
 
State &
Local
 
Total
May 31, 2016
 
$

 
$
71,466

 
$
71,466

November 30, 2015
 
$

 
$
70,056

 
$
70,056




























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CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


A reconciliation of the provision for income taxes computed at the statutory rate to the effective rate for the three months and six months ended May 31, 2016, and May 31, 2015 is as follows:

 
 
Three Months Ended
 
Three Months Ended
 
 
May 31, 2016
 
May 31, 2015
 
 
Amount
 
Percent of Pretax Income
 
Amount
 
Percent of Pretax Income
Continuing Operations
 
 
 
 
 
 
 
 
Provision for (benefit from) income taxes at federal statutory rate
 
$
230,535

 
34.00
 %
 
$
(911,018
)
 
34.00
 %
Changes in provision for income taxes resulting from:
 
 
 
 
 
 
 
 
State income taxes, net of federal income tax benefit
 
19,663

 
2.90
 %
 
(77,704
)
 
2.90
 %
Non-deductible expenses and other adjustments
 
(3,144
)
 
(0.46
)%
 
86,249

 
(3.22
)%
Provision for (benefit from) income taxes at effective rate
 
247,054

 
36.44
 %
 
(902,473
)
 
33.68
 %
Discontinued Operations
 
 
 
 
 
 
 
 
(Benefit from) provision for income taxes at federal statutory rate
 
$
(3,911
)
 
34.00
 %
 
$
97,549

 
34.00
 %
Changes in benefit from income taxes resulting from:
 
 
 
 
 
 
 
 
State income taxes, net of federal income tax benefit
 
(334
)
 
2.90
 %
 
8,320

 
2.90
 %
Non-deductible expenses and other adjustments
 
53

 
(0.46
)%
 
(9,235
)
 
(3.22
)%
(Benefit from) provision for income taxes at effective rate for Discontinued Operations
 
$
(4,192
)
 
36.44
 %
 
$
96,634

 
33.68
 %
Total Provision for (benefit from) income taxes at effective rate
 
$
242,862

 
36.44
 %
 
$
(805,839
)
 
33.68
 %


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CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




Six Months Ended

Six Months Ended


May 31, 2016

May 31, 2015


Amount

Percent of Pretax Income

Amount

Percent of Pretax Income
Continuing Operations












Provision for (benefit from) income taxes at federal statutory rate

$
346,532


34.00
%

$
(877,495
)

34.00
 %
Increases in taxes resulting from:










State income taxes, net of federal income tax benefit

29,557


2.90
%

(74,845
)
 
2.90
 %
Non-deductible expenses and other adjustments

3,135


0.31
%

91,829


(3.56
)%
Provision for (benefit from) income taxes at effective rate

379,224


37.21
%

(860,511
)

33.34
 %









Discontinued Operations








(Benefit from) provision for income taxes at federal statutory rate

$
(7,004
)

34.00
%

$
97,549


34.00
 %
Changes in (benefit from) provision for income taxes resulting from:









State income taxes, net of federal income tax benefit



%

8,320


2.90
 %
Non-deductible expenses and other adjustments

(661
)

3.21
%

(10,208
)

(3.56
)%
(Benefit from) provision for income taxes at effective rate

(7,665
)

37.21
%

95,661


33.34
 %









Total Provision for (benefit from) income taxes at effective rate

$
371,559


37.21
%

$
(764,850
)

33.34
 %



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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 “Plan”). The 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 plan expired in April, 2015. On August 13, 2015, the shareholders approved the 2015 CCA Industries, Inc. Incentive Plan (the "2015 Plan"). The 2015 Plan authorizes 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 and/or restricted stock.
On January 1, 2006, the Company adopted 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 fair value of the stock option grants below were estimated on the date of the grant using a Black-Scholes valuation model and the assumptions in the following table:
Option Grant Date
December 1, 2015
Assumptions:
 
Risk-free interest rate
1.19
%
Dividend yield

Stock volatility
39.39
%
Option Term (years)
3.0


On December 1, 2015, the Company granted non-qualifed stock options under the Plan for 75,000 shares each to four directors: Sardar Biglari, Philip Cooley, Christopher Hogg and S. David Fineman. All options were granted at $3.16 per share. The closing price of the Company's stock on the date of grant was $3.16 per share. The options vest one year from the date of grant. The options expire on November 30, 2020. The Company has estimated the fair value of the options granted to be $263,550 as of the grant date, which amount shall be amortized as an expense over a one year period beginning December 1, 2015. The Company recorded a charge against earnings in the amount of $70,488 for the three months ended May 31, 2016 and $23,897 for the three months ended May 31 2015 for all outstanding stock options granted. The Company recorded a charge against earnings in the amount of $140,977 and 58,662, respectively, for the six months ended May 31, 2016 and 2015 for all stock options granted.











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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




A summary of stock option activity for the Company is as follows:
 
Number of Options
Weighted-Average Exercise Price
Weighted-Average Remaining Term (years)
Aggregate Intrinsic Value
Outstanding at November 30, 2014
137,000

$
3.40

5.4


Granted
185,000

$
3.46


 
Exercised




Canceled or Forfeited
218,000

$
3.45



Outstanding at November 30, 2015
104,000

$
3.42

7.6


Granted
300,000

$
3.16



Exercised




Canceled or Forfeited




Outstanding at February 29, 2016
404,000

$
3.23

9.2


Granted

 
 
 
Exercised

 
 
 
Canceled or Forfeited

 
 
 
Outstanding at May 31, 2016
404,000

$
3.23

9.0

 








18

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CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 13 - INCOME (LOSS) PER SHARE
Basic earnings (loss) per share is calculated using the average number of common shares outstanding. Diluted earnings (loss) per share is computed on the basis of the average number of common shares outstanding plus the effect of outstanding stock options using the “treasury stock method”.

 
Three Months Ended
 
Six Months Ended
 
May 31,2016
 
May 31, 2015
 
May 31,2016
 
May 31 2015
Net income (loss) available for common shareholders
$
423,677

 
$
(1,586,718
)
 
$
627,052

 
$
(1,529,111
)
Weighted average common shares outstanding-Basic
7,006,684

 
7,006,684

 
7,006,684

 
7,006,684

Net effect of dilutive stock options
119,649

 

 
81,431

 

Weighted average common shares and common shares equivalents—Diluted
7,126,333

 
7,006,684

 
7,088,115

 
7,006,684

 
 
 
 
 
 
 
 
Earnings (loss) per Share:
 
 
 
 
 
 
 
    Basic
 
 
 
 
 
 
 
Continuing Operations
$
0.06

 
$
(0.25
)
 
$
0.09

 
$
(0.25
)
Discontinued Operations
$

 
$
0.03

 
$

 
$
0.03

Income
$
0.06

 
$
(0.22
)
 
$
0.09

 
$
(0.22
)
 
 
 
 
 
 
 
 
    Diluted
 
 
 
 
 
 
 
Continuing Operations
$
0.06

 
$
(0.25
)
 
$
0.09

 
$
(0.25
)
Discontinued Operations
$

 
$
0.03

 
$

 
$
0.03

Income
$
0.06

 
$
(0.22
)
 
$
0.09

 
$
(0.22
)

For the three and six month periods ending May 31, 2016 and 2015 there were 404,000 and 312,000 shares, respectively, underlying previously issued stock options that were excluded from diluted loss per share because the effects of such shares were anti-dilutive.





NOTE 14 - RESTRUCTURING
On January 20, 2014, the Company announced that its Board of Directors had approved management’s plan to restructure the Company’s operations, and enter into a key business partnership with The Emerson Group, a premier sales and marketing company located in Wayne, Pennsylvania. As part of this change, the Company outsourced to Emerson certain sales and administrative functions effective February 1, 2014. In addition, warehousing and shipping was outsourced to Ozburn-Hessey Logistics "OHL", one of the largest integrated global supply chain management companies in the United States. The Company’s inventory was moved to an OHL-managed facility in Indianapolis, Indiana and shipping commenced from there as of the week of February 3, 2014. A key benefit of the outsourcing move is that it shifted a substantial portion of the Company’s current fixed costs into a variable cost structure moving forward which can ultimately help keep expenses in better alignment with any future revenue generated by its brands. As a result of the outsourcing, the Company reduced its work force. The Company's workforce as of May 31, 2016 has been reduced to 13 employees. As of May 31, 2016, there were unpaid severance costs of $1,164,672 which is recorded as an accrued expense on the Company's consolidated balance sheet. As of November 30, 2015, accrued restructuring costs were $1,676,781.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 

The Company made payments of $167,836 and $512,109, respectively for the three and six month periods ending May 31, 2016 related to the termination of employees during the quarter and year to date. The unpaid balance will be paid out during the balance of fiscal 2016 and the first quarter of fiscal 2017.
In April 2015, the Company moved from its facility at 200 Murray Hill Parkway, East Rutherford, New Jersey to a new facility at 65 Challenger Road, Suite 340, Ridgefield Park, New Jersey. The East Rutherford facility consisted of warehouses and offices totaling approximately 81,000 square feet of space. As a result of the outsourcing to the Emerson Group, the Company had not been using the warehouse space since December 2014. The facility at Ridgefield Park is located in an office building and consists of 7,414 square feet of office and allocated common space with an annual rental cost of $159,401 per year. In addition, the Company pays an electric charge of $1.75 per square foot per year. The lease is for five years and four months, commencing April 10, 2015, and contains a provision for four months of rent at no charge. In June 2015, the Company sub-let the East Rutherford facility. The terms of the sublet is for a monthly rent of $36,963 plus all common charges and utilities for a term of six years and ten and a half months, expiring in May 2022. The sub-lease provides for annual increases of 2% per year. The Company was leasing the East Rutherford facility for $41,931 per month, with annual increases equal to the change in the consumer price index. The lease expires in May 2022. The Company recorded an expense of $407,094 in the second quarter of fiscal 2015 as a restructuring charge as an estimate for the difference between the rent that the Company pays its landlord and the rent received from the sub-tenant over the term of the sub-lease. In addition, the Company recorded a restructuring expense of $155,245 for a commission to be paid to the real estate agent who negotiated the sub-lease.
The Company also wrote off $714,138 of leasehold improvements for the East Rutherford facility in the second quarter of fiscal 2015, and $128,943 of furniture and fixtures no longer needed, both of which were recorded as restructuring expense, along with $56,897 related to the termination of employees during the quarter for a total of $1,462,317 for the three months ending May 31, 2015. For the six months ended May 31, 2015, total restructuring changes for the Company was $1,497,340. The difference was the $35,023 related to the termination of employees during the first quarter 2015.

  


NOTE 15 - DISCONTINUED OPERATIONS
The Company discontinued the Gel Perfect color nail polish business effective as of May 31, 2014. The Gel Perfect brand had declining sales in fiscal 2013 and fiscal 2014. The brand has been recorded as discontinued operations and are reflected as such in the Company's statement of operations.
The following table summarizes those components of the statement of operations for the discontinued brand, which contains additional returns for the three and six month periods ending May 31, 2016 and 2015:



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 
Three Months Ended
Six Months Ended
 
May 31, 2016
 
May 31, 2015
May 31, 2016
 
May 31, 2015
Revenues:
 
 
 
 
 
 
Sales of health and beauty-aid products-net
$
(11,504
)
 
$
286,908

$
(20,600
)
 
$
286,908

Total revenues
(11,504
)
 
286,908

(20,600
)
 
286,908

Costs and Expenses:
 
 
 
 
 
 
Cost of sales

 


 

Selling, general and administrative expenses

 


 

Advertising, cooperative and promotions

 


 

Total expenses

 


 

( Loss) income before provision for income taxes
(11,504
)
 
286,908

(20,600
)
 
286,908

(Benefit from) provision for income taxes
(4,192
)
 
96,634

(7,665
)
 
95,661

(Loss) income from Discontinued Operations
$
(7,312
)
 
$
190,274

$
(12,935
)
 
$
191,247



NOTE 16 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
David Edell served as a director during fiscal 2014 until September 5, 2014. Ira Berman is a former director. On September 5, 2014, the Company entered into Separation Agreements with David Edell and Ira Berman, (the “Founders”) whereby they are no longer required to perform any consulting services pursuant to their Amended and Restated Employment Agreements. The Company was required per the Separation Agreements to make an additional payment of $200,000 in the aggregate to the Founders by October 1, 2015 and pay $794,620 in the aggregate in fifteen equal monthly installments of $25,000 commencing on October 3, 2014. The Company, Mr. Edell and Mr. Berman agreed to defer the $200,000 payment until October 1, 2016. In addition, as of May 31, 2016, the Company owed $120,828 in the aggregate to Mr. Edell and Mr. Berman. This amount is being paid at the rate of $25,000 per month until fully paid.
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, who also is 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) . Interest and amortized financing costs in the amount of $0 and 3,085, respectively is recorded on the consolidated statement of operations for the quarter and six months ended May 31, 2016 as interest expense to a related party.
The Company entered into an agreement with Funston Media Management ("FMM"), effective December 1, 2015. FMM is owned by Lance Funston, the Company's Chairman of the Board and Chief Executive Officer. The independent members of the Board of Directors approved the agreement. The agreement provides for FMM to plan and act as an agent to provide any television, radio, internet and social media advertising for the Company's brands. Under the terms of the agreement, FMM receives a commission of 10% on all gross media spending for media that was planned or purchased by FMM on behalf of the Company, plus any out-of-pocket expenses. Commissions under

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


the agreement in the amount of $38,667 and $