UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
one)
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For
the Quarterly Period Ended June 30, 2018
OR
[ ]
|
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: 000-53810
HER
IMPORTS
(Exact
name of registrant as specified in its charter)
Nevada
|
|
30-0802599
|
(State
or Other Jurisdiction
of
Incorporation or Organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
8861
W. Sahara Ave., Suite 210
|
|
89117
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Telephone:
702-544-0195
(Registrant’s
telephone number, including area code)
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 [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 [ ]
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
definitions of “large accelerated filer,” “accelerated filer,” “Smaller reporting company,”
and “emerging growth company” in Rule 12-b of the Exchange Act.
Large
accelerated filer
|
[ ]
|
|
Accelerated
filer
|
[ ]
|
|
|
|
|
|
Non-accelerated
filer
|
[ ]
|
(Do
not check if a smaller reporting company)
|
Smaller
reporting company
|
[X]
|
|
|
|
|
|
Emerging
growth company
|
[X]
|
|
|
|
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
APPLICABLE
ONLY TO CORPORATE ISSUERS
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As
of August 13, 2018, the registrant’s outstanding common stock consisted of 8,656,459 shares, $0.001 par value.
Table
of Contents
Her
Imports
Index
to Form 10-Q
For
the Quarterly Period Ended June 30, 2018
Her
Imports
Condensed
Consolidated Balance Sheets
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
156,138
|
|
|
$
|
190,233
|
|
Receivables
|
|
|
124,707
|
|
|
|
165,770
|
|
Related party receivables
|
|
|
181,971
|
|
|
|
108,026
|
|
Inventories
|
|
|
2,054,653
|
|
|
|
2,335,753
|
|
Prepaid maintenance
fees - current
|
|
|
-
|
|
|
|
75,000
|
|
Other prepaid expenses
|
|
|
15,785
|
|
|
|
64,923
|
|
Deposits
|
|
|
189,298
|
|
|
|
196,392
|
|
Total current assets
|
|
|
2,722,552
|
|
|
|
3,136,097
|
|
|
|
|
|
|
|
|
|
|
Property, Equipment
and software, net
|
|
|
140,309
|
|
|
|
267,464
|
|
Prepaid maintenance
fees - non-current
|
|
|
-
|
|
|
|
209,375
|
|
Other asset
|
|
|
25,000
|
|
|
|
25,000
|
|
Trademark
|
|
|
8,200,000
|
|
|
|
8,200,000
|
|
Total assets
|
|
$
|
11,087,861
|
|
|
$
|
11,837,936
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
and accrued liabilities
|
|
$
|
606,263
|
|
|
$
|
822,216
|
|
Income tax liability
|
|
|
38,316
|
|
|
|
134,432
|
|
Notes
payable
|
|
|
384,062
|
|
|
|
177,390
|
|
Total current
liabilities
|
|
|
1,028,641
|
|
|
|
1,134,038
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,028,641
|
|
|
|
1,134,038
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Callable $0.144 per share per year
non-cumulative dividend liquidation preference of $2.00 per share, preferred stock, $0.001 par value, 10,000,000 shares authorized
and 5,000,000 issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
|
|
|
5,000
|
|
|
|
5,000
|
|
Common stock, $0.001 par value, 70,000,000
shares authorized, 8,656,459 and 4,150,059 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
|
|
|
8,656
|
|
|
|
4,150
|
|
Additional paid-in
capital
|
|
|
30,128,593
|
|
|
|
26,679,777
|
|
Accumulated
deficit
|
|
|
(20,083,029
|
)
|
|
|
(15,985,029
|
)
|
Total stockholders’
equity
|
|
|
10,059,220
|
|
|
|
10,703,898
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
11,087,861
|
|
|
$
|
11,837,936
|
|
See
accompanying notes to these consolidated financial statements.
Her
Imports
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Product sales
|
|
$
|
3,108,412
|
|
|
$
|
4,623,778
|
|
|
$
|
6,418,092
|
|
|
$
|
8,984,798
|
|
Cost of products
sold
|
|
|
1,849,932
|
|
|
|
2,758,268
|
|
|
|
3,476,039
|
|
|
|
4,893,332
|
|
Gross profit
|
|
|
1,258,480
|
|
|
|
1,865,510
|
|
|
|
2,942,053
|
|
|
|
4,091,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties
|
|
|
4,522
|
|
|
|
5,894
|
|
|
|
9,449
|
|
|
|
5,894
|
|
Selling expense
|
|
|
1,066,480
|
|
|
|
1,522,059
|
|
|
|
2,282,109
|
|
|
|
2,786,840
|
|
General
and administrative expense
|
|
|
350,159
|
|
|
|
297,113
|
|
|
|
687,434
|
|
|
|
609,959
|
|
Total operating expenses
|
|
|
1,421,161
|
|
|
|
1,825,066
|
|
|
|
2,978,992
|
|
|
|
3,402,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(162,681
|
)
|
|
|
40,444
|
|
|
|
(36,939
|
)
|
|
|
688,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
-
|
|
|
|
20
|
|
|
|
-
|
|
|
|
69
|
|
Interest expense
|
|
|
(2,484
|
)
|
|
|
(4,085
|
)
|
|
|
(12,994
|
)
|
|
|
(4,951
|
)
|
Loss on abandonment
of fixed assets
|
|
|
(379
|
)
|
|
|
-
|
|
|
|
(384,454
|
)
|
|
|
-
|
|
Contract
termination expense - related party
|
|
|
(3,397,500
|
)
|
|
|
-
|
|
|
|
(3,397,500
|
)
|
|
|
-
|
|
Total other expense
|
|
|
(3,400,363
|
)
|
|
|
(4,065
|
)
|
|
|
(3,794,948
|
)
|
|
|
(4,882
|
)
|
Income (loss) before benefit (provision)
for income taxes
|
|
|
(3,563,044
|
)
|
|
|
36,379
|
|
|
|
(3,831,887
|
)
|
|
|
683,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
(provision) for income taxes
|
|
|
34,100
|
|
|
|
(16,043
|
)
|
|
|
93,887
|
|
|
|
(245,656
|
)
|
Net income (loss) attributable to Company
|
|
|
(3,528,944
|
)
|
|
|
20,336
|
|
|
|
(3,738,000
|
)
|
|
|
438,235
|
|
Preferred stock
dividends
|
|
|
(180,000
|
)
|
|
|
(180,000
|
)
|
|
|
(360,000
|
)
|
|
|
(360,000
|
)
|
Net loss to common
stockholders
|
|
$
|
(3,708,944
|
)
|
|
$
|
(159,664
|
)
|
|
$
|
(4,098,000
|
)
|
|
$
|
78,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net basic income
(loss) per share attributable to common stockholders: basic and diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
number of common shares outstanding: basic and diluted
|
|
|
4,645,619
|
|
|
|
4,150,059
|
|
|
|
4,399,208
|
|
|
|
4,150,059
|
|
See
accompanying notes to these condensed consolidated financial statements.
Her
Imports
Consolidated
Statements of Cash Flows
|
|
For the Six Month Ended
|
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to Company
|
|
$
|
(3,738,000
|
)
|
|
$
|
438,235
|
|
Adjustments to reconcile
net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
39,591
|
|
|
|
54,579
|
|
Stock-based compensation
|
|
|
55,822
|
|
|
|
-
|
|
Loss on abandonment
of fixed assets
|
|
|
384,454
|
|
|
|
-
|
|
Contract termination
expense
|
|
|
3,397,500
|
|
|
|
-
|
|
Changes in operating
assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
41,063
|
|
|
|
(82,486
|
)
|
Related party receivables
|
|
|
(73,945
|
)
|
|
|
(47,153
|
)
|
Inventories
|
|
|
281,100
|
|
|
|
(200,258
|
)
|
Prepaid maintenance
fees
|
|
|
-
|
|
|
|
37,500
|
|
Other prepaid expenses
|
|
|
49,138
|
|
|
|
(35,953
|
)
|
Deposits
|
|
|
7,094
|
|
|
|
(269,934
|
)
|
Accounts payable
and accrued liabilities
|
|
|
(215,953
|
)
|
|
|
56,149
|
|
Income tax liability
|
|
|
(96,115
|
)
|
|
|
244,678
|
|
Other
asset
|
|
|
-
|
|
|
|
(25,000
|
)
|
Net cash provided by operating activities
|
|
|
131,749
|
|
|
|
170,357
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(12,515
|
)
|
|
|
(30,452
|
)
|
Net cash used in investing activities
|
|
|
(12,515
|
)
|
|
|
(30,452
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Issuance of notes
payable
|
|
|
1,074,202
|
|
|
|
-
|
|
Repayment on notes
payable
|
|
|
(867,530
|
)
|
|
|
(28,966
|
)
|
Payment
of preferred dividend
|
|
|
(360,000
|
)
|
|
|
(360,000
|
)
|
Net cash used in financing activities
|
|
|
(153,329
|
)
|
|
|
(388,966
|
)
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH
|
|
|
(34,095
|
)
|
|
|
(249,061
|
)
|
|
|
|
|
|
|
|
|
|
CASH - BEGINNING
OF PERIOD
|
|
|
190,233
|
|
|
|
355,568
|
|
CASH - END
OF PERIOD
|
|
$
|
156,138
|
|
|
$
|
106,507
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
12,994
|
|
|
$
|
4,951
|
|
Income
taxes paid
|
|
$
|
4,254
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Shares
issued in exchange of cancellation of MIP Agreement
|
|
$
|
4,500
|
|
|
$
|
-
|
|
See
accompanying notes to these consolidated financial statements.
Notes
to the Condensed Consolidated Financial Statements
1.
Description of the Company
Her
Imports, (previously known as EZJR, Inc.), (“the Company” or “Her”), was incorporated on August 14, 2006
under the laws of the State of Nevada.
Corporate
Structure and Business
Her
is a retailer of Human
Hair Extensions and related haircare and beauty products headquartered in Las Vegas, Nevada. The Company sells its products at
consultation studios and on its Website, www.herimports.com. As of June 30, 2018, the Company operated 21 retail locations, all
of which are in the U.S. These locations are primarily in “executive offices suites” such as Regus PLC, where furniture,
administrative staff and security are provided. The Company then stocks the location with products and point-of-sale equipment.
These locations are leased on a short-term basis (primarily one year or less). Five leases, including our corporate office, have
leases longer than one year at the time they were entered into. This allows the Company to open and close its consultation studios
within a short period of time at minimal expense to the Company. At the Company’s consultation studios, the customer is
provided with a personal, one-on-one consultation with a Her beauty expert. Additionally, the Company has one larger location
in Greenbelt Maryland where there are several consultants as well as a waiting room.
The
Company has one wholly owned subsidiary, Her Marketing Concepts, Inc. (“Her Marketing”), a Nevada corporation.
All employees of the Company are employed by Her Marketing.
Agreement
with Cabello Real Ltd.
On
November 28, 2016, the Company entered into an Asset Share Purchase & Business Agreement with Cabello Real Ltd. (“Cabello”),
a private United Arab Emirates company to acquire the exclusive U.S. rights to the Her Imports trademark. In addition to these
rights, the Company also purchased certain other assets owned by Cabello including customer lists and various digital content.
In exchange for these rights, and other digital assets, the Company issued to Cabello 10,000,000 shares of non-voting, non-cumulative,
callable preferred stock (subsequently revised to 5,000,000) with a dividend rate of $0.144 per share per annum and a liquidation
preference of $2.00 per share. In addition, the Cabello received 1,250,000 shares of common stock. Both the preferred stock and
common stock issued were unregistered. Additionally, the Company applied with the State of Nevada for the approval of the Certificate
of Designations, Preferences, and Rights of Callable Non-cumulative Preferred Stock. The Certificate designated 5,000,000 as Callable
Non-cumulative Preferred Stock at a par value of $.001 per share. Cabello is controlled by Mr. Jonathan Terry, who is the Company’s
principal shareholder who is also actively involved in its daily operations.
On
January 12, 2017, the Company changed its name from EZJR, Inc. to Her Imports.
eCommerce
Platform
In
January 2018 the Company converted to a new cloud-based eCommerce platform from its server-based eCommerce platform. The primary
reason for the change was to allow the Company to optimize its mobile marketing efforts. In the past, marketing efforts have focused
on traditional media, email, and search. However, due to the proliferation of smart phones and social media it is much more effective,
while less expensive, to reach our customers using mobile marketing using SMS messaging and social platforms such as Facebook
and Snapchat. Furthermore, advances in eCommerce shopping carts to cloud-based platforms allow for significant customization that
was not previously available. The Company can interface with the shopping cart using various self-developed “mini-CRMs”
depending on the marketing promotion and platform.
As
a result of the change, the Company incurred a one-time charge of $383,542 from the write-off of the previous CRM and the prepaid
maintenance agreement associated with it.
Media
Investor Purchaser Agreement
On
June 29, 2014, the Company entered into a Media Investor Purchaser Agreement (“MIP”) with Leader Act HK Ltd (“Leader”),
a shareholder. On July 31, 2017, this agreement was assigned by Leader to Cabello. Under the terms of the assigned agreement,
Cabello undertakes the responsibility to provide the investment dollars for the “media purchase.” The purpose of this
media purchase is to generate revenues from the sale of various products and services. When revenues are generated they will be
split on a 50/50 basis after deducting direct expenses and fees related to the revenues the media purchase, merchant fees, product
costs, and affiliate fees. Cabello is responsible for lead generation by spending the funds necessary to purchase various media
while managing the overall process. Cabello is also responsible for graphic design, Website design and various other programming
expenses. Conversely, the Company is responsible for customer service, network costs, accounting, and any other related general
and administrative costs. Prior to signing the agreement Leader advanced the Company $50,000 which the agreement allowed to be
converted to 83,333 shares of common at $.60 per share. That left up to 9,500,000 shares of common stock that Cabello could purchase
at $0.05 per share from its portion of the funds generated by the offers it creates. Contrary to customary practice, the MIP
did not provide for any adjustment in the event of a future reverse split so the Company’s recent reverse split did not
affect the number of shares purchasable or the exercise price. This highlighted an unfair agreement which adversely affected the
Company. This problem was exacerbated since Cabello is a related party. From April 19 to April 20, 2018, Cabello ran a program
to sell a variety of the Company’s hair products. This program generated approximately $150,000 in revenue, however, a final
accounting of the results of the program were never completed. Instead, on June 20, 2018 the Company issued to Cabello
4,500,000 of restricted common stock in exchange for cancelation of the MIP Agreement and forgiveness of any monies owed to Cabello
for program in April. This cancellation resulted in a non-cash expense of $3,397,500 based on the estimated value of the
stock issued in exchange for the cancellation of the agreement.
Agreement
with Cabello Real FZE
On
April 20, 2017, the Company entered into a Marketing and Selling Agreement with Cabello Real FZE, owner of a hair care product
line called OSIworks, whereby the Company exclusively purchases, markets and sells OSIworks’ products in the United States.
Under the agreement the Company pays Cabello a royalty of 2% of net sales. Cabello Real FZE is also controlled by Jonathan Terry,
the Company’s principal shareholder. During the three and six months ended quarter ending June 30, 2018 the Company recognized
royalty expense of $4,522 and $5,894, respectively, related to the agreement.
2.
Summary of Significant Accounting Policies
There
have been no changes in Significant Accounting Policies from those described in our Form 10-K for our fiscal year ending December
31, 2017 filed with the Securities and Exchange Commission on March 27, 2018.
Principles
of Consolidation
The
condensed consolidated financial statements include the accounts of the Company (a Nevada corporation) and its wholly owned
subsidiary, Her Marketing. All significant intercompany transactions have been eliminated in consolidation.
Basis
of Presentation of the Condensed Consolidated Financial Statements
The
accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary,
Her Marketing. The Company maintains its books of account and prepares consolidated financial statements in accordance with Generally
Accepted Accounting Principles in the United States of America (“U.S. GAAP”). The Company’s fiscal year ends
on December 31. All significant intercompany balances and transactions have been eliminated in consolidation.
On
January 31, 2017, the Company effected a 1-for-2 reverse stock split effective January 31, 2017. The par value was not adjusted
as a result of the reverse stock split. On April 9, 2018, the Company effected a 1-for-6 reverse stock split effective April 9,
2018. All references to numbers of shares of our common stock and per-share information in the accompanying condensed consolidated
financial statements and in these notes to the condensed consolidated financial statements have been adjusted retroactively to
reflect these splits.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting period. The Company evaluates its estimates on an ongoing
basis, including those related to the fair values of stock-based awards, income taxes and contingent liabilities, among others.
The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable,
the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could
differ from those estimates and such differences could be material to the consolidated financial position and results of operations.
Fair
Value of Financial Instruments
The
Company measures fair value based on the prices that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. Fair value measurements are based on a three-tier hierarchy
that prioritizes the inputs used to measure fair value, using quoted prices in active markets for identical assets (Level 1);
significant other observable inputs (Level 2); and significant unobservable inputs (Level 3).
The
Company did not have any assets measured at fair value on a recurring basis at June 30, 2018 and December 31, 2017.
The
Company believes the carrying amounts of cash and cash equivalents, accounts receivable, other current assets, accounts payable,
and other accrued liabilities are a reasonable approximation of the fair value of those financial instruments because of the nature
of the underlying transactions and the short-term maturities involved.
Deposits
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deposits on Products
|
|
$
|
156,068
|
|
|
$
|
175,819
|
|
Security Deposits
|
|
|
33,230
|
|
|
|
20,573
|
|
Total
|
|
$
|
189,298
|
|
|
$
|
196,392
|
|
Intangibles
Intangible
assets are comprised primarily of trademarks that represent the Company’s exclusive ownership of the HER trademarks in the
US and are inclusive all related social media sites and domain names in the US., all used in connection with (consisting of the
name, Her Imports and the Her Imports Logo) the manufacture, sale and distribution of human hair extensions and related beauty
products. In accordance with Financial Accounting Standards Board Accounting Standard Codification 350 (FASB ASC 350), intangible
assets with indefinite lives are not amortized but instead are measured for impairment at least annually, or when events indicate
that an impairment exists through the use of discounted cash flow models. The Company calculates impairment as the excess of the
carrying value of its indefinite-lived assets over their estimated fair value. If the carrying value exceeds the estimate of fair
value a write-down is recorded. For the three and six months ended June 30, 2018 and 2017 there were no impairments recorded.
Revenue
Recognition
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued accounting standards update (“ASU”)
No. 2014-09, Revenue from Contracts with Customers, to clarify the principles of recognizing revenue and create common revenue
recognition guidance between U.S. GAAP and International Financial Reporting Standards. ASU No. 2014-09, as amended, is effective
for the Company as of January 1, 2018.
The
adoption did not result in any material change in the timing of recognizing revenue The adoption will also result in a change
in the timing of recognizing revenue for sales where we ship the merchandise to the customer from a distribution center or store,
as revenue for sales where we ship the merchandise to customers will be recognized when control of the merchandise transfers to
the customer, which is generally at the time of shipment rather than upon delivery of the products to the customer. Additionally,
the Company has had a deminimis amount of sales returns.
The
Company, through the Her Imports retail locations and its eCommerce Website, www.herimports.com, sells a variety of hair extensions
and related products.
Revenue
is recognized at the “point of sale” in the stores. Customers pay for the products using either cash, a debit card
or a credit card. All sales are final. In the case of cash sales at the store, the store manager makes a nightly deposit of the
cash. For credit card and debit sales, the Company recognizes the sale when the card is charged and approved. Sales tax collected
from customers is excluded from revenue and is included in accrued liabilities on our condensed consolidated balance sheets.
Product
purchases on the Company’s Website are paid for using either debit cards, credit cards, or PayPal Revenue for online product
sales are recognized upon shipment of the product. Additionally, customers have the option of making installment payments on products
purchased. In this case fifty percent of the purchase price is paid at the time of sale and the remainder withdrawn from the customer’s
account via ACH. Because there is a significant amount of uncertainty related to the subsequent collections via ACH, those payment
are only recognized as revenue upon receipt. Finally, customers may purchase product using a payment facility called PayNearMe
where a customer who doesn’t have a debit/credit/PayPal account can place an online order with an agreement to take cash
and pay for the order at a PayNearMe location. The product is then shipped at time PayNearMe notifies the Company that the payment
has been received. Revenue is recognized at the time of the shipment of the product.
Also
included in revenue is shipping revenue from our e-commerce customers. Sales taxes collected from retail customers are excluded
from reported revenues when control of the merchandise transfers to the customers, which is generally at the time of shipment
rather than upon delivery of the products to the customer.
Earnings
(Loss) per Share
The
Company utilizes FASB ASC 260. Basic earnings per share is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding. Diluted earnings per share is computed similar to basic earnings per share
except that the denominator is increased to include the number of additional common shares that would have been outstanding if
the potential common shares had been issued and if the additional common shares were dilutive. Common equivalent shares are excluded
from the computation if their effect is anti-dilutive.
Reverse
Stock Split
All
references to numbers of shares of our common stock and per-share information in the accompanying financial statements have been
adjusted retroactively to reflect the Company’s 1-for-2 reverse stock split effected on January 31, 2017, and a 1-for-6
reverse stock split effective April 9, 2018. The par value was not adjusted because of the reverse stock splits.
Stock-based
compensation
The
Company records stock-based compensation issued to external entities for goods and services at either the fair market value of
the shares issued, or the value of the services received, whichever is more readily determinable, using the measurement date guidelines
enumerated in FASB ASC 505-50-30. For the three months and six months ended June 30, 2018, the Company recognized stock-based
compensation expense of $36,001 and $55,822, respectively. There was no stock-based compensation for the three months and six
months ended June 30, 2017.
Recent
Accounting Pronouncements
Except
as noted below, the Company has considered all recent accounting pronouncements and has concluded that there are no recent accounting
pronouncements that may have a material impact on its condensed consolidated financial statements, based on current information.
In
July 2018, the FASB issued ASU 2018-10 Leases (Topic 842), Codification Improvements and ASU 2018-11 Leases (Topic 842), Targeted
Improvements, to provide additional guidance for the adoption of Topic 842. ASU 2018-10 clarifies certain provisions and correct
unintended applications of the guidance such as the application of implicit rate, lessee reassessment of lease classification,
and certain transition adjustments that should be recognized to earnings rather than to stockholders’ equity. ASU 2018-11
provides an alternative transition method and practical expedient for separating contract components for the adoption of Topic
842. In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842) which requires an entity to recognize assets and liabilities
arising from a lease for both financing and operating leases with terms greater than 12 months. ASU 2018-11, ASU 2018-10, and
ASU 2016-02 (collectively, “the new lease standards”) are effective for fiscal years beginning after December 15,
2018, with early adoption permitted. The Company is currently evaluating the effect the new lease standards will have on its Condensed
Consolidated Financial Statements; however, the Company anticipates recognizing assets and liabilities arising from any leases
that meet the requirements under the new lease standards on the adoption date and including qualitative and quantitative disclosures
in the Company’s Notes to the Condensed Consolidated Financial Statements.
In
July 2018, the FASB issued ASU 2018-09, Codification Improvements. The amendments in ASU 2018-09 affect a wide variety of Topics
in the FASB Codification and apply to all reporting entities within the scope of the affected accounting guidance. The Company
has evaluated ASU 2018-09 in its entirety and determined that the amendments related to Topic 718-740, Compensation-Stock Compensation-Income
Taxes, are the only provisions that currently apply to the Company. The amendments in ASU 2018-09 related to Topic 718-740, Compensation-Stock
Compensation-Income Taxes, clarify that an entity should recognize excess tax benefits related to stock compensation transactions
in the period in which the amount of the deduction is determined. The amendments in ASU 2018-09 related to Topic 718-740 are effective
for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company does not expect the adoption of
the new standard to have a material impact on the Company’s Condensed Consolidated Financial Statements.
In
March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting
Bulletin No. 118. This standard amends Accounting Standards Codification 740, Income Taxes (ASC 740) to provide guidance on accounting
for the tax effects of the Tax Cuts and Jobs Act (the Tax Reform Act) pursuant to Staff Accounting Bulletin No. 118, which allows
companies to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This
standard is effective upon issuance. As described in the footnotes to the Annual Report on Form 10-K, the Company’s accounting
for the tax effects of enactment of the Tax Reform Act is being assessed; however, in certain cases, as described below, we made
a reasonable estimate of the effects on our existing deferred tax balances and valuation allowance. The Company determined that
the $62.9 million recorded in connection with the re-measurement of certain deferred tax assets and liabilities, and corresponding
valuation allowance was a provisional amount and a reasonable estimate at December 31, 2017. The Company has not completed the
accounting with regard to the tax effects associated with an intra-entity transfer of certain intellectual property rights with
the enactment of Tax Reform Act. Our accounting for the intra-entity transfer reflects the utilization of net operating losses
on the basis of the laws in effect before the Tax Reform Act. The Company is evaluating the impact under Tax Reform Act on the
Company’s global business structure. In all aspects, the Company will continue to make and refine calculations as additional
analysis is completed. The Company expects to complete the accounting assessment during the one-year measurement period provided
by SAB 118.
3.
Property, Equipment and Software
Property
and equipment consisted of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Software
|
|
$
|
110,000
|
|
|
$
|
463,310
|
|
Computers and equipment
|
|
|
100,100
|
|
|
|
99,592
|
|
Furniture
|
|
|
37,169
|
|
|
|
30,391
|
|
Leasehold improvements
|
|
|
23,067
|
|
|
|
19,493
|
|
subtotal
|
|
|
270,336
|
|
|
|
612,786
|
|
Accumulated depreciation
and amortization
|
|
|
(130,027
|
)
|
|
|
(345,322
|
)
|
Property, equipment
and software, net
|
|
$
|
140,309
|
|
|
$
|
267,464
|
|
Depreciation
and amortization expense on property, plant, equipment, and software for the three and six months ended June 30, 2018 was $19,997
and $39,591, respectively. Depreciation and amortization expense on property, plant, equipment, and software for the three and
six months ended June 30, 2017 was $27,428 and $54,579, respectively.
4.
Sales tax payable
The
Company is delinquent in filing some sales tax returns for one state (including the remittance of taxes), for which the Company
has transacted business. The Company has recorded tax obligations plus potential interest and penalties estimated to be approximately
$35,180, computed through June 30, 2018, which are included in accounts payable and accrued liabilities on the balance sheet.
The Company is in the process of becoming fully compliant.
5.
Related Party Transactions
Related
Party Accounts Receivable and Payable
At
June 30, 2018 and December 31, 2017, the Company had a receivable from Cabello, its principal stockholder, of $181,971 and $108,026,
respectively, that resulted from payments made by the Company on behalf of Cabello. The Company has the right to offset this receivable
against any future dividend payments owed Cabello related to the preferred stock described in Note 1. As described in Note 11,
subsequent to June 30, 2018, two dividends of $60,000 each were declared and offset against amounts owed by Cabello. For
further information on related party transactions, see Note 1. As described below, the Company incurred $9,449 in royalty expense
in 2018 which has also been offset against the Cabello receivable.
Royalty
Expense
Royalty
expense is a result of royalties incurred on products sold under the brand name OSIworks, a company under common control with
the Company’s principal shareholder. During the three ended June 30, 2018 and 2017 royalty expense was $4,522 and $5,894,
respectively. During the six months ended June 30, 2018 and 2017 royalty expense was $9,449 and $5,894, respectively.
Contract
Termination Expense – Related Party
On
June 20, 2018, the Company issued to Cabello 4,500,000 shares of restricted common stock in exchange for cancelation of the MIP
Agreement (described in Note 1) and forgiveness of any monies owed to Cabello for program run in April. This cancellation resulted
in a non-cash expense of $3,397,500 based on the estimated value of the stock issued in exchange for the cancellation of the agreement.
6.
Commitments and Contingencies
Leases
At
June 30, 2018, the Company leased or rented 23 different facilities including its corporate headquarters and active retail locations.
Future lease obligation for these facilities are as follows:
Year
|
|
|
Amount
|
|
|
2018
(remaining six months)
|
|
|
$
|
145,217
|
|
|
2019
|
|
|
|
194,750
|
|
|
2020
|
|
|
|
134,115
|
|
|
2021
|
|
|
|
111,623
|
|
|
2022
|
|
|
|
114,648
|
|
|
Thereafter
|
|
|
|
49,072
|
|
|
Total
|
|
|
$
|
749,425
|
|
Rent
expense for the three months ended June 30, 2018 and 2017 was $128,533 and $172,204, respectively. Rent expense for the six months
ended June 30, 2018 and 2017 was $252,922 and $325,507, respectively.
Concentrations
As
of June 30, 2018, the Company has only twelve qualified vendors that supply its wigs and hair extension products. The Company
sources its hair care products from one vendor. There are numerous suppliers of styling tools as this is a commodity product.
During the three months ended June 30, 2018, the Company purchased hair products from four different vendors, however, two vendors
accounted for approximately 88.8% of all hair products purchased.
During
the three months ended June 30, 2018, the Company purchased hair products from four different vendors, however, two vendors accounted
for approximately 88.8% of all hair products purchased. During the six months ended June 30, 2018, the Company purchased hair
products from five different vendors, however, two vendors accounted for approximately 91.5% of all hair products purchased. During
the three months ended June 30, 2017, the Company purchased hair products from four different vendors, however, two vendors accounted
for approximately 93.6% of all hair products purchased. During the six months ended June 30, 2017, the Company purchased hair
products from six different vendors, however, two vendors accounted for approximately 95.0% of all hair products purchased.
Legal
Proceedings
From
time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of
business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise
from time to time that may harm the Company’s business.
On
or about September 5, 2015, the Company received a summons naming it in a civil action against Her Imports, LLC, Her Imports New
York, LLC, Her Holding, Inc. and EZJR, Inc. (now Her Imports) from a former independent contractor of Her Imports, LLC. The complaint
claims unpaid wages and overtime wages in violation of New York Labor Law, among other things. No specific damages are mentioned
in the complaint. The Company subsequently answered the complaint and denied any wrongdoing as EZJR had no relationship with the
contractor, whatsoever. At this point in the litigation it is impracticable to foresee the outcome, however, the Company believes
it has meritorious defense and is vigorously defending this litigation. On February 16, 2018, a magistrate judge ruled that EZJR,
Her Holding and Her Imports, LLC acted as a joint employer. The judge also found that genuine issues of material fact exist as
to “whether plaintiff qualifies as an ‘employee’ under the law or was an ‘independent contractor’.”
While the Company disagrees with the ruling that it was a joint employer, it has decided to proceed to trial on the basis that
the plaintiff was an independent contractor, while reserving the right to appeal the decision.
On
or about On March 13, 2018, the Company received a summons in a civil action alleging that it had violated the Telephone
Consumer Protection Act of 1991 (TCPA). In the complaint, an individual who provided his phone number to the Company to obtain
certain discounts on the Company’s products, claims that the Company sent several text messages to his cell phone without
prior written consent. The suit was filed by on behalf of the plaintiff and others similarly situated. On or about June 5, 2018
the Company received a second summons in a civil action also alleging that it had violated the TCPA. In the complaint,
an individual who provided her phone number to the Company to obtain certain discounts on the Company’s products, claims
that the Company sent several text messages to her cell phone without prior written consent. The suit was filed by on behalf
of the plaintiff and others similarly situated. In both instances our review of the circumstance surrounding the claim are that
the actions are not justified and as such we made the decision to intend to vigorously defend the Company against these actions.
In the case of the first action we have filed a response denying the allegations. In the case of the second action we have file
a motion to dismiss or consolidate this action with the first based on what is known “the-first-to-file rule.”
To date there has been no ruling on this motion.
On
January 12, 2017, the Company entered into a Business Purchase Agreement with EnzymeBioSystems, Inc. (“EnzymeBio”),
a Nevada corporation, whereby the Company entered into an agreement to purchase 100% ownership of EnzymeBio’s wholly owned
subsidiary, Share Acquisition Corp. (“SAC”), a Nevada corporation in exchange for approximately 9,167 shares of the
Company’s common stock and $25,000 cash. On February 28, 2017, EnzymeBio agreed to spin-off SAC as a dividend. Pursuant
to the Business Purchase Agreement and Nevada Revised Stature 92A.180 (Merger of a subsidiary into parent or parent into subsidiary)
,
SAC was to be acquired and merged into the Company. Restricted common shares of the Company were to be exchanged on a pro-rata
one-for-one ownership basis. After the exchange took place, SAC would be collapsed into the Company and subsequently dissolved
with the Nevada Secretary of State. The Company agreed to acquire SAC for the sole purpose to increase its shareholder base. As
of the date of these financial statements, the $25,000 had been paid, however, the share exchange did not take place and the agreement
was not consummated. The Company was subsequently informed by its legal counsel that this transaction cannot be concluded under
applicable securities laws. The Company has informed EnzymeBio of this and requested that the $25,000 payment be returned.
As a result, the $25,000 payment is recorded under Other Asset on the balance sheet. EnzymeBio refused to return the $25,000 and
as a result on March 13, 2018 the Company filed a legal complaint against those parties which include a demand for the $25,000
as well as legal fees and specific damages the Company incurred as a result of their actions. In June 2018, the defendants responded
to the complaint denying the allegation and also filed a counter claim against the Company and its Chief Executive
Officer’s. Subsequently, the defendants stipulated and all charges against the Company and its Chief Executive Officer were
dismissed.
7.
Promissory Notes
UPS
Capital
On
November 8, 2017 the Company entered into an agreement with UPS Capital Corporation (UPS) for a $500,000 credit facility. Under
the terms of the agreement UPS will loan 100% of the invoice amount on incoming offshore shipments carried by UPS. Upon funding
the loan, the Company pays a transaction fee of 1.85% or 2.75% for air shipment or ocean shipment, respectively. Repayment of
amounts funded are due in 60 days for air shipments and 90 days for ocean shipment. Amounts funded are secured by inventory on
hand and are personally guaranteed by the Company’s Chief Executive Officer and the Company’s principal controlling
shareholder. As of June 30, 2018, and December 31, 2017 the Company owed $384,062 and $177,390, respectively under the facility.
8.
Stockholders’ Equity
On
January 31, 2017, the Company effected a 1-for-2 reverse stock split effective January 31, 2017. The par value was not adjusted
as a result of the reverse stock split. On April 9, 2018, the Company effected a 1-for-6 reverse stock split effective April 9,
2018. All references to numbers of shares of our common stock and per-share information in the accompanying condensed consolidated
financial statements and in these notes to the condensed consolidated financial statements have been adjusted retroactively to
reflect these splits.
As
described in Note 1, on November 28, 2016, the Company entered into an Asset Share Purchase & Business Agreement with Cabello
to acquire the exclusive U.S. rights to the Her Imports trademark. In exchange for these rights, and other digital assets, the
Company issued to Cabello 10,000,000 shares of unregistered non-voting, non-cumulative, callable preferred stock (subsequently
revised to 5,000,000 shares) and 1,250,000 unregistered common stock with a combined value of $8,200,000. All shares of callable
preferred stock rank superior to all the Company’s preferred stock and common stock currently outstanding and hereafter
issued, as to distributions of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary (with the exception of a merger), including the payment of dividends. The callable preferred stock is subject to a
monthly dividend payment equal to a rate of $0.144 per share of preferred stock per annum. The declaration and payment of the
dividend on a monthly basis is subject to the approval of the Company’s Board of Directors. Such dividend is non-cumulative
should the Company not pay the dividend. The Company has a right of first refusal to purchase the callable preferred stock,
should the shareholder decide to sell all or part of their callable preferred stock. The callable preferred stock has no voting
rights. Through June 30, 2018, the Board of Directors has declared and approved, preferred stock dividends of $1,140,000 ($60,000
each month) to Cabello related to the 5,000,000 shares of callable, non-voting, non-cumulative preferred stock. Because the dividends
on the preferred stock are non-cumulative and at the discretion of the Company, these preferred shares are considered to
be equity.
At
June 30, 2018 and December 31, 2017, the Company had 10,000,000 shares of preferred stock authorized and 5,000,000 issued and
outstanding and 70,000,000 shares of common stock authorized. At June 30 2018 and December 31, 2017 there were 8,656,459 and 4,150,039
shares of common stock outstanding, respectively.
As
described in Note 1, on October 13, 2016, the Company entered into a five-year maintenance agreement on its eCommerce platform
with Leader in exchange for 250,000 shares of the Company’s common stock valued at $375,000 based on the fair market value
of a service maintenance contract provided to other third parties which approximates the fair value of the common stock at the
time it was issued. In January 2018 the Company converted to a new cloud-based eCommerce platform from its server-based eCommerce
platform. As a result, the Company wrote off $265,625 of unamortized prepaid software maintenance related to the agreement.
As
described in Note 1, on June 20, 2018 the Company issued 4,500,000 shares of restricted common stock to Cabello in exchange for
cancelation of the MIP Agreement and forgiveness of monies owed to Cabello for program that was run in April 2018.
9.
Stock-based Compensation
On
September 5, 2017 the Company adopted the 2017 Her Imports Stock Incentive Plan. For the three and six months ended June
30, 2018, the Company recognized $36,001 and $55,822, respectively in stock-based compensation related to stock options and common
stock issued under the plan. Stock-based compensation expense is included in the following captions on the condensed consolidated
statements of operations.
|
|
Three Month Ended
|
|
|
Six Month Ended
|
|
|
|
June
30, 2018
|
|
|
June
30, 2018
|
|
Selling expense
|
|
$
|
19,080
|
|
|
$
|
28,590
|
|
General and
administrative expense
|
|
|
16,921
|
|
|
|
27,232
|
|
Total
|
|
$
|
36,001
|
|
|
$
|
55,822
|
|
Changes
in the Company’s outstanding stock options under the plan during the six months ended June 30, 2018 were as follows:
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Options
|
|
|
Price
|
|
Outstanding at December 31, 2017
|
|
|
58,332
|
|
|
$
|
9.42
|
|
Granted
|
|
|
3,332
|
|
|
|
1.65
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited of expired
|
|
|
(8,333
|
)
|
|
|
10.68
|
|
Outstanding at June 30, 2018
|
|
|
53,331
|
|
|
$
|
8.73
|
|
Exercisable at June 30, 2018
|
|
|
18,958
|
|
|
$
|
9.15
|
|
The
weighted average remaining contractual term and aggregate intrinsic value of outstanding options as of June 30, 2018 was 4.12
years and $124,547, respectively.
The
Company’s stock options are measured at fair value using the Black-Scholes Option Pricing Model methodology. A summary of
the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s stock
options that are categorized within Level 3 of the fair value hierarchy for six months June 30, 2018 is as follows:
Strike Price
|
|
$
|
1.65
to 10.68
|
|
Volatility
|
|
|
46.21
|
%
|
Risk-free interest rate
|
|
|
2.15
|
%
|
Contractual life (in years)
|
|
|
5
|
|
Dividend yield (per share)
|
|
|
0
|
%
|
10.
Income Taxes
The
tax reform bill that Congress voted to approve December 20, 2017, also known as the “Tax Cuts and Jobs Act”, made
sweeping modifications to the Internal Revenue Code, including a much lower corporate tax rate, changes to credits and deductions,
and a move to a territorial system for corporations that have overseas earnings. The act replaced the prior-law graduated corporate
tax rate, which taxed income over $10 million at 35%, with a flat rate of 21%.
The
Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. An
approximate estimated blended tax rate of 18.3% was used to calculate the benefit for taxes based on operations for the six months
ended June 30, 2018 and 35.9% to calculate the provision for taxes based on income for the three months ended June 30, 2017. For
financial reporting purposes the benefit for income taxes is based on a pre-tax loss of $509,377 for the six months ended June
30, 2018 and pre-tax income of $683,891 for the six months ended June 30, 2017. In 2018, and for fourteen years thereafter, there
will be a permanent book versus tax difference of $546,667 each year related to the amortization of the trademark, which is deductible
for tax purposes but is not amortized and expensed for financial reporting purposes. The provision (benefit) for income taxes
for the three and six months ended June 30, 2018 and 2017 consisted of the following:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
U.S. Federal
|
|
$
|
47,711
|
|
|
$
|
(10,361
|
)
|
|
$
|
100,755
|
|
|
$
|
(225,758
|
)
|
U.S. State
|
|
|
(13,611
|
)
|
|
|
(5,906
|
)
|
|
|
(6,868
|
)
|
|
|
(19,898
|
)
|
Total
|
|
|
34,100
|
|
|
|
(16,267
|
)
|
|
|
93,887
|
|
|
|
(245,656
|
)
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
benefit (provision) for income taxes
|
|
$
|
34,100
|
|
|
$
|
(16,267
|
)
|
|
$
|
93,887
|
|
|
$
|
(245,656
|
)
|
As
of June 30, 2018, we had a tax loss carryforward of approximately $436,968 which can be used to offset future Federal income taxes.
11.
Subsequent Events
On
July 3, 2018, the Board of Directors approved the monthly $60,000 dividend related to 5,000,000 shares of Callable Preferred Stock
owned by Cabello Real Ltd. This dividend was offset against amounts owed to the Company by Cabello.
On
August 7, 2018, the Board of Directors approved the monthly $60,000 dividend related to 5,000,000 shares of Callable Preferred
Stock owned by Cabello Real Ltd. This dividend was offset against amounts owed to the Company by Cabello.
ITEM
2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS
Our
discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.
The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that
may affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the
reported amounts of revenues, costs and expenses during the reporting periods. Actual results could differ materially from these
estimates.
Forward-Looking
Statements
This
report contains forward-looking statements including our statements on liquidity, anticipated capital asset requirements
and anticipated growth and plans for funding our operations. Forward-looking statements can be identified by words such as “anticipates,”
“intends,” “plans,” “seeks,” “believes,” “estimates,” “expects”
and similar references to future periods.
Forward-looking
statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions.
Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances
that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements.
We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical
fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially
from those in the forward-looking statements include the risks contained in our Form 10-K for the year ended December 31, 2017
which was filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2018 and other risks including
a deterioration in general or regional economic, market and political conditions, failure to raise capital or obtain a credit
facility ineffective marketing, unanticipated federal legislation or regulation that increases our cost of compliance, failure
to implement our business plan and competition.
Any
forward-looking statement made by us speaks only as of the date on which it is made. Factors or events that could cause our actual
results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation
to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except
as may be required by law.
The
following discussion and analysis compares our results of operations for the three and six months ended June 30, 2018 and June
30, 2017. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto
and our Form 10-K for our fiscal year ending December 31, 2017 filed with the SEC on March 27, 2018.
Business
Organization and Overview
We
are a retailer of Human Hair Extension and related haircare and beauty products headquartered in Las Vegas, Nevada. We sell our
products at consultation studios throughout the U.S. and on our Website at www.herimports.com. Additionally, by way of our proprietary
eCommerce platform and strategic leveraging of social media buys, we convert prospects into customers while developing long-term
personal relationships and loyal customers. Our consultation studios are primarily leased on a short-term basis (one year or less).
This allows the Company to open and close locations with a minimal amount of time and expense. At these consultation studios,
the customer is provided with a personal, one-on-one consultation. Additionally, the Company has one “super-store”
in Greenbelt Maryland where we have a number of consultants as well as a waiting room.
Seasonality
In
the opinion of our management, the business areas in which we operate are subject to seasonal fluctuations during holidays and
personal income tax filing season. We believe our quarterly revenues are highest in the late Winter and Spring when our customers
receive income tax refunds. As such, past quarterly results are not indicative of future results and may be subject to seasonal
fluctuations.
Results
of Operations
Discussion
of three months ended June 30, 2018 and 2017
Product
Sales
Product
sales for the three months ended June 30, 2018 were $3,108,412 representing a 32.8% decrease from revenues of $4,623,778 for the
three months ended June 30, 2017. These sales were derived primarily from the sale of human hair extensions and related hair care
products under the brands “Her Imports” or “OSIworks.” These sales were made either online or at Her Imports’
consultation studios. Consultation studio sales decreased by 52% to $1,680,888 for the three months ended June 30, 2018 when compared
to $3,540,101 for the three months ended June 30, 2017. The reason for the decrease is that we closed 13 under-performing studios
during second half of 2017 and in the first quarter of 2018. We also experienced greater competition from various online
retailers. Partially offsetting this decrease in studio sales was an increase in online sales. Online sales increased by 30.8%
to $1,417,524 for the three months ended June 30, 2018 from $1,083,677 for the three months ended June 30, 2017. Online sales
as a percentage of overall sales increased to 45.6% for the three months ended June 30, 2018 compared to 23.4% for the three months
ended June 30, 2017. This increase in online sales as a percentage of overall sales continued a trend that began in the second
quarter of 2017 as we moved away from retail expansion to an emphasis on online sales and a launch of a new eCommerce Website
as well as sales promotions that were implemented with new marketing techniques utilizing our customer database. Additionally,
at the beginning of 2018 we launched a new cloud-based eCommerce platform. Finally, during the three months ended June
30, 2018, the were $10,000 of wholesale sales. There were no wholesale sales during the three months ended June 30, 2017.
Cost
of Products Sold, Gross Profit and Gross Margins
Cost
of products sold for the three months ended June 30, 2018 were $1,849,923 representing a 32.9% decrease from cost of products
sold of $2,758,268 for the three months ended June 30, 2017. Accompanying this decrease was a nominal increase in gross
margins to 40.5% for the three months ended June 30, 2018 up from a gross margin of 40.3% for the three months ended June 30,
2017. As a result, gross profit decreased to $1,258,480 or 32.5% from gross profit of $1,865,510 for the three months ended June
30, 2017.
Operating
Expenses
Operating
expenses consist of royalty expense, selling expense and general and administrative expense and decreased by 22.1% when comparing
the three months ended June 30, 2018 to the same period for 2017. Total operating expenses for the three months ended June 30,
2018 were $1,421,161, compared to $1,825,066 for the three months ended June 30, 2017. Royalty expense for the three months ended
June 30, 2018 was $4,522 compared to $5,894 for the three months ended June 30, 2017. Selling expense for the three months ended
June 30, 2018 decreased by $455,579 or 29.9% for the three months ended June 30, 2018 when compared to the same 2017 period. The
decrease in selling expense was primarily attributable to a decrease in consultation studio operating expenses including payroll,
rent, travel expenses and other operating expenses due to the closing of these retail locations. There were 23 consultation studios
open at some time during the three months ended June 30, 2018 compared to 35 consultation studios open in the same period for
2017. Also, contributing to the decrease were decreases in Website development expense and promotion expense. General and administrative
expenses increased by $53,046 or 17.9% for the three months ended June 30, 2018 when compared to the same period last year. This
increase was primarily due to non-cash compensation, Board of Directors expenses, and legal fees. These increase we partially
offset by a decrease in investor relations and shareholder expenses and depreciation and amortization.
Income
(loss) from operations
The
above resulted in loss from operations of $162,681 for the three months ended June 30, 2018 compared to income from operations
of $40,444 for the three months ended June 30, 2017.
Other
income and expense
For
the three months ended June 30, 2018, other expense of $3,400,363 consisted primarily of $3,397,500 of non-cash contract termination
expense as well as interest expense of $2,484 from notes payable and a $379 loss on the abandonment of fixed assets. This compares
to other expense for the three months ended June 30, 2017 of $4,065 consisting of interest expense of $4,085 and interest income
of $20.
Provision
for income taxes
For
the three months ended June 30, 2018, we recognized a tax benefit of $34,100 compared to a provision for taxes of $16,043
for the three months ended June 30, 2017. These provisions/benefits are based on estimated income for the entire year. An approximate
estimated blended tax rate of 22.1% was used to calculate the provision for taxes based on income for the 2018 and 35.9% for 2017.
The reason for the decrease in the effective tax rate in 2018 was a change in the Federal corporate tax rate from 35% to 21% as
a result of the “Tax and Jobs Act” pass by Congress in December 2017.
Net
income (loss) attributable to company
As
a result of the above, net loss attributable to company for the three months ended June 30, 2018 was $3,528,944 compared to net
income attributable to company of $20,336 for the three months ended June 30, 2017.
Results
of Operations
Discussion
of six months ended June 30, 2018 and 2017
Product
Sales
Product
sales for the six months ended June 30, 2018 were $6,418,092 representing a 28.6% decrease from revenues of $8,984,798 for the
six months ended June 30, 2017. These sales were derived primarily from the sale of human hair extensions and related hair care
products under the brands “Her Imports” or “OSIworks.” These sales are made either online or at Her Imports’
consultation studios. Consultation studio sales decreased by 41.0% to $3,789,562 for the six months ended June 30, 2018 when compared
to $6,423.495 for the six months ended June 30, 2017. The reason for the decrease was primarily due to the closure of consultation
studios as the Company began focusing on online sales. There were 35 consultation studios open at some time during the
six months ended June 30, 2017 compared to 23 consultation studios open at some time during the same period for 2018. This decrease
was partially offset was by an increase in online sales wholesale sales. Online sales increased by 2.6% to $2,618,531 for the
six months ended June 30, 2018 from $2,553,381 for the six months ended June 30, 2017. Wholesale sales decreased by $2,078 when
comparing the six months ended June 30, 2018 to the six months ended June 30, 2017.
Cost
of Products Sold
Cost
of products sold for the six months ended June 30, 2018 were $3,476,039, representing a 29.0% decrease from cost of products
sold of $4,893,332 for the six months ended June 30, 2017. This decrease was the result of lower sales. Gross margin increased
slightly to 45.8% for the six months ended June 30, 2018 up from a gross margin of 45.5% for the six months ended June
30, 2017.
Operating
Expenses
Operating
expenses consist of royalty expense, selling expense and general and administrative expense. Total operating expenses for the
six months ended June 30, 2018 was $2,978,992, representing a 12.5% or $423,701 decrease from $3,402,693 for the six months ended
June 30, 2017. This decrease was primarily a result of decrease in selling expense partially offset by an increase in both general
and administrative expense and royalties. Selling expense for the six months ended June 30, 2017 decreased $504,731 or 18.1% for
the six months ended June 30, 2018 when compared to the same 2017 period. The decrease in selling expense was primarily attributable
to a decrease in consultation studio operating expenses including payroll, rent, travel expenses and other operating expenses
due to the closing of retail locations. There were 23 consultation studios open at some time during the six months ended June
30, 2018 compared to 35 consultation studios open in the same period for 2017. Also, contributing to the decrease were decreases
in Website development expense and promotion expense. General and administrative expenses for increased by $77,475 or 12.7% for
the six months ended June 30, 2018 when compared to the same period last year. This increase was primarily due to non-cash compensation,
Board of Directors expenses, administrative payroll and professional fees. These increase we partially offset by a decrease in
investor relations, bank service fees and depreciation and amortization. Royalty expense was $9,449 for the six months ended June
30, 2018 compared to $5,894 for the six months ended June 30, 2017. The reason for increase is that in 2017 there were no royalty
expenses during in the first quarter.
Income
from operations
The
above resulted in loss from operations of $36,939 for the six months ended June 30, 2018 compared to income from operations of
688,773 for the six months ended June 30, 2017.
Other
income and expense
For
the six months ended June 30, 2018, other expense of $3,794,948 consisted of a non-cash charge of $3,397,500 related
to the termination of the Media Investor Purchase Agreement, dated as of June 29, 2014, a $384,454 loss on abandonment of
fixed assets and $12,994 of interest expense related to notes payable. This compares other expense $4,882 for the six months ended
June 30, 2017 of which consisted of $4,951 of interest expense and $69 of interest income.
Provision
for income taxes
For
the six months ended June 30, 2018, a tax benefit of $93,887 was recognized compared to a tax provision of $245,656 for the six
months ended June 30, 2017. These provisions/benefits are based on estimated income for the entire year. An approximate estimated
blended tax rate of 22.1% was used to calculate the provision for taxes based on income for the 2018 and 35.9% for 2017. The reason
for the decrease in the effective tax rate in 2018 was a reduction in the Federal corporate tax rate from 35% to 21% as a result
of the “Tax and Jobs Act” pass by Congress in December 2017.
Net
income (loss) attributable to company
As
a result of the above, net loss attributable to the Company for the six months ended June 30, 2018 was $3,738,000 compared
to net income attributable to the Company of $438,235 for the six months ended June 30, 2017.
Liquidity
and Capital Resources
We
had a working capital surplus of $1,693,911 and $2,002,059 at June 30, 2018 and December 31, 2017, respectively, representing
a $308,148 decrease in our working capital. As of August 13, 2018, we had $76,796 in cash.
Our
primary use of cash is the purchase of inventory and the payment of dividends on outstanding callable non-cumulative preferred
stock. We anticipate that inventory will continue to fluctuate depending on the level of sales and, as we add additional SKU’s
to our product line and when close or we open new retail operations, subject to the occurrence of any material risks, trends
and uncertainties stated above. We currently plan to fund our growth through earnings, however, we are currently negotiating with
various financial institutions to obtain a credit facility related to the purchase of inventory. Additionally, it is likely that
during the coming year, we will seek to raise additional capital either through the sale of equity to support our plan to list
our common stock on a national securities exchange. We believe we have sufficient working capital to pay our expenses for
the next twelve months and anticipate paying monthly dividends of $60,000 on the preferred stock until such time that we call
the preferred stock.
A
large portion of our future expenditures is to fund our growth, and we can adjust our capital and operating expenditures by operating
segment, including future expansion of our product offerings. We may need or want to raise additional funds in the future, and
these funds may not be available to us when we need or want them, or at all. If we cannot raise additional funds when we need
or want them, our operations and prospects could be negatively affected.
Net
Cash Provided by Operating Activities
Net
cash provided by operating activities for the six months ended June 30, 2018 totaled $131,749 primarily from a reduction
of inventory of $281,100, offset by a net change in accounts payable and accrued liabilities of ($215,953) and income tax liability
of ($96,115). Non-cash items were contract termination expense of $3,397,500, depreciation of $39,591, stock-based compensation
of $55,822 and $384,455 of loss on abandonment of fixed assets.
Net
cash provided by operating activities for the six months ended June 30, 2017 totaled $170,357 and resulted primarily from net
income attributable to the Company of $438,235, offset by a net change in operating assets and liabilities of ($297,457). The
most significant change in operating assets and liabilities was an increase of $200,258 in inventories, a $269,934 in deposits
in accounts receivable and a $244,679 in income tax liability. Non-cash items were $54,579 in depreciation and amortization.
Net
Cash Used in Investing Activities
Net
cash used in investing activities during the six months ended June 30, 2018 totaled $12,516 related to purchases of fixed assets.
Net
cash used in investing activities during the six months ended June 30, 2017 totaled $30,452, reflecting primarily purchase of
fixed assets.
Net
Cash Used in Financing Activities
Net
cash used in financing activities during the six months ended June 30, 2018 totaled $153,329 resulting from borrowings of $1,074,202
offset by $867,530 of repayments of these borrowings. Additionally, the Company paid preferred dividends of $360,000 during the
period.
Net
cash used in financing activities during the six months ended June 30, 2017 totaled $388,966 resulting from payments of preferred
dividends of $360,000 and repayments on notes payable of $28,966.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors.
Related
Party Transactions
For
information on related party transactions and their financial impact, see Note 5 to the Unaudited Condensed Consolidated Financial
Statements.
Critical
Accounting Policies and Estimates
In
response to the SEC’s financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting
Policies, the Company has selected its most subjective accounting estimation processes for purposes of explaining the methodology
used in calculating the estimate, in addition to the inherent uncertainties pertaining to the estimate and the possible effects
on the Company’s financial condition. These estimates involve certain assumptions that if incorrect could create a material
adverse impact on the Company’s results of operations and financial condition. There were no material changes to our principal
accounting estimates during the period covered by this report.
Revenue
Recognition: Revenue is recognized at the “point of sale” in the stores. Customers pay for the products using either
cash, a debit card or a credit card. In the case of cash sales at the store, the store manager makes a nightly deposit of the
cash. For cash sales, we recognize the sale when the deposit is recorded into our account by the bank. For credit card and debit
sales, we recognize the sale when the card is charged and approved. Allowances for sales returns are recorded as a reduction of
net sales in the periods in which the related sales are recognized. Sales tax collected from customers is excluded from revenue
and is included in accrued expenses on our Consolidated Balance Sheets.
Product
purchases on the Website are paid for using either debit cards, credit cards, PayPal, or an independent financing company. Revenue
for Website product sales are recognized upon shipment of the product. Also included in revenue is shipping revenue from our e-commerce
customers. Sales taxes collected from retail customers are excluded from reported revenues.
Recent
Pronouncements
Our
management has evaluated all the recently issued accounting pronouncements through the filing date of this quarterly report
on Form 10-Q and does not believe that any of these pronouncements will have a material impact on our financial position and
results of operations. See Note 1 to the Unaudited Consolidated Financial Statements.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Our
disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), are designed to ensure that information required to be disclosed in reports filed or submitted
under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in rules and forms adopted
by the SEC, and that such information is accumulated and communicated to management, including the Chief Executive Officer, to
allow timely decisions regarding required disclosures.
Management,
with the participation of the Chief Executive Officer and Chief Financial Officer, who is also a member of our Board of Directors,
have evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2018. Based on such evaluation, the
Chief Executive Officer concluded that, as of June 30, 2018, our disclosure controls and procedures were not effective. Our disclosure
controls and procedures were not effective at the reasonable assurance level due to the “material weaknesses” described
below:
In
light of the material weaknesses described below, we performed additional analysis and other post-closing procedures to ensure
our consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly,
we believe that the consolidated financial statements included in this report fairly present, in all material respects, our financial
condition, results of operations and cash flows for the periods presented.
A
material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing
Standards) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of
the annual or interim consolidated financial statements will not be prevented or detected. Management has identified the following
material weakness which has caused management to conclude that, as of June 30, 2018, our disclosure controls and
procedures were not effective at the reasonable assurance level:
We
do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls
over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act which is applicable to us for the quarter ending
June 30, 2018. Management evaluated the impact of our failure to have adequate written documentation of our internal controls
and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that
resulted represented a material weakness.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of
the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
From
time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business.
However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time
to time that may adversely affect our business.
ITEM
1A. RISK FACTORS
As
a Smaller Reporting Company, we are not required to provide information otherwise required by this item; however, you may review
risk factors contained in our Form 10-K for the fiscal year ending December 31, 2017.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. MINE SAFETY DISCLOSURES.
Not
applicable.
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
The
exhibits listed in the accompanying “Index to Exhibits” are filed or incorporated by reference as part of this Form
10-Q.
INDEX
TO EXHIBITS
Copies
of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to
our shareholders who make a written request to our Corporate Secretary at 8861 W. Sahara Ave., Suite 210, Las Vegas, NV 89117.
*
Represents compensatory plan of management.
**
This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance
with Item 601 of Regulation S-K.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date:
August 14, 2018
|
By:
|
/s/
Barry Hall
|
|
Name:
|
Barry
Hall
|
|
Title:
|
Executive
Chairman, Chief Executive Officer and Chief Financial Officer
|
|
|
(Principal
Executive Officer, Principal Financial Officer and Principal Accounting Officer)
|
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