Notes
to the 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, on its Website, www.herimports.com and on Amazon.com. As of December 31, 2018, the
Company operated 16 retail locations, all of which are in the U.S and one of which was closed on that date. 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 locations in Greenbelt, Maryland and Brooklyn, New York with salons where
customers can have their hair purchases “installed.”
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 filed with the Secretary of 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. Johnathan
Terry, who is the Company’s principal shareholder who is also actively involved in its 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. 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 years ending December 31, 2018 and December 31, 2017 the Company recognized
royalty expense of $13,329 and $14,675, 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
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 Consolidated Financial Statements
The
accompanying 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 consolidated financial
statements and in these notes to the 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 December 31, 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
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Deposits
on Products
|
|
$
|
122,599
|
|
|
$
|
175,819
|
|
Security
Deposits
|
|
|
23,273
|
|
|
|
20,573
|
|
Total
|
|
$
|
145,872
|
|
|
$
|
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 year ended December 31, 2018, based on expert analysis and advice we determined that there
was an impairment to the carrying value of our trademark in the amount of $3,560,000. For the year ended December 31, 2017 there
were no impairments recorded.
The
following table presents the changes in trademark:
Balance as of December 31, 2017
|
|
$
|
8,200,000
|
|
Impairment expenses
|
|
|
(3,560,000
|
)
|
Balance as of December 31, 2018
|
|
$
|
4,640,000
|
|
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, its eCommerce Website, www.herimports.com and Amazon.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 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.
From
time to time, the Company partners with third-party financing companies which provide our customers the ability to pay over time.
These arrangements are between the third-party financing company and the customer and, hence, there is no recourse against the
Company. In these instances, revenue is recorded at the time of sale when the customer makes the purchase at a retail location
and at the time of shipment when the purchase is made online.
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.
Revenue
from sales on Amazon.com are recorded net of certain expenses paid to Amazon.com including selling fees, transaction fees, service
fees, administrative fees and inventory and inbound service fees. All advertising fees paid to Amazon.com is recognized as a period
expense and is booked to selling expense.
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 year ended December 31, 2018, and December 31, 2017 the Company recognized stock-based
compensation expense of $70,932 and $28,530, respectively.
Liquidity
At
December 31, 2018, the Company had cash and cash equivalents of $107,969, a positive working capital deficit of approximately
$1,185,408 and an accumulated deficit of $24,182,592. Additionally, the Company has incurred loss a loss from operations of $231,100
and a net loss of $8,197,563. Majority of the loss was non-cash due to impairment of our trademark and contract termination expense.
As
of April 13, 2018, the Company had approximately $172,000 in cash on hand as a result of our return to profitability.
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 may increase as a result of sales growth and the addition of more SKU’s to our product
line and when we open new retail operations. We currently plan to fund our growth through earnings, however, have obtained a credit
facility related to the purchase of inventory. 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.
Management
has taken several actions to ensure that the Company will continue as a going concern over the next twelve months, including the
closing of certain stores, headcount reductions, and reductions in discretionary expenditures.
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 consolidated financial statements, based on current information.
In
March 2019, the FASB issued ASU 2019-01, Leases (Topic 842) Codification Improvements, which provides clarification on implementation
issues associated with adopting ASU 2016-02. The implementation issues noted in ASU 2019-01 include determining the fair
value of the underlying asset by lessors that are not manufacturers or dealers, presentation on the statement of cash flows for
sales-type and direct financing leases, and transition disclosures related to Topic 250, Accounting Changes and Error Corrections. We
will apply the guidance, if applicable, as of January 1, 2019, the date we adopted ASU 2016-02. The adoption of this ASU
did not have a material impact on our financial position, results of operations, cash flows, or presentation thereof.
In
October 2018, the FASB issued ASU 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entitles, that
changes the guidance for determining whether a decision-making fee paid to a decision makers and service providers are variable
interests. The guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those
fiscal years, with early adoption permitted. We will adopt this standard on its effective date of January 1, 2020. We do
not expect the adoption of this ASU to have a material impact on our consolidated financial position, results of operations, cash
flows, or presentation thereof.
In
August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. ASU 2018-15 aligns the
requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements
for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for fiscal
years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted.
We will adopt this standard on its effective date of January 1, 2020. We are currently evaluating the impact of this ASU
on our financial position, results of operations, cash flows, or presentation thereof.
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements
for Fair Value Measurement. ASU 2018-13 removes or modifies certain disclosures and in certain instances requires additional disclosures. The
standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years,
with early adoption permitted. We will adopt this standard on its effective date of January 1, 2020. We do not expect the
adoption of this ASU to have a material impact on our financial position, results of operations, cash flows, or presentation thereof.
In
July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements which provides a new transition method
and a practical expedient for separating components of a lease contract. ASU 2018-11 is intended to reduce the costs and ease
the implementation of the new leasing standard for financial statement preparers. The effective date and transition requirements
for the amendments related to separating components of a contract are the same as the effective date and transition requirements
in ASU 2016-02. We adopted this ASU on its effective date of January 1, 2019. Refer to the discussion of ASU 2016-02 below
for the impact on our financial position, results of operations, cash flows, or presentation thereof.
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 Consolidated Financial Statements.
In
June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment. ASU 2018-07 aligns the accounting for share based payments granted to non-employees with that of share-based payments
granted to employees. We adopted this ASU on its effective date of January 1, 2019. The adoption of this ASU did not have
a material impact on our financial position, results of operations, cash flows, or presentation thereof.
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:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Software
|
|
$
|
110,000
|
|
|
$
|
463,310
|
|
Computers and equipment
|
|
|
113,098
|
|
|
|
99,592
|
|
Furniture
|
|
|
42,064
|
|
|
|
30,391
|
|
Leasehold
improvements
|
|
|
26,384
|
|
|
|
19,493
|
|
subtotal
|
|
|
291,546
|
|
|
|
612,786
|
|
Accumulated
depreciation and amortization
|
|
|
(167,187
|
)
|
|
|
(345,322
|
)
|
Property,
equipment and software, net
|
|
$
|
124,359
|
|
|
$
|
267,464
|
|
Depreciation
and amortization expense on property, plant, equipment, and software for the years ended December 31, 2018 and December 31, 2017
was $77,464 and $129,945 respectively.
4.
Sales tax payable
The
Company is delinquent in filing 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 $18,792, computed through December 31, 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
December 31, 2018 and December 31, 2017, the Company had a receivable from Cabello, its principal stockholder, of $204,893 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 December 31, 2018, three 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, in 2018 and 2017, the Company
incurred $13,329 and $14,675, respectively, in royalty expense which were also 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 years ended December 31, 2018 and December 31, 2017 royalty expense was
$13,329 and $14,675, 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
December 31, 2018, the Company leased or rented 19 different facilities including its corporate headquarters, a warehouse and
15 active retail locations. Future lease obligation for these facilities are as follows:
Year
|
|
Amount
|
|
2019
|
|
$
|
282,240
|
|
2020
|
|
|
159,292
|
|
2021
|
|
|
148,804
|
|
2022
|
|
|
120,045
|
|
2023
|
|
|
24,808
|
|
Total
|
|
$
|
735,189
|
|
Rent
expense for the years ended December 31, 2018 and December 31, 2017 was $493,343 and $620,469, respectively.
Concentrations
As
of December 31, 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 year ended December 31, 2018, the Company purchased hair products from eight different vendors, however, two vendors accounted
for approximately 85.8% of all hair products purchased. During the year ended December 31, 2017, the Company purchased hair products
from seven different vendors, however, three vendors accounted for approximately 91.3% 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. The
Company paid the $25,000, 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
informed EnzymeBio of this and requested that the $25,000 payment be returned. As a result, the $25,000 payment was 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 included 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 counterclaim against the Company and its Chief Executive Officer. Subsequently, the defendants stipulated and
all charges against the Company and its Chief Executive Officer were dismissed. On and effective October 30, 2018 all parties
involved in the lawsuit agreed to a settlement and mutual release. Under the settlement agreement, the Company agreed to dismiss
that lawsuit. In return, certain shareholders of the Company agreed to return to the Company 72,324 shares of the Company’s
common stock upon the filing by the Company of a Form 15 with the U.S. Securities and Exchange Commission. The returned common
stock was retired. Additionally, the shareholders agreed to place 120,000 shares of common in an attorney trust account and that
such shares will be surrendered for retirement to the Company on January 1, 2020 should the Company refrain from trading its stock
other than on the “pink sheet system or OTC market.”
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 December 31, 2018, and December 31, 2017 the Company owed $401,979 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 consolidated financial
statements and in these notes to the 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 December
31, 2018, the Board of Directors has declared and approved, preferred stock dividends of $1,320,000 ($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
December 31, 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 December 31, 2018 and December 31, 2017 there were 8,584,135
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.
As
described in Note 6, as part of a settlement agreement certain shareholders of the Company agreed to return to the Company 72,324
shares of the Company’s common stock upon the filing by the Company of a Form 15 with the U.S. Securities and Exchange Commission.
The returned common stock was retired.
9.
Stock-based Compensation
On
September 5, 2017 the Company adopted the 2017 Her Imports Stock Incentive Plan. For the years ended December 31, 2018 and December
31, 2017, the Company recognized $70,932 and $28,530, 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 consolidated statements
of operations.
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Selling
expense
|
|
$
|
38,041
|
|
|
$
|
-
|
|
General
and administrative expense
|
|
|
32,891
|
|
|
|
28,530
|
|
Total
|
|
$
|
70,932
|
|
|
$
|
28,530
|
|
Changes
in the Company’s outstanding stock options under the plan during the year ended December 31, 2018 and 2017 were as
follows:
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Options
|
|
|
Price
|
|
Outstanding at December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
58,332
|
|
|
|
9.42
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2017
|
|
|
58,332
|
|
|
|
9.42
|
|
Granted
|
|
|
3,332
|
|
|
|
1.65
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited or expired
|
|
|
(61,664
|
)
|
|
|
9.00
|
|
Outstanding at December 31, 2018
|
|
|
-
|
|
|
$
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2017
|
|
|
7,292
|
|
|
$
|
10.68
|
|
Exercisable at December 31, 2018
|
|
|
-
|
|
|
$
|
N/A
|
|
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 year ended December 31, 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. For
financial reporting purposes, the provision for income taxes is based on pre-tax loss of $$4,598,845 for the year ended December
31, 2018 and a pre-tax income of $945,103 for the year ended December 31, 2017. An estimated blended tax rate of 2.9% has been
used to calculate the benefit for income before taxes of $132,203 for the year ended December 31, 2018. Beginning in 2017, 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
benefit resulting from the loss before income taxes for taxes based on income for the year ended December 31, 2018 is based on
a 1.2% rate for the provision for taxes. This resulted in provision of $11,306. The provision (benefit) for income taxes for the
years ended December 31, 2018 and December 31, 2017 consisted of the following:
|
|
Year
Ended
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
U.S. Federal
|
|
$
|
132,203
|
|
|
$
|
-
|
|
U.S.
State
|
|
|
-
|
|
|
|
(11,306
|
)
|
Total
|
|
|
132,203
|
|
|
|
(11,306
|
)
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
Total
benefit (provision) for income taxes
|
|
$
|
132,203
|
|
|
$
|
(11,306
|
)
|
As
of December 31, 2018, we had a tax loss carryforward of approximately $5,832,269 which can be used to offset future Federal income
taxes.
Deferred
income tax assets at December 31 2018 and 2017 are as follows:
Deferred income tax assets
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
1,808,621
|
|
|
$
|
1,233,424
|
|
Stock-based compensation
|
|
|
70,932
|
|
|
|
28,530
|
|
Depreciation, amortization and other
|
|
|
546,667
|
|
|
|
546,667
|
|
Total deferred tax assets
|
|
|
2,426,220
|
|
|
|
1,808,621
|
|
Valuation allowance
|
|
|
(2,426,220
|
)
|
|
|
(1,808,621
|
)
|
Deferred income tax, net
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company generated a deferred tax asset through net operating loss carry-forwards. The Company has not completed its IRC Section
382 Valuation, as required and the NOL’s because of potential Change of Ownerships might limit the usage or render the NOL’s
completely worthless. Therefore, management of the Company based upon management’s evaluation has recorded a full valuation
reserve (100%), since it is more likely than not that no benefit will be realized for the deferred tax assets.
11.
Subsequent Events
On
January 3, 2019, a monthly $60,000 dividend related to 5,000,000 shares of Callable Preferred Stock owned by Cabello Real Ltd
was approved. This dividend was offset against amounts owed to the Company by Cabello.
On
February 4, 2019, a monthly $60,000 dividend related to 5,000,000 shares of Callable Preferred Stock owned by Cabello Real Ltd
was approved. This dividend was offset against amounts owed to the Company by Cabello.
On
March 4, 2019, a monthly $60,000 dividend related to 5,000,000 shares of Callable Preferred Stock owned by Cabello Real Ltd was
approved. This dividend was offset against amounts owed to the Company by Cabello.
On
April 3, 2019, a monthly $60,000 dividend related to 5,000,000 shares of Callable Preferred Stock owned by Cabello Real Ltd was
approved. This dividend was offset against amounts owed to the Company by Cabello.