ITEM 1.
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DESCRIPTION
OF BUSINESS.
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The
Company was incorporated in the State of Delaware on June 25, 2002. We operate in two separate business segments; cold weather
clothing and a house wrap for the building construction industry. Both of our segment lines use products made from INSULTEX, which
is a low density foamed polyethylene with buoyancy, scent block, and thermal resistant properties. We have a license agreement
directly with the owner of the INSULTEX Technology. In December 2015, we took delivery of equipment capable of producing INSULTEX.
Given the time and cost of bringing the equipment into production mode and our current financial condition, it is our current
intention to attempt to sell the equipment. We will continue to operate under the license agreement for the manufacture of INSULTEX
used in our cold weather clothing.
Other
companies are free to purchase INSULTEX from us assuming that it is a company within the distribution jurisdiction that we have,
which is worldwide with the exception of Korea and Japan. Other than Korea and Japan, we are the sole worldwide supplier/distributor
of the INSULTEX material.
We
offer the following products containing INSULTEX:
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Floating
Swimwear
: Product under our product name "Swimeez". Our swimwear is designed
to be a swim aid. The interior lining of our swimwear product is made from INSULTEX,
which enhances floatability. This product was discontinued during 2010 and we are only
selling from our existing inventory.
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Hunting
Apparel Line
: Our hunting apparel provides almost total block from odors provided
by the INSULTEX material. This product was discontinued during 2010 and we are only selling
from our existing inventory.
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Arctic
Armor Line
: The Arctic Armor line, introduced in April of 2006, consists of a jacket,
bib and gloves. The suit contains 3 layers of INSULTEX for uncompromised warmth and provides
the user with guaranteed buoyancy. The gloves contain a single layer of INSULTEX and
are windproof, waterproof and good to sub-zero temperatures as are the jacket and bibs.
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INSULTEX
House Wrap
: Our house wrap product is designed for the building construction industry.
This product, made from INSULTEX, provides barrier protection plus moisture vapor transmission
and approximately R-3 and R-6 value insulation. We also sell a tape that is designed
to be used with the INSULTEX House Wrap. In December 2016, we temporarily suspended any
advertising of our House Wrap product line.
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INSULTEX
Material
: We sell INSULTEX material in bulk to non-competing customers.
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We
also offer a product that helps restore the waterproof character of the outer side of our Arctic Armor clothing. In addition,
we offer cold weather headgear and a base insulation clothing product.
Our
apparel products containing INSULTEX are manufactured, under agreement, at a facility we currently utilize in Indonesia. We assumed
no material costs associated with the design, prototyping, and testing of these products because: (a) we did not utilize the services
of any outside consultant or company for these purposes and (b) although we used the services of our Chief Executive Officer and
Vice President of Sales and Marketing for these purposes, their efforts are part of their normal responsibilities. Our INSULTEX
House Wrap product is manufactured in the United States through a third-party manufacturer.
For
financial information regarding each segment, please see Note 9 of the Notes to Financial Statements appearing elsewhere in this
Report.
The
INSULTEX License and Manufacturing Agreement
Under
the terms of the agreement between us and the Ketut Group, Ketut Group agrees to promptly deliver to Innovative Designs, Inc.
within twenty-eight (28) days of receiving an order, all INSULTEX ordered by us. Under the terms of the agreement, we are required
to pay a fixed amount per meter of INSULTEX. This fixed amount will not change under the agreement for a period of ten (10) years
after the date of the agreement was signed, which was April 1, 2006. The agreement provides that after the ten (10) year period,
the price of the INSULTEX shall be adjusted for a subsequent ten (10) year term, no more than twelve percent (12%) for the subsequent
ten (10) year period. We order INSULTEX from time to time as needed and are not required to purchase any minimum amount of INSULTEX
during the term of the agreement, and we are not required to make any minimum annual payment. However, should we place an order;
any quantity ordered must be a minimum of 100,000 yards of INSULTEX. We are not required to pay any part of any sublicense fee
that we receive from third party sub-licensees, and we are not required to pay any fees to the Ketut Group. This agreement will
be in full legal force and effect for an initial term of ten (10) years from the date of its execution. We have the option to
renew this agreement for up to three (3) successive terms of ten (10) years each by giving notice of our intention to so renew
not less than ninety (90) days prior to the expiration of the then-current term. The Company has exercised the first ten-year
renewal option. We purchased the equipment capable of producing INSULTEX from the Ketut Group.
COLD
WEATHER CLOTHING PRODUCTS
Arctic
Armor Line
Our
Arctic Armor line products are intended for use by the following consumer groups that are in the Company’s target market
for these products:
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Oil/gas
pipeline workers
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Ski
resort workers; and
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Police
and First Responders.
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Website
and Retailers
We
sell both wholesale and retail products on our web site. Our web site, located at www.idigear.com, contains information on our
products, technical information on INSULTEX insulation, e-commerce capabilities with "shopping cart", wholesaler information
and order forms, company contact information, and links to retailers that carry our products. We have obtained the services of
BA Web Productions who assists us in designing and continually developing our website. Our web site features a "wholesaler
only" area, allowing our wholesalers access to information, ordering, and reordering. Our products are offered and sold by
retailers, distributors and through our web site in all states and Canada. Except for products sold through our web site, others
who purchase our products do so at wholesale prices which they plan to sell at their retail prices or use within their industry.
Sales
We
primarily sell our products through independent sales agents and agencies. Once we have made contact with a potential sales agency
or solo agent, we evaluate their existing accounts, the capacity and potential for them to effectively push our products. We also
look at their current product lines through the sales channel. Our primary market area is the outdoor industry which includes
all activity done in cold weather. These activities include recreational such as hunting, ice fishing, snowmobiling, and industries
such as oil and gas, utilities and construction. Once we agree to bring on an independent sales agent or agency, we enter into
a standard agreement.
A
typical sales representative agreement will have a term of one year with the right of either party to terminate upon thirty days
written notice. We do not provide any free samples of our products and all sales expenses are the sole obligation of the sales
agent.
Certain
retailers buy directly from us. We have no verbal or written agreements with them. These retailers purchase our products strictly
on a purchase order basis. During our last fiscal year, we sold our products to such retailers as Canadian Tire and Dick’s
Sporting Goods. Some of our distributors during the last fiscal year were Triple S Pro Fishing Supplies and Fleece Corner. We
distribute our products to the following:
Swimeez
Products
We
distribute our Swimeez products through our web site.
Hunting
Apparel Line
We
distribute our hunting apparel through our web site.
Our
hunting apparel consists of a six pocket pants, 1/2 zip pullover jacket with collar, parka jacket, fleece jacket, bib coveralls
in light weight, and bib coveralls in arctic weight.
Arctic
Armor Line
We
distribute the Arctic Armor Line to retailers and distributors across the United States and Canada. These products are also marketed
to utility companies, oil/gas pipeline workers, railroad workers, police and first responders, and to construction workers.
During
our last fiscal year, two customers accounted for more than ten percent of our cold weather clothing products sales, Fleece Corner
(27.1%) and Pro Fishing Supplies (14.5%).
HOUSE
WRAP
House
Wrap
In
early January 2008, we announced that we had completed our research and development effort on a new use for INSULTEX as a house
wrap for the building construction industry. This house wrap provides barrier protection plus moisture vapor transmission and
the feature of approximately R-3 and R-6 value insulation. The INSULTEX House Wrap was designed to specifically add enhanced insulating
characteristics. In addition, the house wrap is priced competitively with existing house wraps that do not provide any insulation.
The development efforts were conducted by our own personnel and an outside consultant. In December 2016, we temporarily suspended
any advertising for our House Wrap product line as we are currently in litigation with the Federal Trade Commission (“FTC”).
Please see “Legal Proceedings” appearing elsewhere in this report.
INSULTEX
House Wrap
During
our last fiscal year three customers accounted for more than ten percent of our total sales of our House Wrap product, A-Team
Building Supplies, LLC (38.7%), Well Done Insulation (31.1%), and Eddie’s Ace Hardware (13.2%).
Competition
Many
companies offer a type of house wrap some with insulating properties. These companies have large operations and are well financed.
Some of the larger companies are DuPont, Owens-Corning and Kimberly Clark. The Company expects to face intense competition with
others who have much greater resources in the building construction supply industry.
Our
marketing program consists of the following:
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MARKETING
COMPONENT
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Website Development and Internet
Marketing
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We contract with marketing consultants
to:
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(a) increase visitation
to our website;
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(b) link with other
established websites;
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(c) issue press
releases to on-line publications;
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(d) conduct banner
advertising;
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(e) develop arrangements
with online retailers that purchase our products on a wholesale basis.
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Sales Representatives
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Our vice president of sales and marketing
works to:
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(a) sell our merchandise
to retail chain stores;
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(b) attend and network
trade shows to establish industry related contracts;
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(c) initiate relationships
with local and national recreational organizations; and
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(d) provide support
to our manufacturer representatives
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Contract with Manufacturer
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We utilize the services of sales agencies
to represent our products in the United States and Canada.
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Design and Develop
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We presently
use our own staff for services related to literature, displays, develop brochures, point-of-sale displays, mailers, media
materials, and literature and sales tools for our sales representatives and manufacturer representatives. At such time as
we have sufficient funding, we intend to contract out some of these services.
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Establish Wholesale
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We are and
continue to develop relationships or distribution relationships with retail points for our products to retail chain outlets
and mass merchandisers to sell our products.
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Develop Trade Show Booth
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We use our
own personnel to design and develop a portable display booth, and product materials to be used in sporting goods and outdoor
apparel trade shows. During the last fiscal year, we did not attend any trade shows.
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We
ship wholesale product orders by United Parcel Service or trucking companies. Retail orders from our website are shipped United
Parcel Ground Service or Federal Express overnight. The costs of shipping our finished goods are paid by our customers. We have
not instituted any formal arrangements or agreements with United Parcel Service, Federal Express or trucking companies, and we
do not intend to do so.
INSULTEX
is used in all our Arctic Armor finished goods, except for our headwear, and is purchased directly from the Ketut Group.
All
of our cold weather clothing products, except for our gloves, which are purchased from a supplier in the U.S., are sub-manufactured
by PT Lidya and Natalia located in Indonesia. Indonesia does not impose quotas that limit the time period or quantity of items
which can be imported. The U.S. Customs Service imposes an importation duty of 6.5% on all our imported products.
We
have no verbal or written agreements or long-term agreements with PT Lidya and Natalia, and we do not plan to obtain any such
agreements. Our products, including our House Wrap, are manufactured on a per order basis.
The
fulfillment process involved in completing wholesale orders for non-stocked Arctic Armor products and House Wrap product is described
below:
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We
receive a purchase order for a certain number of items from a wholesale purchaser by
hand delivery, fax, courier, or mail, with an authorized signature of the purchaser.
We do not accept telephone orders.
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We
contact our sub-manufacturers with the details of the order, including the number of
units to be produced according to design or model, size, or color. The sub-manufacturer
procures all materials required for the product. Our House Wrap inventory is stored in
the facility that manufactures it. We use a commercially available breathable water repellant
film used in the manufacturing process that we store at the seller’s facility.
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We
complete and forward a purchase order to the manufacturer. The manufacturer approves
or disapproves a purchase order.
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If
the purchase order is approved, the manufacturer responds with a final cost, production
schedule and date the goods will be delivered to us.
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We
receive finished goods and facilitate turn-around for shipment to retailers. Goods are
received in our warehouse/distribution center located in Pittsburgh, Pennsylvania where
they are packaged in Master Packs, hang tags attached, and UPC/UCC codes labels applied
to items for retailer distribution.
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Any
apparel inventory we maintain is stored at our warehousing facility. Our warehouse facility has the capacity to hold 250,000 units
of finished products in inventory. Our House Wrap inventory is stored in the facility that manufactures it.
In
2004, we were granted a trademark for our name "idigear" with the United States Patent and Trademark Office.
In
2007, we were granted the mark "INSULTEX" by the United States Patent and Trademark Office.
In
2011, we were granted a trademark for “INSULTEX HOUSE WRAP” by the United States Patent and Trademark Office.
In
December 2009, we filed a patent application, No. 12 642714, with the United States Patent and Trademark Office for our Composite
House Wrap. The application is still pending. In order to obtain the broadest possible patent protection for this invention Innovative
Designs, Inc. has appealed a portion of the decision of the Patent Trial and Appeal Board (PTAB) entered in Appeal 2015-006289
to the Court of Appeals for the Federal Circuit (CAFC) under 35 U.S.C. §141. The portion of the decision of the Patent Trial
and Appeal Board (PTAB) entered in Appeal 2015-006289 reversing the examiner’s rejection has not been appealed. Innovative
Designs, Inc. expects a favorable action allowing for the broadest possible patent protection to be obtained.
We
had filed a provisional application in December 2008. The patent is currently held by our Chief Executive Officer and a consultant
to the Company.
In
February of 2010, our Chief Executive Officer filed a patent application for a composite fabric material and apparel made therefrom.
The patent has been allowed. The patent has been assigned to the Company.
In
May 2016, our Chief Executive Officer and a consultant to the Compliant filed a patent application relating to INSULTEX entitled
“Process for Forming Closed Cell Expanded Low Density Polyethylene Foam and Products Formed Thereby”.
Our
production costs are limited to the invoices we receive from our sub-manufacturer, PT Lidya and Natalia, on a per production basis
and for our gloves from our supplier in the U.S and for our House Wrap product from the manufacturer.
Although
we are not aware of the need for any government approval of our principal products, we may be subject to such approvals in the
future.
United
States and foreign regulations may subject us to increased regulation costs, and possibly fines or restrictions on conducting
our business. We are subject, directly or indirectly, to governmental regulations pertaining to the following government agencies:
United
States Customs Service
We
are required to pay a 6.5% importation duty to the United States Customs Service on all imported products. We import INSULTEX
from Indonesia from the Ketut Group, in accordance with Innovative Design’s agreement with the Ketut Group.
United
States Department of Labor's Occupational Safety and Health Administration
Because
our sub-manufacturers manufacture our completed products, we and our sub-manufacturers will be subject to the regulations of the
United States Department of Labor's Occupational Safety and Health Administration.
We
are not aware of any governmental regulations that will affect the Internet aspects of our business. However, due to increasing
usage of the Internet, a number of laws and regulations may be adopted relating to the Internet covering user privacy, pricing,
and characteristics and quality of products and services. Furthermore, the growth and development of Internet commerce may prompt
more stringent consumer protection laws imposing additional burdens on those companies conducting business over the Internet.
The adoption of any additional laws or regulations may decrease the growth of the Internet, which, in turn, could decrease the
demand for Internet services and increase the cost of doing business on the Internet. These factors may have an adverse effect
on our business, results of operations, and financial condition.
Moreover,
the interpretation of sales tax, libel, and personal privacy laws applied to Internet commerce is uncertain and unresolved. We
may be required to qualify to do business as a foreign corporation in each such state or foreign country. Our failure to qualify
as a foreign corporation in a jurisdiction where we are required to do so could subject us to taxes and penalties. Any such existing
or new legislation or regulation, including state sales tax, or the application of laws or regulations from jurisdictions whose
laws do not currently apply to our business, could have a material adverse effect on our business, results of operations and financial
condition.
We
currently have no costs associated with compliance with environmental regulations. Because we do not manufacture our products,
but rather they are manufactured by our sub-manufacturers, we do not anticipate any costs associated with environmental compliance.
Moreover, the delivery and distribution of our products will not involve substantial discharge of environmental pollutants. However,
there can be no assurance that we will not incur such costs in the future.
We
estimate that all of our revenues will be from the sale of our products. We will sell our products at prices above our original
cost to produce our products. Prices for some of our products will be lower than similar products of our competitors, while others
will be higher. We expect our product prices to be lower than network marketing companies, but higher compared with retail establishments
that directly manufacture their own products.
Products
that are sold directly by our website will be priced according to our Manufacturer Suggested Retail Prices. Our wholesale clients
will purchase our products at our wholesale prices. We recommend that our retailer clients sell our products at the Manufacturer
Suggested Retail Prices that we provide to them which are the same prices for products on our website; however, they are not required
to do so and may price our products for retail sale at their discretion. We have established M.A.P. (minimum advertised pricing)
on our Arctic Armor™ suit in an attempt to allow all retailers and distributors carrying the line to obtain reasonable gross
margin dollars.
We
currently have a total of 3 full time employees. We hire part-time personnel as needed.
We
have no collective bargaining or employment agreements.
Reports
and Other Information to Shareholders
We
are subject to the informational requirements of the Securities Exchange Act of 1934. Accordingly, we file annual, quarterly and
other reports and information with the Securities and Exchange Commission. You may read and copy these reports and other information
we file at the Securities and Exchange Commission's public reference rooms in Washington, D.C., New York, New York, and Chicago,
Illinois. Our filings are also available to the public from commercial document retrieval services and the Internet world wide
website maintained by the Securities and Exchange Commission at www.sec.gov.
Pending
Litigation
We
are a defendant in a complaint brought by the FTC. While we believe we have a defense to the allegation asserted by the FTC, should
there be an adverse ruling we may be forced to disgorge all revenues derived from the sale of our House Wrap product line, and
we would not be able to sell the product. The result of this action would have a materially adverse effect on the Company’s
revenues and operations. See “Legal Proceeding” appearing elsewhere in this report.
Lack
of Sufficient Operating Funds
Because
we are not able to generate sufficient funds from sales and because we are unable to access commercial sources of credit, we are
consistently underfunded. As a result, our growth is very limited, and we have difficulty in sustaining our current level of operations.
We are not able to initiate adequate marketing programs, hire additional staff, develop new products or have flexibility in ordering
products from our manufacturers. In addition, the action by the FTC has adversely affected our ability to sell our House Wrap
product line. In the past, we have depended on borrowings from our CEO and other private parties, primarily shareholders and the
private sale of our common stock. Should we not be able to continue to rely on these sources of funding to at least meet our current
level of operations our revenue stream will be adversely affected.
Competition
The
markets served by the Company are highly competitive. Competitive pricing pressure could result in loss of customers or decreased
profit margins. Competition by product type includes the following:
The
markets for our products are increasingly competitive. Our competitors have substantially longer operating histories, greater
brand name and company name recognition, larger customer bases and greater financial, operating, and technical resources than
us. Because we are financially and operationally smaller than our competitors, we will encounter difficulties in capturing market
share. Our competitors are able to conduct extensive marketing campaigns and create more attractive pricing of their target markets
than we are.
Some
of our biggest competitors in the Arctic Armor™ line are:
We
compete in the following ways:
A.
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Emphasize
the Advantages of our Products.
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Arctic
Armor Line
We
emphasize the following characteristics and advantages of our Arctic Armor line products:
INSULTEX
provides a scent barrier which we had a permeation test performed on at the Texas Research Institute Austin, Inc. The product
was subjected to gas stimulant for an eight-hour period. The product was tested for permeation of the gas every three minutes
for the duration of the test with almost no detection of the gas throughout the test. The testing was based upon accepted industry
practices as well as the test method used.
B.
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Utilize
our web site to promote, market, and sell our products to consumers.
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C.
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Utilize
professional sales representatives and manufacturer representatives to sell our products
to established retailers, especially sporting goods retailers.
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Our
products have the following disadvantages in comparison to the products of our competitors:
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Lack
of brand name recognition or recognition of the properties of INSULTEX and its advantages.
We, as well as our products, have little brand name recognition compared to our competitors.
And we may encounter difficulties in establishing product recognition. Also, although
our products have insulation properties, the material "down" has a widespread
and established reputation as being the superior insulation in the market, while the
properties and advantages of INSULTEX has little public recognition.
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There
can be no assurance that we will be able to compete in the sale of our products, which could have a negative impact upon our business.
We
do not expect our business to be dependent on one or a few customers or retailers; however, there is no assurance that we will
not become so dependent.
Cyclicality
The
Company’s Arctic Armor apparel sales fluctuate based on temperature and weather conditions. Our products are suitable primarily
for cold weather conditions. This will cause a cyclical effect on sales. It also makes our revenues totally dependent on cold
weather.
Material
Acquisition
All
of the materials and items required to manufacture our cold weather clothing products are purchased by our manufacturer in Indonesia.
The
Company currently has only one supplier of INSULTEX, the special material which is manufactured within the apparel of our cold
weather products and our House Wrap product. Additionally, we have one manufacturer that produces the apparel on behalf of the
Company, located in Indonesia. Any delays in getting INSULTEX and/or our finished products will adversely affect our revenue stream.
Once we have our own equipment operating, we will be able to produce INSULTEX. We intend to use such INSULTEX for our House Wrap
product.
Our
Indonesia based manufacturer, PT Lidya and Natalia, has sole discretion in the sourcing and ordering of materials for their production
runs, the costs of which we reimburse PT Lidya and Natalia.
Geographic
Concentration
Most
of the Company’s sales for its cold weather clothing products to retailers are concentrated in colder climates of the United
States and Canada. To the extent that any regional economic downturn impacts these regions, the Company will be adversely affected.
Management
The
Company is dependent on the management of Joseph Riccelli, our Chief Executive Officer. The loss of Mr. Riccelli’s services
could have a negative effect on the performance and growth of the Company for some period of time.
Stock
Price
The
Company’s stock is thinly traded. Should a major shareholder decide to liquidate its position, there could be a negative
effect on the price of the stock until this condition is resolved.
Penny
Stock Considerations
Our
shares are "penny stocks" as that term is generally defined in the Securities Exchange Act of 1934 as equity securities
with a price of less than $5.00. Our shares may be subject to rules that impose sales practice and disclosure requirements on
broker-dealers who engage in certain transactions involving a penny stock.
Under
the penny stock regulations, a broker-dealer selling a penny stock to anyone other than an established customer or "accredited
investor" must make a special suitability determination regarding the purchaser and must receive the purchaser's written
consent to the transaction prior to the sale, unless the broker-dealer is otherwise exempt. Generally, an individual with a net
worth, exclusive of one’s residence, in excess of $1,000,000 or annual income exceeding $200,000 individually or $300,000
together with his or her spouse is considered an accredited investor. In addition, under the penny stock regulations the broker-dealer
is required to:
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Deliver,
prior to any transaction involving a penny stock, a disclosure schedule prepared by the
Securities and Exchange Commission relating to the penny stock market, unless the broker-dealer
or the transaction is otherwise exempt;
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Disclose
commissions payable to the broker-dealer and its registered representatives and current
bid and offer quotations for the securities;
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Send
monthly statements disclosing recent price information pertaining to the penny stock
held in a customer's account, the account's value and information regarding the limited
market in penny stocks; and
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Make
a special written determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser's written agreement to the transaction, prior to
conducting any penny stock transaction in the customer's account.
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Because
of these regulations, broker-dealers may encounter difficulties in their attempt to sell shares of our stock, which may affect
the ability of shareholders or other holders to sell their shares in the secondary market and have the effect of reducing the
level of trading activity in the secondary market. These additional sales practice and disclosure requirements could impede the
sale of our securities if our securities become publicly traded. In addition, the liquidity for our securities may be adversely
affected, with a corresponding decrease in the price of our securities.
In
October 2002, we arranged for the lease of warehouse space for our inventory and raw materials at 124 Cherry Street, Etna, Pennsylvania.
We also use this space as our principal executive offices. This facility encompasses 13,000 square feet of storage space on the
first floor and 2,000 square feet for our sales department offices located on the second floor. We have entered into a verbal
agreement with the owner of the building and we pay $3,500 per month for the space. This facility is composed of: (a) warehouse
and storage areas including four (4) shipping bays and a distribution area consisting of square footage to store upward of 250,000
finished goods products; and (b) four (4) offices, one (1) conference room, with presentation area and sample display and (2)
bathrooms totaling approximately 2,000 square feet located on the second floor. Mr. Frank Riccelli is the brother to our Chief
Executive Officer and the owner of the property. The condition of our leased property is good.
We
do not own any property, nor do we have any plans to own any property in the future. We do not currently intend to develop properties.
We are not subject to competitive conditions for property and currently have no property to insure. We have no policy with respect
to investments in real estate or interests in real estate and no policy with respect to investments in real estate mortgages.
Further, we have no policy with respect to investments in securities of or interests in persons primarily engaged in real estate
activities. We consider the condition of our leased property to be suitable for our needs.
ITEM 3.
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LEGAL
PROCEEDINGS.
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On
November 4, 2016, the FTC filed a complaint against the Company in the U.S. District Court Western District of Pennsylvania, number
16-1669. In the complaint, the FTC alleges that, among other matters, the Company does not have substantiation of claims made
by the Company regarding the R value and energy efficiency of its INSULTEX House Wrap products. The complaint asks as to redress
a rescission of revenue the Company received from the sale of House Wrap and a permanent injunction. As a result of the partial
federal government shutdown, a new trial date has been set for July 29, 2019.
The
Company strongly denies the allegation and intends to vigorously defend itself. It is the Company’s belief that the complaint
is based on improper testing of the INSULTEX products using the wrong type of testing equipment.
ITEM 4.
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REMOVED
AND RESERVED.
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1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Operations
- Innovative Designs, Inc. (the “Company”), which was incorporated in the State of Delaware on June
25, 2002, markets cold weather recreational and industrial clothing products, as well as house wrap, which are made from INSULTEX,
a low density foamed polyethylene, a material with buoyancy, scent block, and thermal resistant properties. Our clothing and housewrap
is offered and sold by retailers, distributors, and companies throughout the United States and Canada.
We
operate two reportable segments: Apparel and House Wrap. Our apparel segment offers a wide variety of extreme cold weather apparel
and related items. Our House Wrap segment offers our INSULTEX House Wrap which has an R-value of 3 and an R-value of 6 and our
own seam tape.
Basis
of Accounting
- The financial statements are prepared using the accrual basis of accounting in which revenues are recognized
when earned and expenses are recognized when incurred.
Fiscal
Year End
- The Company’s fiscal year ends on October 31. The fiscal years ending October 31, 2018 and 2017 are referred
to as 2018 and 2017, respectively, throughout the Company’s financial statements.
Estimates
- The preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results
may differ from these estimates and assumptions.
Cash
and Cash Equivalents
- The Company defines cash and cash equivalents as those highly liquid investments purchased with a maturity
of three months or less.
Revenue
Recognition
- The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the
sales price is fixed or determinable and collectability is probable. Revenue is derived from sales of the Company’s recreational
products, such as Arctic Armor, and our house wrap line of products. Sales of these items are recognized when the items are shipped.
The Company offers a 5-day return policy and no warranty on all of its products. All sales outside the United States are entered
into using the U.S. dollar as its functional currency. During 2018 and 2017, the Company took back certain products from customers
that accounted for $683 and $5,165, respectively in revenue. The Company was not required to accept these returns but made a business
decision to do so.
Fair
Value of Financial Instruments
- The carrying value of cash and cash equivalents, accounts receivable, accounts payable, and
certain other liabilities approximate their estimated fair values due to the short-term nature of these instruments. The fair
value of the Company’s debt instruments approximates their fair values as the interest is tied to or approximates market
rates.
Estimated
Uncollectable Accounts
- Management evaluates its receivables on a quarterly basis to assess the validity of remaining receivables.
Management has determined that there is significant doubt regarding the receivable balance over 90 days of $9,320 as of the fiscal
year ended October 31, 2018 and an allowance is applied on this receivable balance over 90 days. No allowance was deemed necessary
for the fiscal year ended October 31, 2017.
Inventory
- Inventory consists primarily of finished goods. Inventory is stated at the lower of cost or net realizable value and is
valued based on first-in-first-out. Net realizable value is the estimated selling price in the ordinary course of business, less
reasonably predictable costs of completion, disposal, and transportation.
During
the fiscal year ended October 31, 2010, the Company discontinued its hunting and swimming lines of apparel. A reserve balance
of approximately $75,000 and $51,000 was recorded as of October 31, 2018 and 2017, respectively. The reserve is evaluated on a
quarterly basis and adjusted accordingly.
Deposits
on Inventory
- The Company only has one manufacturer that produces the apparel on behalf of the Company, located in Indonesia.
The Company will send deposits to the manufacturer for future production of the apparel based on approved purchase orders between
the Company and the manufacturer. Once finished purchase orders are received by the Company, the deposits associated with those
purchase orders are transferred into inventory. The Company had a on deposit for the INSULTEX in the amount of $57,330 and $70,000
as of October 31, 2018 and 2017, respectively.
Property
and Equipment
- Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to income
as incurred. Additions, improvements and major replacements are capitalized. The cost and accumulated depreciation related to
assets sold or retired are removed from the accounts and any gain or loss is credited or charged to income.
For
financial reporting purposes, depreciation is primarily provided on the straight-line method over the estimated useful lives of
depreciable assets, which range from 5 to 7 years.
Deposits
on Equipment
- On July 12, 2015, the Company reached an agreement with Ketut Jaya to purchase the machinery and equipment
utilized to produce the INSULTEX material. The purchase price is $700,000 and to be made in four installments. The first installment
of $300,000 is to be made at the execution of the agreement. The second installment of $200,000 is to be made when the machinery
and equipment is ready to be shipped to the United States. The third installment of $100,000 is to be made once the machinery
and equipment is producing INSULTEX, and the fourth and final installment of $100,000 is to be made after the first commercial
production run of INSULTEX is completed. As of October 31, 2018, the Company has made payments of $500,000 in accordance with
the agreement and made a $100,000 pre-payment as the machine is not yet producing INSULTEX. Additionally, the Company has incurred
$17,000 of additional expenses related to shipping. Given the expected time and cost of bringing the equipment into production
mode and our current financial condition, it is our intention to attempt to sell the equipment.
Impairment
of Long-lived Assets
- Management of the Company considers the valuation and depreciation of property and equipment. Management
considers both the current and future levels of undiscounted cash flow generated by the Company and the continuing value of property
and equipment to determine when and if an impairment has occurred. Any write-downs due to impairment are charged to operations
at the time the impairment is identified. No such write-downs due to impairment have been recorded in 2018 and 2017.
Income
Taxes
- The Company accounts for income taxes in accordance with Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 740 “
Income Taxes
”, which requires an asset and
liability approach for financial reporting purposes. Deferred income taxes are provided for differences between the tax bases
of assets and liabilities and the financial reporting amounts at the end of the period, and for net operating loss and tax credit
carryforwards available to offset future taxable income. Changes in enacted tax rates or laws result in adjustments to recorded
deferred tax assets and liabilities in the periods in which the tax laws are enacted or tax rates are changed.
In
addition, ASC 740 clarifies the accounting for uncertainty in tax positions and requires that a company recognize in its financial
statements the impact of a tax position, only if it is more likely than not of being sustained upon examination, based on the
technical merits of the position. The Company recognized no material adjustments to the liability for unrecognized income tax
benefits.
The
Company’s policy regarding the classification of interest and penalties recognized in accordance with ASC 740 is to classify
them as income tax expense in its financial statements, if applicable.
The
Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.
Concentration
of Credit Risk
- The Company maintains its cash and cash equivalents with a financial institution which management believes
to be of high credit quality. Their accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 in
coverage. The balances in these accounts may, at times, exceed the federally insured limits. The Company has not experienced any
losses on the deposits and management believes the Company is not exposed to any significant credit risk related to these accounts.
The Company had no uninsured cash balances as of October 31, 2018 and 2017, respectively.
Shipping
and Handling
- Shipping costs associated with acquiring inventories are charged to cost of goods sold when incurred. The Company
pays shipping and handling costs on behalf of customers for purchased merchandise. These costs are billed back to the customer
through the billing invoice and are included in revenue at the time the merchandise is shipped. The shipping and handling costs
associated with customer orders was $16,247 and $18,825 for the fiscal years ended October 31, 2018 and 2017, respectively.
Net
Income Per Common Share
- The Company calculates net income per share in accordance with ASC Topic 260 “
Earnings
per Share
”. Basic earnings per share are calculated by dividing net income by the weighted average number of common
shares outstanding for the period. The Company only has common stock outstanding for 2018 and 2017. As a result, diluted earnings
per share was not calculated.
Stock-Based
Compensation
- The Company accounts for stock based compensation in accordance with ASC Topic 718 “
Compensation -
Stock Compensation
”. In accordance with the provisions of ASC 718, share-based payment transactions with employees are
measured based on the fair value of the nonequity instruments issued on the grant date or on the fair value of the liabilities
incurred. Share-based payments to nonemployees are measured and recognized using the fair-value method, based on the fair value
of the equity instruments issued or the fair value of goods or services received, whichever is more reliably measured.
Recent
Accounting Standards Update
– Recently, various new Accounting Standards Updates (“ASUs”) were issued by
the Financial Accounting Standards Board (FASB). Management has determined, based on their review, the following ASUs issued recently
that will be applicable to the Company. Management will continue to monitor the issuance of updates throughout the year to determine
if the update will have an impact on the Company’s financial statements and should it have an impact, the update will be
disclosed in the notes to the financial statements.
In
February 2016, the FASB issued ASU 2016-02, “Leases”, which added a requirement than an entity, when acting as a lessee,
should recognize in the balance sheet a liability to make lease payments and a right-of-use asset representing its right to use
the underlying asset for the lease term. For public business entities, ASU 2016-02 is effective for fiscal years beginning after
December 15, 2019 including interim periods within fiscal years beginning after December 15, 2020. Early application is permitted.
Management is determining if the adoption of this guidance will have any impact on the financial statements and notes thereto.
Restatement
-
The Form 10-K report filed on March 13, 2019 had inventory valued at $749,519. This value was overstated by $28,257 due
to inventory being valued at an older standard cost that has not been adjusted to the new current standard cost. The Company
decreased the inventory value by $28,257 and increased the cost of sales by a like amount to correct this overstatement.
2.
PROPERTY
AND EQUIPMENT
Property
and equipment are summarized by major classifications as follows:
|
|
2018
|
|
2017
|
|
|
|
|
|
Equipment
|
|
$
|
221,835
|
|
|
$
|
217,577
|
|
Containers
|
|
|
14,900
|
|
|
|
14,900
|
|
Furniture and fixtures
|
|
|
11,083
|
|
|
|
11,083
|
|
Leasehold improvements
|
|
|
4,806
|
|
|
|
4,806
|
|
Automobile
|
|
|
9,121
|
|
|
|
9,121
|
|
|
|
|
261,745
|
|
|
|
257,487
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
130,213
|
|
|
|
96,265
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
- net
|
|
$
|
131,532
|
|
|
$
|
161,222
|
|
Depreciation expense for the fiscal years ended October 31, 2018 and 2017 was $33,588 and $30,963, respectively.
3.
BORROWINGS
Borrowings
at October 31, 2018 and 2017 consisted of the following:
|
|
2018
|
|
2017
|
|
|
|
|
|
Due
to Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
Payable $8,000 - Roberta Riccelli, February 2012. Due June 17, 2012; interest is 10% for 120 days. Note was extended through
a verbal agreement with no set maturity date.
|
|
$
|
5,000
|
|
|
$
|
5,000
|
|
Note
Payable $20,000 - Corinthian Development, January
15, 2013. Due May 15, 2013; payable on demand; interest is 10%; Note was extended through a verbal agreement with no set maturity
date.
|
|
|
10,000
|
|
|
|
10,000
|
|
Note
Payable $25,000 - Sol & Tina Waxman Family Foundation,
March 2015. Amended January 15, 2018 for $30,250; Due January 5, 2019; interest is 10%.
|
|
|
30,250
|
|
|
|
27,500
|
|
Note
Payable $90,000 - Joseph Riccelli, Sr., May 2013. Due
November 22, 2013; interest is 10% for 180 days. Note was extended through a verbal agreement with no set maturity date.
|
|
|
13,500
|
|
|
|
40,000
|
|
Note
Payable $50,000 - Lawrence Fraser, May 29, 2018. Due
June 1, 2019; interest is 10% annually. Note was extended through a verbal agreement with no set maturity date.
|
|
|
50,000
|
|
|
|
—
|
|
Note
Payable $40,672 - Riccelli Properties, August 7, 2017. Due
February 7, 2018; interest is 10%.
|
|
|
36,600
|
|
|
|
36,000
|
|
|
|
|
|
|
|
|
|
|
Total
Due to Stockholders
|
|
$
|
145,350
|
|
|
$
|
118,500
|
|
|
|
|
|
|
|
|
|
|
Notes
Payable
|
|
|
|
|
|
|
|
|
Note
Payable - U.S. Small Business Administration. Due
July 2035; payable in monthly installments of $1,820 including interest at 2.9% annum.
|
|
$
|
119,486
|
|
|
$
|
137,358
|
|
|
|
|
|
|
|
|
|
|
Total
Borrowings
|
|
|
264,836
|
|
|
|
255,858
|
|
|
|
|
|
|
|
|
|
|
Less
Due to Stockholders
|
|
|
145,350
|
|
|
|
118,500
|
|
|
|
|
|
|
|
|
|
|
Less
Current Portion of Notes Payable
|
|
|
18,628
|
|
|
|
18,096
|
|
|
|
|
|
|
|
|
|
|
Total
Long Term Portion of Notes Payable
|
|
$
|
100,858
|
|
|
$
|
119,262
|
|
Maturities
of long-term debt are as follows:
Year
Ending
|
|
|
|
Notes
|
|
|
October
31
|
|
Stockholders
|
|
Payable
|
|
Amount
Due
|
|
|
|
|
|
|
|
|
2019
|
|
|
$
|
145,350
|
|
|
|
18,628
|
|
|
$
|
163,978
|
|
|
2020
|
|
|
|
—
|
|
|
|
19,168
|
|
|
|
19,168
|
|
|
2021
|
|
|
|
—
|
|
|
|
19,739
|
|
|
|
19,739
|
|
|
2022
|
|
|
|
—
|
|
|
|
20,319
|
|
|
|
20,319
|
|
|
2023
|
|
|
|
—
|
|
|
|
20,916
|
|
|
|
20,916
|
|
|
Thereafter
|
|
|
|
—
|
|
|
|
20,716
|
|
|
|
20,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
145,350
|
|
|
$
|
119,486
|
|
|
$
|
264,836
|
|
DUE
TO STOCKHOLDERS
In
February 2012, the Company entered into a note payable with Roberta Riccelli for $8,000. This loan was to be used to fund operations
of the Company. This loan is due on demand, including interest at 10% for 120 days. This note was extended through a verbal agreement.
The loan balance as of October 31, 2018 and 2017 was $5,000.
In
January 2013, the Company entered into a note payable with Corinthian Development for $20,000. This loan was to be used to fund
operations of the Company. This loan is due on demand, including interest at 10% with an original repayment date of May 2013.
This note was extended through a verbal agreement. The loan balance at October 31, 2018 and 2017 was $10,000.
In
May 2013, the Company entered into a note payable with the Sol & Tina Waxman Family Foundation for $100,000. This loan was
to be used to fund operations of the Company. The Company’s CEO has pledged 250,000 shares of his stock, as collateral.
This note is also personally guaranteed by the Company’s CEO. There have been various subsequent amendments to the original
note agreement. The most recent amendment was made in January 2018 for the balance of $30,250. Interest is payable at 10% and
total payment is due by January 5, 2019. The loan balance at October 31, 2018 and 2017 was $30,250 and $27,500, respectively.
In
May 2013, the Company entered into a note payable with its CEO, Joseph Riccelli, for $90,000. This loan was to be used to fund
operations of the Company. This loan is due on demand, including interest at 10% with an original repayment date of November 2013.
This note was extended through a verbal agreement. The loan balance at October 31, 2018 and 2017 was $13,500 and $40,000, respectively.
During
May 2018, the Company entered into a note payable agreement with Lawrence Fraser for $50,000. This loan was used to fund the operations
of the Company. This loan is due on June 1, 2019, including interest at 10%. The loan balance at October 31, 2018 was $50,000.
During
August 2017, the Company entered into a note payable agreement with Riccelli Properties, which is wholly owned and operated by
the Company’s CEO, Joseph Riccelli, in the amount of $40,672. This amount reflects payments made by Riccelli Properties
on the Small Business Association promissory note. Riccelli Properties sold the real estate that was collateral on the promissory
note. The note has a term of 6 months and an interest rate of 10%. This loan balance at October 31, 2018 and 2017 was $36,600
and $36,000, respectively.
NOTES
PAYABLE
In
July 2005, the Company was approved for a low interest promissory note from the U.S. Small Business Administration in the amount
of $280,100. In January 2006 the Company amended the promissory note with the Small Business Administration increasing the principal
balance to $430,500. The note bears an annual interest rate of 2.9% and matures on July 13, 2035. Monthly payments, including
principal and interest, of $1,820 are due monthly. A payment was made on the note of $40,672 during the year ended October 31,
2017 due to the sale of real estate by Riccelli Properties that was collateral on the promissory note. The loan balance was $119,486
and $137,358 at October 31, 2018 and 2017, respectively. This note is guaranteed by the Company’s CEO.
4.
EXCLUSIVE
LICENSING AND MANUFACTURING AGREEMENT
On
April 16, 2006, the Company entered into an Exclusive License and Manufacturing Agreement (the “Agreement”) with the
Ketut Group, with an effective date of April 1, 2006, whereby the Company acquired an exclusive license to develop, use, sell,
manufacture and market products related to or utilizing INSULTEX™, Korean Patent Number, (0426429) or any INSULTEX Technology.
At the behest of the Board of Directors, the INSULTEX trademark was chosen as the mark to identify the product utilized by Innovative
since its inception and was originally registered by Joseph Riccelli on February 17, 2005. The new trademark, intended to avoid
confusion arising from the use of the old Eliotex trademark in association with a new, subsequent, different and separately-patented
product, was assigned by Mr. Riccelli to the Company on April 25, 2006, with that assignment to become effective upon final approval
of the Statement of Use by the United States Patent and Trademark Office. The License was awarded by the Korean inventor, an individual
who is part of the Ketut Group, and the manufacturer of INSULTEX™. The Company received an exclusive forty (40) year worldwide
license, except for Korea and Japan, with an initial term of ten (10) years and an option to renew the License for up to three
(3) successive ten (10) year terms. The first ten-year option was exercised. Additionally, the Company was granted the exclusive
rights to any current or future inventions, improvements, discoveries, patent applications and letters of patent which the Ketut
Group controls or may control related to INSULTEX™. Furthermore, the Company has the right to grant sub-licenses to other
manufacturers for the use of INSULTEX™ or any INSULTEX Technology.
5.
CONCENTRATIONS
Revenues
from three customers were approximately 51% and 34% of the Company’s revenues for the fiscal years ended October 31, 2018
and 2017, respectively.
Three
customers accounted for approximately 86% and 71% of the Company’s accounts receivable as of October 31, 2018 and 2017,
respectively.
The
Company only has one supplier of INSULTEX, the special material which is manufactured within the apparel of the Company. Additionally,
the Company only has one manufacturer that produces the apparel on behalf of the Company, located in Indonesia, and one manufacturer
that produces house wrap on behalf of the Company in Massachusetts.
6.
INCOME
TAXES
In
prior years, the Company incurred net operating losses and, accordingly, no provision for income taxes has been recorded. In addition,
no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets. For the 2017 tax year,
fiscal year end October 31, 2018, the Company had net operating loss carryforwards of approximately $5,700,000 for tax purposes.
The carryforwards are available to offset taxable income of future periods and begin to expire after the Company’s 2037
tax year, fiscal year end October 31, 2038. Effective for tax years ending in 2018 or later, net operating losses cannot be carried
back but can be carried forward to future tax years indefinitely. Realization of the deferred tax benefit related to the carryforward
is dependent upon the Company generating sufficient taxable income in the future, against which the loss can be offset, which
is not guaranteed
Deferred
income taxes reflect the net tax effect of temporary differences between carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, as well as tax benefits of net operating loss carryforwards.
The significant components of the Company’s deferred tax assets and liabilities relate to the following:
|
|
2018
|
|
2017
|
|
|
|
|
|
Net operating
loss carryforward
|
|
$
|
2,554,625
|
|
|
$
|
2,000,000
|
|
Depreciation
|
|
|
—
|
|
|
|
—
|
|
Net deferred tax assets
before valuation allowance
|
|
|
2,554,625
|
|
|
|
2,000,000
|
|
Less: Valuation allowance
|
|
|
(2,554,625
|
)
|
|
|
(2,000,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
For
financial reporting purposes, the Company has incurred losses in previous years. Based on the available objective evidence, including
the Company’s previous losses, management believes it is more likely than not that the net deferred tax assets will not
be fully realizable. Accordingly, the Company provided for a full valuation allowance against its net deferred tax assets as of
October 31, 2018 and 2017, respectively.
The
effective income tax rate varied from the statutory Federal tax rate as follows:
|
|
2018
|
|
2017
|
|
|
|
|
|
Federal
statutory rate
|
|
|
21
|
%
|
|
|
34
|
%
|
Effect of net operating
losses
|
|
|
(21
|
%)
|
|
|
(34
|
%)
|
|
|
|
|
|
|
|
|
|
Effective income tax
rate
|
|
|
—
|
|
|
|
—
|
|
The
Company’s effective tax rate is lower than what would be expected if the federal statutory rate were applied to income (loss)
before taxes, primarily due to net operating loss carryforwards.
On
December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (H.R.1) (the “Act”). The Act includes a
number of changes to existing tax law impacting businesses including, among other things, a permanent reduction in the corporate
income tax rate from 34% to 21%. The rate reduction applies to tax years beginning on or after January 1, 2018.
As
a result of the reduction in the corporate income tax rate under the Act, the Company had to revalue its net deferred tax liability,
for the fiscal year ended October 31, 2017. The did not change the Company’s net income for the fiscal year ended October
31, 2018.
7.
COMMITMENTS
The
Company leases its executive offices/warehouse space from Frank Riccelli, a stockholder and brother of our Chief Executive Officer,
for $3,500 per month. The lease is based on a verbal agreement with month to month terms. For the fiscal years ended October 31,
2018 and 2017 rent expense totaled $42,000.
8.
QUARTERLY
FINANCIAL INFORMATION (UNAUDITED)
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
2018
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
116,203
|
|
|
$
|
17,163
|
|
|
$
|
34,149
|
|
|
$
|
82,167
|
|
|
$
|
249,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from
operations
|
|
$
|
(138,990
|
)
|
|
$
|
(155,805
|
)
|
|
$
|
(145,870
|
)
|
|
$
|
(146,807
|
)
|
|
$
|
(587,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(146,249
|
)
|
|
$
|
(158,023
|
)
|
|
$
|
(154,221
|
)
|
|
$
|
(124,389
|
)
|
|
$
|
(582,882
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average
shares
outstanding
|
|
|
26,732,245
|
|
|
|
27,033,872
|
|
|
|
27,228,038
|
|
|
|
27,492,223
|
|
|
|
27,122,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
loss
per
share
|
|
|
(0.005
|
)
|
|
|
(0.006
|
)
|
|
|
(0.006
|
)
|
|
|
(0.005
|
)
|
|
|
(0.021
|
)
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
2017
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
169,210
|
|
|
$
|
39,162
|
|
|
$
|
41,811
|
|
|
$
|
117,772
|
|
|
$
|
367,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from
operations
|
|
$
|
(110,754
|
)
|
|
$
|
(157,147
|
)
|
|
$
|
(181,520
|
)
|
|
$
|
(154,710
|
)
|
|
$
|
(604,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(119,240
|
)
|
|
$
|
(160,751
|
)
|
|
$
|
(186,966
|
)
|
|
$
|
(166,098
|
)
|
|
$
|
(633,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average
shares
outstanding
|
|
|
25,370,310
|
|
|
|
25,396,265
|
|
|
|
25,616,962
|
|
|
|
25,942,310
|
|
|
|
2
5,582,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
loss
per share
|
|
|
(0.005
|
)
|
|
|
(0.006
|
)
|
|
|
(0.007
|
)
|
|
|
(0.006
|
)
|
|
|
(0.025
|
)
|
9.
SEGMENT
INFORMATION
We
have organized our operations into two segments as discussed in Note 1 to the financial statements. We rely on an internal management
reporting process that provides segment information for purposes of making financial decisions and allocating resources.
The
following tables present our business segment information for the fiscal years ending October 31, 2018 and 2017:
|
|
2018
|
|
2017
|
|
|
|
|
|
Revenues:
|
|
|
|
|
Apparel
|
|
$
|
117,147
|
|
|
$
|
183,661
|
|
Housewrap
|
|
|
132,535
|
|
|
|
184,294
|
|
Total Revenues
|
|
$
|
249,682
|
|
|
$
|
367,955
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Apparel
|
|
$
|
500,208
|
|
|
$
|
677,566
|
|
Housewrap
|
|
|
1,202,325
|
|
|
|
1,159,095
|
|
Total
|
|
$
|
1,702,533
|
|
|
$
|
1,836,661
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
Apparel
|
|
$
|
4,258
|
|
|
$
|
—
|
|
Housewrap
|
|
|
—
|
|
|
|
14,900
|
|
Total
|
|
$
|
4,258
|
|
|
$
|
14,900
|
|
|
|
|
|
|
|
|
|
|
Depreciation:
|
|
|
|
|
|
|
|
|
Apparel
|
|
$
|
9,961
|
|
|
$
|
7,336
|
|
Housewrap
|
|
|
23,627
|
|
|
|
23,627
|
|
Total
|
|
$
|
33,588
|
|
|
$
|
30,963
|
|
10.
COMMON
STOCK
During
the quarter ended January 31, 2017, there was no stock sold or issued.
During
the quarter ended April 30, 2017, the Company issued 30,000 shares of common stock to one director for services performed during
February 2017 valued at $7,500. The stock was issued at a price of $0.25 per share. Pursuant to Rule 12b-15 under the Securities
and Exchange Act of 1934, as amended, this Form 10-Q includes new certifications by our principal executive officer and principal
financial officer under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.
During
the quarter ended July 31, 2017, the Company issued 130,000 shares of common stock to two shareholders for services performed
in April and May 2017 valued at $40,200 in total. The stock was issued at a price of $0.30 and $0.34 per share. Pursuant to Rule
12b-15 under the Securities and Exchange Act of 1934, as amended, this Form 10-Q includes new certifications by our principal
executive officer and principal financial officer under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.
Additionally,
for the quarter ended July 31, 2017, the Company sold 217,000 shares of common stock to three previous stockholders for total
proceeds of $40,590. The stock was issued at a price ranging from $0.18-$0.22 per share. We believe that Section 4(2) of the Securities
Act of 1933, as amended, was available because these transactions did not involve a public offering and there was no general solicitation
or general advertising involved in these transactions. We placed legends on the stock certificates stating that the securities
were not registered under the Securities Act and set forth the restrictions on their transferability and sale.
During
the quarter ended October 31, 2017, the Company issued 140,000 shares of common stock to one shareholder and one individual for
services performed in September and October 2017 valued at $50,000 in total. The stock was issued at a price of $0.25 and $0.40
per share. Pursuant to Rule 12b-15 under the Securities and Exchange Act of 1934, as amended, this Form 10-Q includes new certifications
by our principal executive officer and principal financial officer under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.
Additionally,
for the quarter ended October 31, 2017, the Company sold 505,000 shares of common stock for total proceeds of $131,950. The stock
was issued at a price ranging from $0.25 - $0.40 per share to three new investors and three stockholders. We believe that Section
4(2) of the Securities Act of 1933, as amended, was available because these transactions did not involve a public offering and
there was no general solicitation or general advertising involved in these transactions. We placed legends on the stock certificates
stating that the securities were not registered under the Securities Act and set forth the restrictions on their transferability
and sale.
During
the quarter ended January 31, 2018, the Company issued 50,000 shares of common stock to one individual for services performed
during December 2017 valued at $20,000. The stock was issued at a price of $0.40 per share. In addition, the Company sold 351,000
shares of common stock to three individuals for total proceeds of $111,560. The stock was issued at a price ranging from $0.30-$0.32
per share.
During
the quarter ended April 30, 2018, the Company issued 55,000 shares of common stock to two individuals for services performed in
April 2018 valued at $9,900. The stock was issued at a price of $0.18 per share. In addition, the Company sold 356,250 shares
of common stock to three individuals for total proceeds of $105,000. The stock was issued at a price ranging from $0.25-$0.32
per share.
During
the quarter ended July 31, 2018, the Company issued 5,000 shares of common stock to one individual for services performed in May
2018 valued at $1,000 in total. The stock was issued at a price of $0.20 per share. In addition, the Company sold 25,000 shares
of common stock to one individual for total proceeds of $5,000. The stock was issued at a price of $0.20 per share. We believe
that Section 4(2) of the Securities Act of 1933, as amended, was available because these transactions and the transaction cited
above did not involve a public offering and there was no general solicitation or general advertising involved in these transactions.
We placed legends on the stock certificates stating that the securities were not registered under the Securities Act and set forth
the restrictions on their transferability and sale.
During
the quarter ended October 31, 2018, the Company issued 130,000 shares of common stock to two shareholders for services performed
in September and October 2018 valued at $39,000 in total. The stock was issued at a price of $0.80 per share. Additionally, for
the quarter ended October 31, 2018, the Company sold 425,000 shares of common stock for total proceeds of $90,000. The stock was
issued at a price ranging from $0.20 - $0.25 per share to three stockholders. We believe that Section 4(2) of the Securities Act
of 1933, as amended, was available because these transactions did not involve a public offering and there was no general solicitation
or general advertising involved in these transactions. We placed legends on the stock certificates stating that the securities
were not registered under the Securities Act and set forth the restrictions on their transferability and sale.
11.
RELATED
PARTY TRANSACTIONS
The
Company has entered into various debt agreements with related parties. These agreements are classified as shareholder loans within
Note 3 to the financial statements.
The
Company has entered into a verbal lease agreement as further discussed in Note 7 to the financial statements.
12.
LITIGATION
On
November 4, 2016, the Federal Trade Commission (FTC) filed a complaint against the Company in the U.S. District Court Western
District of Pennsylvania, number 16-1669. In the complaint, the FTC alleges that, among other matters, the Company does not have
substantiation of claims made by the Company regarding the R value and energy efficiency of its INSULTEX House Wrap products.
The complaint asks as redress of rescission of revenue the Company received from the sale of House Wrap and a permanent injunction.
The parties are currently in the expert discovery phase. As a result of the partial federal government shutdown, a new trial date
has been set for July 29, 2019.
The
Company strongly denies the allegation and intends to vigorously defend itself. It is the Company’s belief that the complaint
is based on improper testing of the INSULTEX products using the wrong type of testing equipment.
13.
GOING
CONCERN
The
Company had a net loss of $582,882 and a negative cash flow from operations of $418,948 for the year ended October 31, 2018. In
addition, the Company has an accumulated deficit of $8,928,694. Management of the Company has represented that they will be able
to continue to support the Company’s cash needs through sales, sales of Company stock, and borrowings from private parties.
14.
SUBSEQUENT EVENTS
In
accordance with ASC Topic 855, “
Subsequent Events
”, the Company evaluated subsequent events through March 13,
2019, the date these financial statements were available to be issued. During their evaluation, the following subsequent events
were identified.
During
January 2019, the Company sold 360,000 shares of stock to five individuals for total proceeds of $61,200. The stock was issued
for $0.17 per share. Each Unit consisted of 60,000 shares of common stock and a warrant to purchase 60,000 shares of common stock.
The strike price of the warrant was $.17 per share. The term was three years. The Company also agreed to register the shares and
the shares underlying the warrants. Each Unit was priced at $10,200. Each purchaser was an “accredited investor”.
The Company believes that Section 4(2) of the Securities Act of 1933, as amended, was available because these transactions did
not involve a public offering and there was no general solicitation or general advertising involved in these transactions. The
Company has placed legends on the stock certificates stating that the securities were not registered under the Securities Act
and set forth the restrictions on their transferability and sale.