NOTES
TO THE CONDENSED FINANCIAL STATEMENTS
Three and
Nine Month Periods Ended July 31, 2019 and 2018 (Unaudited)
Note
1.
|
|
BASIS
OF PRESENTATION
|
In
the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to present fairly
Innovative Designs, Inc.’s financial position as of July 31, 2019, the changes therein for the three and nine month periods
then ended and the results of operations for the three and nine month periods ended July 31, 2019 and 2018.
The
financial statements included in the Form 10-Q are presented in accordance with the requirements of the Form and do not include
all of the disclosures required by accounting principles generally accepted in the United States of America. For additional information,
reference is made to the Innovative Designs, Inc.’s annual report on Form 10-K for the fiscal year ended October 31, 2018.
The results of operations for the nine month periods ended July 31, 2019 and 2018 are not necessarily indicative of operating
results for the full year.
Note
2.
|
|
RIGHT
OF USE ASSETS AND LEASE LIABILITIES
|
During
the quarter ended April 30, 2019, the Company implemented Accounting Standards Update 2016-02, Leases. Under the new guidance,
a lessee must be recorded a liability for lease payments (referred to as the lease liability) and an asset for the right to use
the leased asset during the lease term (referred to at the right of use asset) for all leases, regardless of whether they are
designated as finance or operating leases. This election requires the lessee to recognize lease expense on a straight-line basis
over the lease term. The right of use assets and corresponding right of use liabilities have been recorded using the present value
of the leases. See Notes 11 and 12 within the financial statement for additional disclosure on leases
The
Company had a net loss of $514,171 and a negative cash flow from operations of $151,470 for the nine month period ended July 31,
2019. In addition, the Company has an accumulated deficit of $9,442,865. 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.
Note
4.
|
|
ACCOUNTS
RECEIVABLE
|
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 $10,409 and $9,320 as of the quarter ended July 31,
2019 and as of the fiscal year ended October 31, 2018, respectively. Management has applied an allowance on all balances in excess
of 90 days.
INNOVATIVE
DESIGNS, INC.
NOTES
TO THE CONDENSED FINANCIAL STATEMENTS
Three and
Nine Month Periods Ended July 31, 2019 and 2018 (Unaudited)
Inventory
consists principally of purchased apparel inventory and House Wrap which is manufactured by the Company. Inventory is stated at
the lower of cost or net realizable value on a first-in, first-out basis. Innovative Designs, Inc. (the “Company”)
has decided to discontinue the selling of its hunting and swimming line of apparel. The Company has booked a reserve against apparel
inventory at July 31, 2019 and October 31, 2018 of $75,468. Management has determined that no allowance is currently necessary
on their House Wrap Inventory. Management will continue to evaluate its obsolete inventory reserve throughout the year and make
adjustments as needed.
Note
6.
|
|
EARNINGS
PER SHARE
|
The
Company calculates net income (loss) per share in accordance with Financial Accounting Standards Board (“FASB”) Accounting
Standard Codification (“ASC”) Topic 260 “Earnings per Share”. Basic earnings (loss) per share is
calculated by dividing income (loss) by the weighted average number of common shares outstanding for the period. During the periods
presented, the Company only has common stock outstanding. As a result, diluted earnings per share was not calculated.
The
Company accounts for income taxes in accordance with 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. The Company will continue to evaluate its income tax obligation throughout the
year and will record a tax provision when it is necessary.
Note
8.
|
|
SHIPPING
AND HANDLING COSTS
|
The
Company pays shipping and handling costs on behalf of customers for purchased apparel merchandise. These costs are billed back
to the customer through the billing invoice. The shipping and handling costs associated with merchandise ordered by the Company
are included as part of inventory as these costs are allocated across the merchandise received. With House Wrap orders, the customer
pays the shipping cost. The shipping and handling costs associated with customer orders was approximately $12,000 and $13,000
for the nine month periods ended July 31, 2019 and 2018, respectively.
INNOVATIVE
DESIGNS, INC.
NOTES
TO THE CONDENSED FINANCIAL STATEMENTS
Three and
Nine Month Periods Ended July 31, 2019 and 2018 (Unaudited)
During
the nine month period ended July 31, 2019, the Company sold 962,000 shares of common stock to nine investors for total proceeds
of $121,440. The stock was issued between $0.08 and $0.17 per share. Additionally, during the nine month period ended July 31,
2019, 550,000 shares of common stock were issued to one note holder for the extinguishment of a $50,000 note payable and $5,000
of accrued interest. This stock was issued at $0.10 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 nine month period ended July 31, 2018, the Company sold 732,250 shares of common stock to seven investors for total proceeds
of $221,560. The stock was issued for prices ranging from $0.20 to $0.32 per share. In addition, the Company issued 110,000 shares
to three individuals for services performed during the period. The shares issued were valued ranging between $0.18- $0.40 per
share for a total price of $30,900. 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.
Note
10.
|
|
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 which was to be paid in four installments. The first installment of $300,000
was to be paid at the execution of the agreement. The second installment of $200,000 was to be paid when the machinery and equipment
is ready to be shipped to the United States. The third installment of $100,000 is to be paid 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 July 31, 2019, 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, site improvements and installation of the equipment. Due to various environmental regulations regarding
propane emitted from the machine into the air and other costs to assemble the machine the Company expects to incur costs in excess
of the current deposit agreement. Management of the Company currently cannot reasonably estimate the costs. During the three month
period ended January 31, 2019 Management decided to sell the machine. The shipping and other purchase costs associated with the
purchase of the machine that were originally capitalized as part of the machine cost that were written off. The total loss on
impairment for the nine month period ended July 31, 2019 was $17,000.
INNOVATIVE
DESIGNS, INC.
NOTES
TO THE CONDENSED FINANCIAL STATEMENTS
Three and
Nine Month Periods Ended July 31, 2019 and 2018 (Unaudited)
Note
11.
|
|
RIGHT
OF USE ASSETS
|
The
Company entered into a month to month verbal lease at the time the Company was formed that is classified as right of use asset
and lease liability. The lease for the Company’s office space is estimated to be through June 2022. In accordance with ASU
2016-02, the Company calculated the present value of the leases using the average commercial real estate interest rate of 5.50%
at the commencement of the office lease. Applying the commercial rate, the Company calculated the present value of $150,496 for
the office lease as of July 31, 2019.
As
of July 31, 2019, the right of use assets associated with future operating lease is as follows:
Total present value of right of use asset under lease agreement
|
|
$
|
150,496
|
|
|
|
|
|
|
Amortization of right of use asset
|
|
|
(25,761
|
)
|
|
|
|
|
|
Total right of use asset as of July 31, 2019
|
|
$
|
124,735
|
|
|
|
|
|
|
Less current portion due within one year
|
|
|
36,039
|
|
|
|
|
|
|
Long-term right of use asset
|
|
$
|
88,696
|
|
Total
amortization expense related to the right of use assets under the verbal lease agreement was $22,174 and $0 for the nine month
periods ended July 31, 2019 and 2018, respectively.
Future
amortization of the right of use asset as of July 31, 2019 is as follows:
|
2020
|
|
$
|
36,039
|
|
|
2021
|
|
|
38,072
|
|
|
2022
|
|
|
40,219
|
|
|
2023
|
|
|
10,405
|
|
|
|
|
$
|
124,735
|
|
INNOVATIVE
DESIGNS, INC.
NOTES
TO THE CONDENSED FINANCIAL STATEMENTS
Three and
Nine Month Periods Ended July 31, 2019 and 2018 (Unaudited)
Note
12.
|
|
RIGHT
OF USE LEASE LIABILITY
|
As
disclosed in Note 11, the Company entered into a verbal lease for office space prior to the quarter ended July 31, 2019 that is
classified as a right of use asset and lease liability.
As
of July 31, 2019, the lease liability associated with future payments due under the verbal lease is as follows:
Total future minimum lease payments
|
|
$
|
136,500
|
|
|
|
|
|
|
Less present value discount
|
|
|
11,765
|
|
|
|
|
|
|
Total right of use lease liability as of July 31, 2019
|
|
|
124,735
|
|
|
|
|
|
|
Less current portion due within one year
|
|
|
36,039
|
|
|
|
|
|
|
Long-term right of use liability
|
|
$
|
88,696
|
|
Total
maturities of lease liability as of July 31, 2019 are as follows:
|
|
Total future
|
|
|
|
|
|
|
minimum lease
|
|
Present value
|
|
Right of use
|
|
|
payments
|
|
discount
|
|
lease liability
|
|
|
|
|
|
|
|
|
2020
|
|
|
$
|
42,000
|
|
|
$
|
5,961
|
|
|
$
|
36,039
|
|
|
2021
|
|
|
|
42,000
|
|
|
|
3,928
|
|
|
|
38,072
|
|
|
2022
|
|
|
|
42,000
|
|
|
|
1,781
|
|
|
|
40,219
|
|
|
2023
|
|
|
|
10,500
|
|
|
|
95
|
|
|
|
10,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
136,500
|
|
|
$
|
11,765
|
|
|
$
|
124,735
|
|
Note
13.
|
|
SEGMENT
INFORMATION
|
We
have organized our operations into two segments. We rely on an internal management reporting process that provides segment information
for purposes of making financial decisions and allocating resources.
INNOVATIVE
DESIGNS, INC.
NOTES
TO THE CONDENSED FINANCIAL STATEMENTS
Three and
Nine Month Periods Ended July 31, 2019 and 2018 (Unaudited)
The
following tables present our business segment information for the nine month periods ended July 31, 2019 and 2018:
|
|
2019
|
|
2018
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Apparel
|
|
$
|
111,275
|
|
|
$
|
96,971
|
|
House Wrap
|
|
|
77,461
|
|
|
|
70,544
|
|
Total Revenues
|
|
$
|
188,736
|
|
|
$
|
167,515
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Apparel
|
|
$
|
478,365
|
|
|
$
|
498,341
|
|
House Wrap
|
|
|
1,119,929
|
|
|
|
1,208,561
|
|
Total
|
|
$
|
1,598,294
|
|
|
$
|
1,706,902
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
Apparel
|
|
$
|
—
|
|
|
$
|
4,258
|
|
House Wrap
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
—
|
|
|
$
|
4,258
|
|
|
|
|
|
|
|
|
|
|
Depreciation:
|
|
|
|
|
|
|
|
|
Apparel
|
|
$
|
7,038
|
|
|
$
|
8,962
|
|
House Wrap
|
|
|
17,672
|
|
|
|
17,672
|
|
Total
|
|
$
|
24,710
|
|
|
$
|
26,634
|
|
Note
14.
|
|
LEGAL
PROCEEDINGS
|
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.
Due to the partial government shutdown a new trial date was set for July 29, 2019. The trial commenced and the proceedings have
been stopped until the end of October 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.
Note
15.
|
|
SUBSEQUENT
EVENTS
|
The
Company has evaluated subsequent events in accordance with ASC Topic 855, “Subsequent Events”, through October
31, 2019, which is the date financial statements were available to be issued. The Company identified the below subsequent event.
INNOVATIVE
DESIGNS, INC.
NOTES
TO THE CONDENSED FINANCIAL STATEMENTS
Three and
Nine Month Periods Ended July 31, 2019 and 2018 (Unaudited)
Subsequent
to July 31, 2019, the Company sold 600,000 shares of common stock for a total proceed of $86,000. The common stock was issued
for between $0.12 and $0.17 per share. The Company issued 130,000 shares of common stock in lieu of rent. The total rent is
valuated at $19,500 or $0.15 per share. Additionally, the Company issued 80,000 shares of common stock to two individuals for
services. The shares were issued at $0.20 per share for a total price of $16,000. 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.