Attached files
| file | filename |
|---|---|
| EX-32.1 - Her Imports | ex32-1.htm |
| EX-31.1 - Her Imports | ex31-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2016
OR
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________________ to _________________
Commission File Number: 000-53810
EZJR, Inc.
(Exact name of registrant as specified in its charter)
| Nevada | 20-0667864 | |
| (State or Other Jurisdiction | (I.R.S. Employer | |
| of Incorporation or Organization) | Identification No.) |
| 8250 W. Charleston Blvd., Suite 110 | 89117 | |
| (Address of principal executive offices) | (Zip Code) |
Telephone: 702-544-0195
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [ ] Not Applicable [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
| Large accelerated filer [ ] | Accelerated filer [ ] | Non-accelerated filer [ ] | Smaller reporting company [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of November 15, 2016, the registrant’s outstanding common stock consisted of 32,299,576 shares, $0.001 par value. Authorized – 70,000,000 common shares.
Table of Contents
EZJR, Inc.
Index to Form 10-Q
For the Quarterly Period Ended September 30, 2016
| 2 |
EZJR, Inc.
Condensed Consolidated Balance Sheets
| September 30, 2016 | December 31, 2015 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 145,110 | $ | 449,675 | ||||
| Receivables | 69,284 | 64,940 | ||||||
| Related party receivables | 405,527 | 88,577 | ||||||
| Inventories | 2,410,377 | 1,767,832 | ||||||
| Prepaid maintenance fees | - | 31,250 | ||||||
| Other prepaid expenses | 57,460 | 52,234 | ||||||
| Deposits | 168,398 | 17,780 | ||||||
| Total current assets | 3,256,156 | 2,472,288 | ||||||
| Furniture, equipment and software, net | 259,569 | 307,156 | ||||||
| Intangible asset, net | 1,117,024 | 1,879,111 | ||||||
| Total assets | $ | 4,632,749 | $ | 4,658,555 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 647,169 | $ | 483,155 | ||||
| Income tax liability | 282,040 | 345,376 | ||||||
| Notes payable | 55,727 | 21,903 | ||||||
| Total current liabilities | 984,936 | 850,434 | ||||||
| Total liabilities | 984,936 | 850,434 | ||||||
| Stockholders’ equity | ||||||||
| Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding | - | - | ||||||
| Common stock, $0.001 par value, 70,000,000 shares authorized, 32,299,576 and 32,599,576 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively | 32,300 | 32,600 | ||||||
| Additional paid-in capital | 18,078,097 | 18,135,737 | ||||||
| Accumulated deficit | (14,462,584 | ) | (14,360,216 | ) | ||||
| Total stockholders’ equity | 3,647,813 | 3,808,121 | ||||||
| Total liabilities and stockholders’ equity | $ | 4,632,749 | $ | 4,658,555 | ||||
See accompanying notes to these unaudited condensed consolidated financial statements.
| 3 |
EZJR, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| Product sales | $ | 3,010,915 | $ | 3,650,152 | $ | 10,610,039 | $ | 9,852,941 | ||||||||
| Cost of product sold | 1,567,465 | 1,819,531 | 5,597,174 | 4,918,944 | ||||||||||||
| Gross profit | 1,443,450 | 1,830,621 | 5,012,865 | 4,933,997 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Royalties | 289,125 | 346,829 | 1,016,116 | 941,040 | ||||||||||||
| Selling expense | 1,078,864 | 1,186,470 | 3,522,920 | 2,494,205 | ||||||||||||
| General and administrative expense | 174,397 | 137,723 | 638,759 | 340,076 | ||||||||||||
| Total operating expenses | 1,542,386 | 1,671,022 | 5,177,795 | 3,775,321 | ||||||||||||
| Income (loss) from operations | (98,937 | ) | 159,599 | (164,931 | ) | 1,158,676 | ||||||||||
| Other Income (expense) | ||||||||||||||||
| Gain on sale of subsidiaries | - | - | - | 1,414,804 | ||||||||||||
| Gain on debt settlement | - | 10,375 | - | 10,375 | ||||||||||||
| Interest income | - | - | 68 | - | ||||||||||||
| Interest expense | (338 | ) | (2,254 | ) | (842 | ) | (17,116 | ) | ||||||||
| Total other income (expense) | (337 | ) | 8,121 | (773 | ) | 1,408,063 | ||||||||||
| Income (loss) from continuing operations before benefit (provision) for income taxes | (99,274 | ) | 167,720 | (165,704 | ) | 2,566,739 | ||||||||||
| Benefit (provision) for income taxes | 37,972 | (46,871 | ) | 63,336 | (395,053 | ) | ||||||||||
| Income (loss) from continuing operations after provision for income taxes | (61,302 | ) | 120,849 | (102,368 | ) | 2,171,686 | ||||||||||
| Loss from discontinued operations | - | - | - | (96,604 | ) | |||||||||||
| Net income (loss) | $ | (61,302 | ) | $ | 120,849 | $ | (102,368 | ) | $ | 2,075,083 | ||||||
| Basic income (loss) per share | ||||||||||||||||
| Continuing operations | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.07 | ||||||||
| Discontinued operations | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||
| Net basic earnings (loss) per share | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.07 | ||||||||
| Diluted income (loss) per share | ||||||||||||||||
| Continuing operations | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.07 | ||||||||
| Discontinued operations | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||
| Net diluted earnings (loss) per share | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.07 | ||||||||
| Weighted average number of common shares outstanding - basic | 32,550,662 | 29,860,446 | 32,583,153 | 29,345,913 | ||||||||||||
| Weighted average number of common shares outstanding - fully diluted | 32,550,662 | 29,860,446 | 32,583,153 | 29,345,913 | ||||||||||||
See accompanying notes to these unaudited condensed consolidated financial statements.
| 4 |
EZJR, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2016 | 2015 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net income (loss) from continuing operations | $ | (102,368 | ) | $ | 2,171,687 | |||
| Adjustments to reconcile net income to net cash provided by (used by) operating activities: | ||||||||
| Depreciation and amortization | 835,266 | 138,689 | ||||||
| Non-cash gain on debt settlement | - | (10,375 | ) | |||||
| Gain on sale of subsidiaries | - | (1,414,804 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Receivables | (4,344 | ) | (177,121 | ) | ||||
| Related party receivables | (316,950 | ) | 292,022 | |||||
| Inventories | (642,545 | ) | (736,009 | ) | ||||
| Prepaid maintenance fees | 31,250 | 56,250 | ||||||
| Other prepaid expenses | (5,226 | ) | (68,400 | ) | ||||
| Deposits | (150,618 | ) | (106,990 | ) | ||||
| Accounts payable and accrued liabilities | 164,013 | 202,485 | ||||||
| Related party payables | - | 148,143 | ||||||
| Income tax liability | (63,336 | ) | 395,053 | |||||
| Net cash provided by (used by) operating activities | (254,857 | ) | 890,630 | |||||
| INVESTING ACTIVITIES | ||||||||
| Purchase of fixed assets | (25,592 | ) | (55,110 | ) | ||||
| Net cash used by investing activities | (25,592 | ) | (55,110 | ) | ||||
| FINANCING ACTIVITIES | ||||||||
| Repayment on related party secured promissory note | - | 700,000 | ||||||
| Repayment on notes payable | (24,115 | ) | - | |||||
| Net cash used in by financing activities | (24,115 | ) | 700,000 | |||||
| CASH FLOWS PROVIDED BY DISCONTINUED OPERATIONS | ||||||||
| Net cash provided by operating activities | - | 4,748 | ||||||
| Net cash provided by discontinued operations | - | 4,748 | ||||||
| NET CHANGE IN CASH | (304,565 | ) | 1,540,268 | |||||
| CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | 449,675 | 280,904 | ||||||
| END OF PERIOD | $ | 145,110 | $ | 1,821,172 | ||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Interest paid | $ | 557 | $ | 13,117 | ||||
| Income taxes paid | $ | - | $ | - | ||||
| SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Issuance of note payable for buy back of stock from stockholder | $ | 57,940 | $ | - | ||||
See accompanying notes to these unaudited condensed consolidated financial statements.
| 5 |
Notes to the Condensed Consolidated Financial Statements
1. Description of the Company
EZJR, Inc., (“the Company” or the “Registrant” or “EZJR”), was incorporated on August 14, 2006 under the laws of the State of Nevada as IVPSA Corporation (“IVP”). The Company was incorporated as a subsidiary of Eaton Laboratories, Inc., a Nevada corporation.
Corporate Structure and Business
EZJR is an Internet marketing company headquartered in Las Vegas, Nevada. The Company has one wholly owned subsidiary, Her Marketing Concepts, Inc. (“Her Marketing”), a Nevada Corporation. The primary purpose of Her Marketing is to purchase various media for customer and lead generation. Additionally, Her Marketing acts as a conduit for the implementation and management of the Media Investor Purchase Agreement described below. The Company’s primary business is to improve the sales performance of brands, products and services by way of its proprietary e-commerce platform. The Company’s unique methodology minimizes the cost of generating leads and then maximizes the conversion of those leads into customers. After the initial sale, EZJR utilizes a process for monetizing customers to the greatest extent possible through up sales, down sales and cross sales.
Corporate History
On July 25, 2008, EZJR, a Nevada corporation, and IVPSA Corporation, entered into an Acquisition Agreement and Plan of Merger. Immediately upon the effectiveness of the merger, the original EZJR ceased to exist.
In January 2012, the Company entered into a two-step transaction with OwnerWiz Realty Inc. (“OWR”), a privately held Georgia corporation. The first step of the transaction occurred in January 2012, when an entity owned by the shareholders of OWR and parent company of OW Marketing, Inc. (“OWM”) acquired seven million five hundred thousand (7,500,000) restricted common stock shares of EZJR, representing approximately 95.25% of the then total outstanding common stock shares of 7,873,750 shares from the then two major shareholders in a private transaction. The second step of the transaction occurred on March 1, 2012, when the Company, EZJR Acquisition Corporation (“Sub”), a Nevada corporation and subsidiary of the Company and OWR, entered a Share Exchange Agreement and Plan of Merger “Share Exchange” pursuant to which the Sub was merged with and into OWR, with OWR surviving as a wholly-owned subsidiary of the Company. The Company acquired all the outstanding capital stock of OWR in exchange for issuing restricted 390,000 shares of the Company’s common stock, which were issued to two shareholders of OWR. Since the former shareholders of OWR owned over 95% of the outstanding common stock of the Company upon consummation of the Share Exchange, the transaction was recorded as a reverse merger and resulted in a recapitalization with OWR being the acquirer for accounting purposes.
On January 28, 2014, the Company acquired Leading Edge Financial (“LEF”), a private Florida corporation engaged in the business of personal credit management in a stock exchange transaction whereby the Company exchanged 4,585,000 shares of restricted common stock in exchange for 100% of the stock of LEF.
On April 22, 2015, the Company incorporated Her Marketing Concepts, Inc. (“Her Marketing”), a Nevada Corporation, as a wholly owned subsidiary. The primary purpose of Her Marketing is to purchase various media for customer and lead generation.
| 6 |
On May 15, 2015, the Company entered into an agreement with AdMaxOffers.com LLC (“Admax”), a shareholder and beneficial owner of the Company to sell all of its ownership interest in OWR and LEF in exchange for Admax returning to the Company 650,000 shares of its common stock (valued at $422,500 at the time of the transaction). Pursuant to this divesture transaction, the majority of the assets and obligations of OWR, LEF, and OWM are no longer the assets and obligations of the Company. As part of the sale of these subsidiaries to Admax, Admax agreed to assume the liabilities for all compensation owed to both the Company’s former Chief Technology Officer and the then Chief Executive Officer. In turn, the Company agreed to assume the following liabilities of OWM and LEF: 1) estimated unpaid payroll taxes of $6,665 plus estimated late fees of $1,033; 2) remaining administrative fees and other fees owed under an Assurance of Voluntary Compliance pursuant to the Fair Business Practice Act with the State of Georgia of approximately $10,000; 3) a customer refund for $1,500; and 4) a $25,000 note payable plus unpaid interest. Additionally, the Company agreed to reimburse Edward Zimbardi and Brenda Zimbardi up to $10,000 for legal fees that they may incur to defend against lawsuits related to any legal decisions that they took on behalf of the Company while serving as an officer of the Company or any of its subsidiaries at the time.
For the three and nine months ended September 30, 2015, the operations of OWR, LEF and OWM are accounted for as discontinued operations.
On September 15, 2016, the Company purchased 300,000 common shares of EZJR from Admax by issuing a promissory note for $60,000 payable monthly in equal installments of $5,000 until fully paid. As part of this transaction Admax agreed that it would not sell any free-trading shares for a period of one year from the transaction date. Assuming an implied interest rate of 6.5% the value of the note booked as a payment was $57,940.
EZJR’s Business
Agreement with Her Holding, Inc.
As of October 1, 2014, the Company entered into a Marketing and Selling Agreement (the “Agreement”) with Her Imports, LLC (“Her”), a retailer of human hair extensions and related products. Under the agreement, the Company was to custom design Her’s ecommerce Websites and generate customer leads through email marketing campaigns, online advertising and social media and various affiliate marketing campaigns. Finally, the Company was to sell Her’s products as well as other products to these customers. As part of the Agreement, the Company purchased Her’s inventory that was on hand at September 30, 2014 in exchange for a Secured Promissory Note. The Company intends to enter into similar agreements with other brands and retailers, some of who will pay a commission to the Company based on the sales generated.
In addition to the Company selling the Her products online, Her’s products are sold at independent retail store locations. As part of the agreement with Her, the Company reimburses Her for the expenses of these store locations, employee costs, connectivity expenses and certain other expenses as agreed upon. All retail store sales are made by the Company and are processed through a Point-of-Sale (POS) system implemented by the Company. Additionally, the Company reimburses Her for specific customer service costs, warehousing and fulfillment expenses. Finally, the Company pays Her a 10% royalty on net sales. In return, Her provides the Company with assistance in developing and sourcing of products, promotion of products, employee training, customer service and high level store management. On November 14, 2014, the agreement was modified to allow any payments made by the Company on behalf of Her to be offset against any royalty payments. Effective September 1, 2015, the Company issued 4,000,000 shares of restricted common stock valued at $2,200,000 to Her Holding in exchange for a reduction in the royalty cash payments to 2.5%. Additionally, the Company agreed to pay for certain connectivity, telephony and customer service expenses that heretofore were paid by Her.
During the three and nine months ended September 30, 2016 and September 30, 2015, sales of Her Import products accounted for substantially all of the Company’s revenues.
| 7 |
eCommerce Platform
On May 28, 2014, the Company entered an Asset Purchase Agreement with Leader Act Ltd HK, (“Leader”) a private Hong Kong corporation to purchase an ecommerce Platform (“Platform”) software program developed and owned by Leader. The Platform entails all aspects of interaction that a company has with its customer, whether it is sales or service-related, provides a greater understanding of the customer and helps manage customer data and all interaction with the customer. Under the terms of the Asset Purchase Agreement, Leader agrees to service and maintain the software for a period of two years. Subsequently, Leader will be paid to service and maintain the software. For the Platform and service and maintenance, the Company issued Leader 10,000,000 restricted shares of common stock valued at $0.05 per share. For financial reporting purposes, $350,000 of the purchase price was allocated to the Platform and $150,000 was allocated to the software maintenance agreement, which was booked as a prepaid at the date of the acquisition and is being amortized on a straight-line basis over the two-year term of the agreement. This agreement expired in May 2016. As discussed in Note 10 to these financial statements, the Company has entered into a five-year maintenance agreement on October 13, 2016 in exchange for 3,000,000 shares of the Company’s common stock.
Media Investor Purchaser Agreement
On June 29, 2014, the Company entered into a Media Investor Purchaser Agreement (“MIP”) with Leader. Under the terms of the MIP Agreement, Leader undertakes the responsibility to provide the investment dollars of the “media purchase” for customers and lead generation and to manage this process. In doing so, Leader will create the offers, spend the funds necessary to purchase various media and manage the overall process. The Company’s current on-line offers are focused on selling various consumer products. Leader is also responsible for graphic design, Website design and various other programming expenses. The net revenue from the media purchase will be shared with each party receiving 50 percent after the deduction of certain costs and expenses, including the media purchase, merchant fees, product costs, and affiliate fees. Under the agreement, the Company will be responsible for customer service, network costs, accounting and other general and administrative costs. Leader can advance the Company up to $500,000, which may be converted, into a total of 10,000,000 restricted common shares of the Company’s stock at the fixed price of $0.05 per share. Once Leader has acquired the 10,000,000 shares of the Company’s stock ownership, the MIP Agreement is no longer in force. Leader had previously advanced the Company the sum of $50,000 for media purchases. On June 26, 2014, these funds were used to purchase 1,000,000 restricted shares of the Company’s common stock at $0.05 per share. Since September 30, 2014, there has been no activity related to the MIP agreement as the Company has been focusing its marketing efforts on the agreement with Her Imports. However, the Company anticipates that the MIP program will be reactivated at some point in the future.
Reclassifications
Certain reclassifications have been made to the prior year’s condensed consolidated financial statements to conform to the current year’s presentation. These reclassifications had no effect on previously reported results of operations. The Company reclassified certain expense accounts to conform to the currents year’s treatment.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company (a Nevada Corporation) and its wholly owned subsidiary, Her Marketing Concepts, Inc. All significant intercompany transactions have been eliminated in consolidation.
| 8 |
Basis of Presentation of the Condensed Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements of the Company are prepared by management on the accrual basis of accounting and in accordance with principles generally accepted in the United States of America (“GAAP”) for interim financial information as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), and in conjunction with rules and regulations of the SEC. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by the US GAAP for complete financial statements. The unaudited condensed consolidated financial statements include accounts and related adjustments, which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim period. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. These unaudited condensed consolidated financial statements should be read in conjunction with the condensed consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
The condensed consolidated balance sheet as of December 31, 2015 contained herein has been derived from the audited consolidated financial statements as of December 31, 2015, but do not include all disclosures required by the US GAAP.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Management uses its historical records and knowledge of its business in making estimates. Accordingly, actual results could differ from those estimates.
Discontinued Operations
As described in Note 1, above, on May 15, 2015 the Company sold three wholly owned subsidiaries as part of an exchange of stock. For financial reporting purposes the sale of these entities is reported as discontinued operations for the three months and nine months ended September 30, 2015.
Cash Equivalents
The Company considers deposits that can be redeemed on demand and investments that have original maturities of less than three months, when purchased, to be cash equivalents. As of September 30, 2016 and December 31, 2015, the Company’s cash and cash equivalents were on deposit in federally insured financial institutions, and at times may exceed federally insured limits.
Concentration of Credit Risk for Cash Deposits at Banks
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits. The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 for any single account at the Company’s financial institutions. From time-to-time one or more of the Company’s bank accounts may exceed the FDIC insurance limits.
Accounts Receivable
Accounts receivable represent balances related to products sold for which the Company had not received the related funds from various financial institutions as of the reporting period. Interest is not accrued on accounts receivables and all receivables were received within one week of the end of the reporting period and, as such, the Company has no allowance for doubtful accounts as of September 30, 2016 and December 31, 2015.
| 9 |
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 September 30, 2016 or December 31, 2015.
The Company believes the carrying amounts of cash and cash equivalents, accounts receivable, other current assets, accounts payable, accrued salaries, wages and payroll taxes, and other accrued expenses 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.
Inventories
Inventory is booked at cost on a FIFO basis. The Company evaluates the carrying value of inventory to determine if the carrying value is recoverable at estimated selling prices. To the extent that estimated selling prices do not exceed the associated carrying values, inventory carrying amounts are written down. In addition, the Company inventory on hand or committed with suppliers, that is not expected to be sold within the next 12 months, is considered as excess and thus appropriate write-downs of the inventory carrying amounts are established through a charge to cost of revenues. Significant reductions in product pricing, or changes in technology and/or demand may necessitate additional write-downs of inventory carrying value in the future.
Deposits
Deposits consists of the following:
| September 30, 2016 | December 31, 2015 | |||||||
| Deposits on Products | $ | 144,932 | $ | - | ||||
| Security Deposits | 23,466 | 17,780 | ||||||
| Total | $ | 168,398 | $ | 17,780 | ||||
Intangible Asset, Net
Effective September 1, 2015, the Company issued 4,000,000 shares of restricted common stock valued at $2,200,000 to Her Holding in exchange for a reduction in the royalty cash payments to 2.5%. Additionally, the Company agreed to pay for certain connectivity, telephony and customer service expenses that heretofore were paid by Her. For financial statement reporting purposes, the value of the stock paid to Her was treated as an intangible asset to be amortized into expense until the reduction in royalties paid totals $2,200,000. During the three and nine months ended September 30, 2016, amortization of the intangible asset was $216,844 and $762,087. The amount of intangible asset amortized is calculated by taking the difference between the royalty calculation at previous royalty rate of 10% and the new rate of 2.5%.
| 10 |
Basis for Recording Fixed Assets, Lives, and Depreciation Methods
Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. The Company uses other depreciation methods for tax purposes where appropriate. The estimated useful lives for significant property and equipment categories are as follows:
| Furniture and fixtures | 5 years |
| Computers and equipment | 3 years |
| Software | 5 years |
| Leasehold improvement | remaining life of the lease |
Revenue Recognition
Product Sales
The Company, through the Her Imports store locations and its eCommerce Website, www.herimports.com, sells a variety of hair extensions and related products. In the stores, customers pay for the products using either cash, a debit card or a credit card. In the case of cash sales at the store, the store manager makes a nightly deposit of the cash, rounded down to a dollar. For cash sales, the Company recognizes the sale when the deposit is recorded into the Company’s account by the bank. For credit card and debit sales, the Company recognizes the sale when the card is charged.
Product sales on the Website are paid for using either debit cards, credit cards, PayPal or an independent financing company. Sales for Website product sales are recognized upon shipment of the product.
The Company recognizes revenue from product sales and services once all of the following criteria for revenue recognition have been met: persuasive evidence that an agreement exists; the services have been rendered; the fee is fixed and determinable and not subject to refund or adjustment; and collection of the amount due is reasonably assured.
Impairment Assessments of Purchased Software
On May 28, 2014, the Company purchased, for restricted shares of common stock, an eCommerce software program. The value of the software is amortized over five years. The Company makes judgments about the value of this long-lived asset whenever events or changes in circumstances indicate that an impairment in the remaining value of the assets recorded on the balance sheet may exist. To estimate the fair value of long-lived asset, the Company typically makes various assumptions about the prospects for the business that the asset relates to, considers market factors specific to that business and estimates future cash flows to be generated by that business. These assumptions and estimates are necessarily subjective and based on management’s best estimates based on the information available at the time such estimates are made. Based on these assumptions and estimates, the Company determines whether it needs to record an impairment charge to reduce the value of the asset stated on the balance sheet to reflect its estimated fair value determined by a discounted cash flow analysis. The Company has not recognized any impairment charges related to software during the three and nine month periods ended September 30, 2016 and September 30, 2015.
| 11 |
Income Taxes
The Company accounts for income taxes under the liability method in accordance with FASB ASC 740-10. Under this standard, deferred income tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. Deferred income tax assets are reduced by a valuation allowance when the Company is unable to make the determination that it is more likely than not that some portion or all of the deferred income tax asset will be realized.
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.
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.
Recent Accounting Pronouncements
ASU 2015-14
In August 2015, the FASB issued ASU No. 2015-14, Revenue From Contracts With Customers (Topic 606).” The amendments in this ASU defer the effective date of ASU 2014-09. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We are still evaluating the effect of the adoption of ASU 2014-09.
ASU 2015-11
In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory (Topic 330).” ASU 2015-11 simplifies the accounting for the valuation of all inventory not accounted for using the last-in, first-out (“LIFO”) method by prescribing that inventory be valued at the lower of cost and net realizable value. ASU 2015-11 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 on a prospective basis. We do not expect the adoption of ASU 2015-11 to have a material effect on our financial position, results of operations or cash flows.
ASU 2015-05
In April 2015, the FASB issued ASU 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40).” ASU 2015-05 provides guidance regarding the accounting for a customer’s fees paid in a cloud computing arrangement; specifically, about whether a cloud computing arrangement includes a software license, and if so, how to account for the software license. ASU 2015-05 is effective for public companies’ annual periods, including interim periods within those fiscal years, beginning after December 15, 2016 on either a prospective or retrospective basis. Early adoption is permitted. We do not expect the adoption of ASU 2015-05 to have a material effect on our financial position, results of operations or cash flows.
| 12 |
ASU 2015-03
In April 2015, the FASB issued ASU No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments are effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments are to be applied on a retrospective basis, wherein the balance sheet of each individual period presented is adjusted to reflect the period-specific effects of applying the new guidance. We do not expect the adoption of ASU 2015-03 to have a material effect on our financial position, results of operations or cash flows.
ASU 2015-02
In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis,” which is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). The ASU focuses on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification and improves current U.S. GAAP by placing more emphasis on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (“VIE”), and changing consolidation conclusions for companies in several industries that typically make use of limited partnerships or VIEs. The ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted, including adoption in an interim period. We do not expect the adoption of ASU 2015-02 to have a material effect on our financial position, results of operations or cash flows.
The Company has evaluated other recent pronouncements and believes that none of them will have a material impact on the Company’s financial position, results of operations or cash flows.
3. Discontinued Operations
On May 15, 2015, the Company completed the sale of all the issued and outstanding stock of OwnerWiz Realty Inc., OwnerWiz Management, Inc., and Leading Edge Financial, Inc to Admax, a shareholder and beneficial owner of the Company, in exchange for 650,000 common stock shares of the Company. All non-recurring costs associated with these dispositions have been included as discontinued operations in the condensed consolidated financial statements.
The Company’s results from discontinued operations are summarized below. These operating results for the three and nine months ended September 30, 2015 do not necessarily reflect what they would have been had these three previous subsidiaries not been classified as discontinued operations.
| 13 |
| Three Months Ended | Nine Months Ended | |||||||
| September 30, 2015 | September 30, 2015 | |||||||
| Revenues | $ | - | $ | 60,955 | ||||
| Cost of revenues | - | (5,568 | ) | |||||
| Commission expenses | - | (15,464 | ) | |||||
| Selling expense | - | (37,835 | ) | |||||
| General and administrative expenses | - | (66,892 | ) | |||||
| Interest expense | - | (31,800 | ) | |||||
| Loss from discontinued operations | $ | - | $ | (96,604 | ) | |||
During the nine months ended September 30, 2015 the Company recorded a gain on the sale as follows:
| Common stock received and cancelled | $ | 422,500 | ||
| Liabilities sold | 1,005,434 | |||
| Intecompany payables forgiven | 8,034 | |||
| Carrying value of assets sold | (14,878 | ) | ||
| Intercompany receivables forgiven | (6,186 | ) | ||
| Investment in LEF | (100 | ) | ||
| Net gain on sale of subsidiaries | $ | 1,414,804 |
4. Property and Equipment
Property and equipment consisted of the following:
| September 30, 2016 | December 31, 2015 | |||||||
| Software | $ | 359,315 | $ | 356,005 | ||||
| Computers and equipment | 52,164 | 38,610 | ||||||
| Furniture | 25,702 | 21,197 | ||||||
| Leasehold improvements | 15,577 | 11,354 | ||||||
| 452,758 | 427,166 | |||||||
| Accumulated depreciation and amortization | (193,189 | ) | (120,010 | ) | ||||
| Property and equipment, net | $ | 259,569 | $ | 307,156 | ||||
Depreciation and amortization expense on property, plant and equipment for the three months ended September 30, 2016 and September 30, 2015 was $24,987 and $20,876, respectively. Depreciation and amortization expense on property, plant and equipment for the nine months ended September 30, 2016 and September 30, 2015 was $73,179 and $57,012, respectively.
5. Related Party Transactions
Related Party Accounts Receivable and Payable
As discussed in Note 1, above, on September 1, 2015, the Company issued 4,000,000 shares of common stock to Her resulting in Her having a 12.2% interest in EZJR. At September 30, 2016 and December 31, 2015, the Company had a receivable balance of $405,527 and $88,577, respectively, from Her related to payments made by the Company and on behalf of Her, partially offset by royalties earned by Her under the Marketing and Selling Agreement with Her also described in Note 1.
| 14 |
Royalty Expense
During the three and nine months ended September 30, 2016, the Company recognized royalty expense of $289,125 and $1,016,116, respectively. During the three and nine months ended September 30, 2015, the Company recognized royalty expense of $346,829 and $941,040, respectively. During the three and nine months ended September 30, 2016, $216,844 and $762,087, respectively, of royalty expense was the result of the amortization of the intangible asset described in Note 2, above.
6. Commitments and Contingencies
Facility Sublease
On April 27, 2016, the Company renewed for two years its sublease agreement, effective May 1, 2015, for its corporate office. Under the terms of the sublease the Company pays $925 per month and is responsible to pay its own expenses for utilities, taxes, insurance and repairs. Future lease payments related to the Company’s office lease as of September 30, 2016 are as follows:
| Year | Amount | |||
| 2016 | $ | 2,775 | ||
| 2017 | 11,100 | |||
| 2018 | 3,700 | |||
| Total | $ | 17,575 | ||
Concentrations
As of September 30, 2016, the Company had only nine qualified vendors that provide it with its hair extension products. Quality among these vendors can vary greatly between orders. Should any of these vendors fail to deliver quality products to the Company on a timely basis, our operations could be adversely affected. The Company is actively attempting to source additional qualified vendors but there can be no assurance that it will succeed in this effort.
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. 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 has 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.
| 15 |
7. Promissory Notes
As discussed in Note 1, above, on May 15, 2015, the Company entered into an agreement with Admax, a shareholder and beneficial owner of the Company to sell all stock in OWR and LEF in exchange for Admax returning to the Company 650,000 shares of common stock of the Company. As part of the agreement the Company assumed a $25,000 Note payable plus unpaid interest. Through September 30, 2015, unpaid interest on the note was $15,375. On September 30, 2015, the Company entered into a Settlement Exchange Agreement with the noteholders for a new note with a face value of $30,000 and twelve monthly payments due of $2,500. Assuming an implied interest rate on the new note of 6.5%, the difference between the payments due and the amount of the previous note plus accrued interest was $10,405, which has been recognized as other income at the time of the settlement. As of September 30, 2016, the remaining outstanding balance was $2,474.
On September 15, 2016, the Company purchased 300,000 common shares of EZJR from Admanxoffers.com by issuing a promissory note for $60,000 payable monthly in equal installments of $5,000 until fully paid. As part of this transaction Admax agreed that it would not sell any free-trading shares for a period of one year from the transaction date. Assuming an implied interest rate of 6.5%, the value of the note booked as a payment was $57,940. At September 30, 2016, the remaining outstanding balance on the note was $53,254.
8. Stockholders’ Equity
As described in Note 7, above, on September 15, 2016 the Company purchased and retired 300,000 shares of common stock from Admax.
9. Income Taxes
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. An approximate estimated blended tax rate of 38.25% has been used to calculate the provision for taxes based on income for the three and nine months ended September 30, 2016 and 35% for the three and nine months ended September 30, 2015. For financial reporting purposes the provision for income taxes is based on pre-tax income (loss) of ($99,274) and $167,720 for the three months ended September 30, 2016 and 2015, respectively. For financial reporting purposes the provision for income taxes is based on pre-tax income (loss) of $(165,704) and $1,504,962 for the nine months ended September 30, 2016 and 2015, respectively. The provision (benefit) for income taxes for the three and nine months ended September 30, 2016 and 2015 consisted of the following:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2016 | September 30, 2015 | September 30, 2016 | September 30, 2015 | |||||||||||||
| U.S. Federal | $ | 33,008 | $ | (46,871 | ) | $ | 55,041 | $ | (395,053 | ) | ||||||
| U.S. State | 4,964 | - | 8,295 | - | ||||||||||||
| Total | 37,972 | (46,871 | ) | 63,336 | (395,053 | ) | ||||||||||
| Deferred | - | - | - | - | ||||||||||||
| Total benefit (provision) for income taxes | $ | 37,972 | $ | (46,871 | ) | $ | 63,336 | $ | (395,053 | ) | ||||||
10. Subsequent Event
On October 13, 2016, the Company entered into a Software Maintenance contract with Leader Act Ltd HK, (“Leader”) a private Nevada corporation. Leader has developed a Customer Relations Management (“CRM”) software program that it previously licensed to the Company. Under the agreement, Leader agrees to service and maintain the software for a period of five years. EZJR purchased the maintenance agreement in exchange for 3,000,000 restricted common stock shares.
| 16 |
EZJR, Inc. is referred to herein as “we”, “our” or “us”.
ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues, costs and expenses during the reporting periods. Actual results could differ materially from these estimates.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. When used in this Quarterly Report on Form 10-Q, the words “may,” “could,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” and similar expressions identify forward-looking statements. Although we believe that our plans, intentions, and expectations reflected in any forward-looking statements are reasonable, these plans, intentions, or expectations may not be achieved. Our actual results, performance, or achievements could differ materially from those contemplated, expressed, or implied, by the forward-looking statements contained in this Quarterly Report on Form 10-Q. Important factors that could cause actual results to differ materially from our forward-looking statements are set forth immediately below under Risks, Trends and Uncertainties. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the dates on which they are made. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in this Quarterly Report on Form 10-Q. Except as required by federal securities laws, we are under no obligation to update any forward-looking statement, whether because of new information, future events, or otherwise.
The following discussion and analysis compares our results of operations for the three and nine months ended September 30, 2016 and September 30, 2015. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto and our Form 10-K for our fiscal year ending December 31, 2015 filed with the Securities and Exchange Commission on April 14, 2016.
Risks, Trends and Uncertainties
Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to business trends, risks and uncertainties. The factors impacting these trends, risks and uncertainties include, but are not limited to whether:
| ● | We can raise additional financing for working capital and product development; | |
| ● | We can identify Internet marketing approaches; | |
| ● | There is a deterioration in general or regional economic, market and political conditions; | |
| ● | Our accounting policies and methods will require management to make estimates about matters that are inherently uncertain; | |
| ● | There are adverse state or federal legislation or regulation that increase compliance costs; | |
| ● | We can efficiently manage our operations and effectively implement our strategies; | |
| ● | We can compete against our competitors, many of which have greater operational, financial and human resources; | |
| ● | Any of our competitors deliver customer satisfaction at a higher level than us; | |
| ● | We lose any of our qualified vendors, which would affect our ability to deliver products to us on a timely basis; | |
| ● | Any of our competitors deliver greater quality products at comparable prices than we do; and | |
| ● | We can accurately predict industry and market trends. |
| 17 |
Business Organization and Overview
We were incorporated in Nevada on August 14, 2006 as IVPSA Corporation (“IVP”). We were incorporated as a subsidiary of Eaton Laboratories, Inc., a Nevada corporation. Our one wholly owned subsidiary, Her Marketing Concepts, Inc. (“Her Marketing”), is a Nevada Corporation. We are an Internet marketing company headquartered in Las Vegas, Nevada. Her Marketing purchases various media for customer and lead generation and acts as a conduit for the implementation and management of our Media Investor Purchase Agreement described in Note 1 to our condensed consolidated financial statements for the nine months ended September 30, 2016.
Our primary business involves improving the sales performance of brands, products and services through our proprietary e-Commerce platform. Our unique methodology minimizes the cost of generating leads and then maximizes the conversion of those leads into customers. After the initial sale, we utilize a process for monetizing customers to the greatest extent possible through up sales, down sales and cross sales.
Seasonality
In the opinion of our management, the business areas in which we operate are subject to seasonal fluctuations during holidays and tax season. As such, past quarterly results are not indicative of future results and may be subject to seasonal fluctuations.
Results of Operations
As discussed in Note 3 (Discontinued Operations) to our consolidated financial statements for the three months ended September 30, 2016, we divested our three wholly owned subsidiaries, Owner Wiz Realty, Inc. (“OWR”), OwnerWiz Management, Inc. (“OWM”) and Leading Edge Financial, Inc. (“LEF”) in the second quarter of 2015. Prior to that, we had substantially curtailed the operations of those subsidiaries. For financial reporting purposes, the financial positions and operations of OWR, OWM and LEF are treated as discontinued operations for the three and nine months ended September 30, 2015 and are not included in the discussion of comparative results, below.
Discussion of three months ended September 30, 2016 and 2015
Product Sales
Product sales for the three months ended September 30, 2016 were $3,010,915 representing a 17.5% decrease from revenues of $3,650,152 for the three months ended September 30, 2015. These sales were derived primarily from the sale of human hair extensions and related hair care products under the brand “Her Imports”. These sales are made either online or at Her Import retail locations. The decrease was a result of significantly lower online sales due to our being unable to provide a financing option for our customers to purchase our products. The decrease was partially offset by increased sales in retail location, which is attributable to an expansion of retail locations.
Cost of Products Sold
Cost of products sold for the three months ended September 30, 2016 were $1,567,465 representing a 13.9% decrease from cost of products sold of $1,819,531 for the three months ended September 30, 2015. This decrease was the result of lower sales. Gross margin decreased to 47.9% for the three months ended September 30, 2016 from a gross margin of 50.2% for the three months ended September 30, 2015 since we a strategically decided to focus on improving product quality to enhance our brand, which resulted in higher product costs. We anticipate that this trend will continue in future quarters unless we can source equal quality product at a lower price. This resulted from higher costs of our products.
| 18 |
Operating Expenses
Operating expenses consist of royalty expense, selling expense and general and administrative expense. Total operating expenses for the three months ended September 30, 2016 was $1,542,386, representing a 7.7% or $128,636 decrease from $1,671,022 for the three months ended September 30, 2015. This decrease is primarily attributable to a decrease in selling expenses of $107,606 or 9.1% for the three months ended September 30, 2016 when compared to the same 2015 period. The decrease in selling expense was attributable to a decrease in advertising expense. Decreased Royalties also contributed to decreased Operating expense. Royalties for the three months ended September 30, 2016 were $289,125, including non-cash expense of $216,844 from the amortization of the intangible asset related to the issuance of stock in exchange for a reduction in the rate of royalties to be paid. This compares to Royalties for the three months ended September 30, 2015 of $346,829 which included non-cash expense of $81,677 from the amortization of the intangible. Partially offsetting the decreases in Operating expenses described above was an increase in general and administrative expenses of $36,674 from $137,723 for the three months ended September 30, 2015 to $174,397 for the comparable 2016 period. This increase was primarily due to increased professional fees resulting from legal fees spent to defend us against a lawsuit filed by a former contractor to Her Imports, LLC and fees related to lawsuits filed by us against competitors of Her for violation of the Her Hair trademark for which we have a non-exclusive license. Increased audit fees and other consulting expenses also contributed to increased professional fees was a rise in audit fees and other consulting expenses.
Income (loss) from operations
As a result of the foregoing, we have an operating loss of $98,937 for the three months ended September 30, 2016 compared to an operating income of $159,599 for the three months ended September 30, 2015.
Other income and expense
For the three months ended September 30, 2015, we recognized a gain of $10,375 on the settlement of debt. Also, for the three months ended September 30, 2016, other expenses of $338 consisted of interest expense compared to interest expense for the three months ended September 30, 2015, $2,254 related to two promissory notes.
Provision for income taxes
For the three months ended September 30, 2016, we booked an income tax benefit of $37,972 related to the carryback of losses compared to a tax provision $120,849 for the three months ended September 30, 2015. These provisions are based on estimated income for the entire year net of a loss carry forward which was fully utilized in 2015.
Net income (loss)
As a result of the foregoing, net loss for the three months ended September 30, 2016 was $61,302 compared to net income of $120,849 for the three months ended September 30, 2015.
Discussion of nine months ended September 30, 2016 and 2015
Product Sales
Product sales for the nine months ended September 30, 2016 were $10,610,039 representing an 7.7% increase from revenues of $9,852,941 for the nine months ended September 30, 2015. These sales were derived primarily from the sale of human hair extensions and related hair care products under the brand “Her Imports” and are made either on-line or at Her Import retail locations. The revenue increase was primarily attributable to an expansion of retail locations and our offering financing for product purchases during the first two quarters of 2016. Another contributing factor was the sale of accessory products sales that were not offered in 2015.
Cost of Products Sold
Cost of products sold for the nine months ended September 30, 2016 was $5,597,174 representing a 13.8% increase from cost of product sold of $4,918,944 for the nine months ended September 30, 2015. This resulted in a decrease in our gross margin by 2.9% from 50.1% for the nine months ended September 30, 2015 to 47.2% for the nine months ended September 30, 2016. This increase in cost of products sold was the result of higher costs of products in the second quarter of 2016 as we made a strategic decision to focus on improving the quality of our products as part of our brand enhancement initiative. We anticipate that this trend will continue in future quarters unless we can source equal quality product at a lower price.
| 19 |
Operating Expenses
Operating expenses consist of royalty expense, selling expense and general and administrative expense. Total operating expenses for the nine months ended September 30, 2016 was $5,177,795, representing a 37.1% increase from operating expenses of $3,775,321 for the nine months ended September 30, 2015. This increase was primarily attributable to an increase in selling expenses of $1,028,715 or 41.2% for the nine months ended September 30, 2016 when compared to the same 2015 period. The increase in selling expense was attributable to an increase in advertising expense in the first two quarters of the year since we continued to establish the Her Imports brand, increased Website development/hosting and increased expenses related to retail operations expansion. Also, contributing to the increase in operating expenses was an increase in general and administrative expenses of $298,683 from $340,076 for the nine months ended September 30, 2015 to $638,759 for the comparable 2016 period. This increase was primarily due to increased professional fees resulting from legal fees spent to defend us against a lawsuit filed by a former contractor to Her Imports, LLC and fees related to lawsuits filed by us against certain of our competitors for violation of the Her Imports trademark for which we have a non-exclusive license. Also, contributing to increased professional fees was a rise in audit fees and other consulting expense. Royalty expense increased by 8.0% from $941,040 for the nine months ended September 30, 2015 to $1,016,116 for the comparable 2016 period. This increase was consistent with the increase in sales described above calculated according to the terms of the Selling and Marketing Agreement with Her. Royalties for the nine months ended September 30, 2016 included non-cash expense of $762,087 from the amortization of the intangible asset related to the issuance of stock in exchange for a reduction in the rate of royalties to be paid. Royalties for the nine months ended September 30, 2015 included non-cash expense of $81,677 from the amortization of the intangible.
Income (loss) from operations
As a result of the foregoing, we had an operating loss of $164,931 for the nine months ended September 30, 2016 compared to income from operations of $1,158,676 for the nine months ended September 30, 2015.
Other income and expense
For the nine months ended September 30, 2015, we recognized a $1,414,804 gain from the sale of subsidiaries. Also, for the nine months ended September 30, 2015, we recognized a gain of $10,375 on the settlement of debt. Finally, during the nine months ended September 30, 2015 we had interest expense of $17,116. For the nine months ended September 30, 2016, we had interest income of $68 offset by interest expense of $842.
Provision for income taxes
For the nine months ended September 30, 2016, we booked an income tax benefit of $63,336 related to the carryback of losses compared to a tax provision $395,053 for the nine months ended September 30, 2015. These provisions are based on estimated income for the entire year, net of a loss carry forward which was fully utilized in 2015.
Loss from discontinued operations
Loss from discontinued operations for the nine months ended September 30, 2015 was $96,604. The table below reconciles the loss from discontinued operations.
| Nine Months Ended | ||||
| September 30, 2015 | ||||
| Revenues | $ | 60,955 | ||
| Cost of revenues | (5,568 | ) | ||
| Commission expenses | (15,464 | ) | ||
| Selling expense | (37,835 | ) | ||
| General and administrative expenses | (66,892 | ) | ||
| Interest expense | (31,800 | ) | ||
| Loss from discontinued operations | $ | (96,604 | ) | |
| 20 |
Net income (loss)
As a result of the foregoing, net loss for the nine months ended September 30, 2016 was $102,368 compared to net income of $2,075,083 for the nine months ended September 30, 2015.
Liquidity and Capital Resources
We had a working capital surplus of $2,271,220 and $1,621,854 at September 30, 2016 and December 31, 2015, respectively, representing a $649,336 increase in our working capital.
At September 30, 2016, we had $145,110 in cash and cash equivalents, receivables of $69,284 and total current assets of $3,256,156. Included in current assets are inventory and deposits on inventory of $2,578,775. At the same date, we had total current liabilities of $984,936, including accounts payable and accrued liabilities of $647,169, two promissory notes payable of $55,727 and income tax liability of $282,040. The sole source of cash is operating activities. Our primary use of cash is the purchase of inventory or deposits on inventory. We anticipate that inventory and deposits on inventory will continue to increase as our sales grow and as we open new retail operations subject to the occurrence of any material risks, trends and uncertainties stated above. We currently plan to fund our growth through earnings, however, we may also enter loans to fund operational growth. We continue to explore opportunities to exploit our proprietary eCommerce platform and our expertise in online marketing and selling. Should we execute on this strategic plan it is likely that we will significantly modify our relationship with Her Holdings described in Note 1 to our condensed consolidated financial statements for the three and nine months ended September 30, 2016, to be consistent with this plan.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Critical Accounting Policies and Estimates
Revenue Recognition: We recognize revenue from product sales and services once all of the following criteria for revenue recognition have been met: pervasive evidence that an agreement exists; the services have been rendered; the fee is fixed and determinable and not subject to refund or adjustment; and collection of the amount due is reasonably assured.
Recent Pronouncements
Our management has evaluated all the recently issued accounting pronouncements through the filing date of these condensed consolidated financial statements and does not believe that any of these pronouncements will have a material impact on our financial position and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
| 21 |
ITEM 4T. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in rules and forms adopted by the SEC, and that such information is accumulated and communicated to management, including the Chief Executive Officer, to allow timely decisions regarding required disclosures.
Management, with the participation of the Chief Executive Officer and Chief Financial Officer, who is also a member of our Board of Directors, have evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2016. Based on such evaluation, the Chief Executive Officer concluded that, as of September 30, 2016, our disclosure controls and procedures were not effective. Our disclosure controls and procedures were not effective at the reasonable assurance level due to the “material weaknesses” described below:
In light of the material weaknesses described below, we performed additional analysis and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, we believe that the consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standards) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected. Management has identified the following two material weaknesses which have caused management to conclude that, as of September 30, 2016, our disclosure controls and procedures were not effective at the reasonable assurance level:
1. We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act which is applicable to us for the quarter ending September 30, 2016. Management evaluated the impact of our failure to have adequate written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
2. We do not have a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures.
To address these material weaknesses, management performed additional analyses and other procedures to ensure that the condensed consolidated financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as defined in rules promulgated under the Exchange Act, is a process designed by, or under the supervision of, our Chief Executive Officer and affected by our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that:
| ● | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; | |
| ● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our Board of Directors; and | |
| ● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements |
| 22 |
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable, not absolute, assurance that the objectives of the control system are met and may not prevent or detect misstatements. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Further, over time control may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2016. In making its assessment, management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on its assessment, management has concluded that we had certain control deficiencies described below that constituted material weaknesses in our internal controls over financial reporting. As a result, our internal control over financial reporting was not effective as of September 30, 2016.
A “material weakness” is defined under SEC rules as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis by the company’s internal controls. As a result of management’s review of the investigation issues and results, and other internal reviews and evaluations that were completed after the end of fiscal year 2015 related to the preparation of management’s report on internal controls over financial reporting, management concluded that we had material weaknesses in our control environment and financial reporting process consisting of the following:
| ● | lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight of the establishment and monitoring of required internal controls and procedures; and | |
| ● | insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements. |
We do not believe the material weaknesses described above caused any meaningful or significant misreporting of our financial condition and results of operations for the three or nine months ended September 30, 2016. However, management believes that the lack of a functioning audit committee and the lack of a majority of outside directors on our board of directors results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our consolidated financial statements in future periods.
Management’s Plan to Remediate Material Weaknesses
Management is pursuing the implementation of corrective measures to address the material weaknesses described above. In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated, or plan to initiate, the following series of measures:
(a) We plan to appoint one or more outside directors to our board of directors who shall be appointed to an audit committee resulting in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls and procedures such as reviewing and approving estimates and assumptions made by management when funds are available to us. Additionally, we will create written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements.
(b) We believe the remediation measures described above will remediate the material weaknesses we have identified and strengthen our internal control over financial reporting. We are committed to continuing to improve our internal control processes and will continue to diligently and vigorously review our financial reporting controls and procedures. As we continue to evaluate and work to improve our internal control over financial reporting, we may determine to take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures described above.
| 23 |
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may adversely affect our business.
On or about September 5, 2015, in the United States District Court for the Eastern District of New York, we were named as a defendant in a civil action against Her Imports, LLC, Her Imports New York, LLC, Her Holding, Inc. by the plaintiff, a former independent contractor of Her Imports, LLC. The complaint’s primary allegation involves unpaid wages and overtime wages in violation of New York Labor Law. No specific damages are sought in the complaint. We answered the complaint and have denied any wrongdoing since we had no relationship with the contractor whatsoever. We believe that we have meritorious defenses and we will vigorously defend this litigation.
As a Smaller Reporting Company, we are not required to provide information otherwise required by this item; however, you may review risk factors contained in our Form 10-K for the fiscal year ending December 31, 2015.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Effective September 1, 2015, we issued 4,000,000 shares of restricted common stock valued at $2,200,000 to Her Holdings, Inc. in exchange for a reduction in the royalty to be paid to Her Holdings, Inc. from 10% of sales to 2.5%. This issuance was made pursuant to Section 4(2) of the Securities Act of 1933, as amended.
On October 13, 2016, the Company entered into a Software Maintenance with Leader Act Ltd HK, (“Leader”) a private Nevada corporation. Leader has developed a Customer Relations Management (“CRM”) software program that it previously licensed to the Company. Under the agreement, Leader agrees to service and maintain the software for a period of five years. EZJR purchased the maintenance agreement in exchange for 3,000,000 unregistered restricted common treasury shares. This issuance was made pursuant to Section 4(2) of the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
None.
| 24 |
| Exhibit Number | Ref | Description of Document | |||
| 31.1 | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||
| 32.1 | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. | ||||
| 101 | * | The following materials from this Quarterly Report on Form 10-Q for the quarter ending September 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): | |||
| (1) | Condensed Consolidated Balance Sheets at September 30, 2016 (Unaudited), and December 31, 2015. | ||||
| (2) | Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and September 30, 2015 (Unaudited). | ||||
| (3) | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and September 30, 2015 (Unaudited). | ||||
| (4) | Notes to the Condensed Consolidated Financial Statements. | ||||
* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
| 25 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: November 17, 2016 | By | /s/ Barry Hall |
| Name: | Barry Hall | |
| Title: | Executive Chairman and Chief Financial Officer | |
| (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) |
| 26 |