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, 2017
OR
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________________ to ________________
Commission File Number: 000-53810
HER IMPORTS
(Exact name of registrant as specified in its charter)
| Nevada | 30-0802599 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
| 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.
See definitions of “large accelerated filer,” “accelerated filer,” “Smaller reporting company,” and “emerging growth company” in Rule 12-b of the Exchange Act.
| Large accelerated filer | [ ] | Accelerated filer | [ ] | |
| Non-accelerated filer | [ ] | (Do not check if a smaller reporting company) | Smaller reporting company | [X] |
| Emerging growth company | [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of November 6, 2017, the registrant’s outstanding common stock consisted of 24,899,788 shares, $0.001 par value. Authorized – 70,000,000 common shares.
Table of Contents
Her Imports
Index to Form 10-Q
For the Quarterly Period Ended September 30, 2017
| 2 |
Her Imports
Condensed Consolidated Balance Sheets
| September 30, 2017 | December 31, 2016 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 183,965 | $ | 355,568 | ||||
| Receivables | 136,689 | 45,576 | ||||||
| Related party receivables | 43,752 | 26,612 | ||||||
| Inventories | 2,229,656 | 2,047,453 | ||||||
| Prepaid maintenance fees - current | 75,000 | 75,000 | ||||||
| Other prepaid expenses | 76,776 | 46,411 | ||||||
| Deposits | 108,316 | 32,950 | ||||||
| Total current assets | 2,854,154 | 2,629,570 | ||||||
| Property, equipment and software, net | 306,153 | 256,525 | ||||||
| Prepaid maintenance fees - non current | 228,125 | 284,375 | ||||||
| Other asset | 25,000 | - | ||||||
| Trademark | 8,200,000 | 8,200,000 | ||||||
| Total assets | $ | 11,613,432 | $ | 11,370,470 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 834,628 | $ | 728,425 | ||||
| Income tax liability | 292,864 | 127,651 | ||||||
| Notes payable | - | 43,805 | ||||||
| Total current liabilities | 1,127,492 | 899,881 | ||||||
| Total liabilities | 1,127,492 | 899,881 | ||||||
| Stockholders’ equity | ||||||||
| Callable $0.144 per share per year non-cumulative dividend liquidation preference of $2.00 per share, preferred stock, $0.001 par value, 5,000,000 shares authorized and outstanding as of September 30, 2017 and December 31, 2016, respectively | 5,000 | 5,000 | ||||||
| Common stock, $0.001 par value, 70,000,000 shares authorized and 24,899,788 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively | 24,900 | 24,900 | ||||||
| Additional paid-in capital | 26,630,497 | 26,630,497 | ||||||
| Accumulated deficit | (16,174,457 | ) | (16,189,808 | ) | ||||
| Total stockholders’ equity | 10,485,940 | 10,470,589 | ||||||
| Total liabilities and stockholders’ equity | $ | 11,613,432 | $ | 11,370,470 | ||||
See accompanying notes to these condensed consolidated financial statements.
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Her Imports
Condensed Consolidated Statements of Operations
(Unaudited)
| For the Three Months | For the Nine Months | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Product sales | $ | 3,668,040 | $ | 3,010,915 | $ | 12,652,837 | $ | 10,610,039 | ||||||||
| Cost of products sold | 1,996,633 | 1,567,465 | 6,889,965 | 5,597,174 | ||||||||||||
| Gross profit | 1,671,407 | 1,443,450 | 5,762,872 | 5,012,865 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Royalties | 5,286 | 289,125 | 11,180 | 1,016,116 | ||||||||||||
| Selling expense | 1,259,130 | 1,078,864 | 4,045,970 | 3,522,920 | ||||||||||||
| General and administrative expense | 364,122 | 174,397 | 974,081 | 638,759 | ||||||||||||
| Total operating expenses | 1,628,538 | 1,542,386 | 5,031,231 | 5,177,795 | ||||||||||||
| Income (loss) from operations | 42,869 | (98,936 | ) | 731,641 | (164,931 | ) | ||||||||||
| Other (expense) income | ||||||||||||||||
| Interest income | 1 | - | 70 | 68 | ||||||||||||
| Interest expense | (351 | ) | (337 | ) | (5,302 | ) | (842 | ) | ||||||||
| Loss on abandonment of fixed assets | (2,162 | ) | - | (2,162 | ) | - | ||||||||||
| Total other expense | (2,512 | ) | (337 | ) | (7,394 | ) | (774 | ) | ||||||||
| Income before benefit (provision) for income taxes | 40,356 | (99,273 | ) | 724,247 | (165,705 | ) | ||||||||||
| Benefit (provision) for income taxes | 76,760 | 37,972 | (168,896 | ) | 63,336 | |||||||||||
| Net income (loss) attributable to company | 117,116 | (61,301 | ) | 555,351 | (102,369 | ) | ||||||||||
| Preferred stock dividends | (180,000 | ) | - | (540,000 | ) | - | ||||||||||
| Net income (loss) to common stockholders | $ | (62,884 | ) | $ | (61,301 | ) | $ | 15,351 | $ | (102,369 | ) | |||||
| Net basic income per share attributable to common Stockholders: basic and diluted | $ | 0.00 | $ | (0.00 | ) | $ | 0.02 | $ | (0.01 | ) | ||||||
| Weighted average number of common shares outstanding: basic and diluted | 24,899,788 | 16,275,331 | 24,899,788 | 16,291,576 | ||||||||||||
See accompanying notes to these condensed consolidated financial statements.
| 4 |
Her Imports
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| For the Nine Month Ended | ||||||||
| September 30, | ||||||||
| 2017 | 2016 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net income (loss) attributable to Company | $ | 555,351 | $ | (102,368 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by (used by) operating activities: | ||||||||
| Depreciation and amortization | 92,439 | 835,266 | ||||||
| Loss on abandonment of fixed assets | 2,162 | |||||||
| Changes in operating assets and liabilities: | ||||||||
| Receivables | (91,113 | ) | (4,344 | ) | ||||
| Related party receivables | (17,140 | ) | (316,950 | ) | ||||
| Inventories | (182,203 | ) | (642,545 | ) | ||||
| Prepaid maintenance fees | 56,250 | 31,250 | ||||||
| Other prepaid expenses | (30,365 | ) | (5,226 | ) | ||||
| Deposits | (75,366 | ) | (150,618 | ) | ||||
| Accounts payable and accrued liabilities | 106,203 | 164,013 | ||||||
| Income tax liability | 165,213 | (63,336 | ) | |||||
| Net cash provided by (used by) operating activities | 581,431 | (254,858 | ) | |||||
| INVESTING ACTIVITIES | ||||||||
| Purchase of fixed assets | (144,229 | ) | (25,592 | ) | ||||
| Investment in subsidiary | (25,000 | ) | - | |||||
| Net cash used in investing activities | (169,229 | ) | (25,592 | ) | ||||
| FINANCING ACTIVITIES | ||||||||
| Repayment on notes payable | (43,805 | ) | (24,115 | ) | ||||
| Payment of preferred dividend | (540,000 | ) | - | |||||
| Net cash used in financing activities | (583,805 | ) | (24,115 | ) | ||||
| NET (DECREASE) INCREASE IN CASH | (171,603 | ) | (304,565 | ) | ||||
| CASH - BEGINNING OF PERIOD | 355,568 | 449,675 | ||||||
| CASH - END OF PERIOD | $ | 183,965 | $ | 145,110 | ||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Interest paid | $ | 5,539 | $ | 557 | ||||
| Income taxes paid | $ | 4,337 | $ | 9,855 | ||||
| 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 condensed consolidated financial statements.
| 5 |
Notes to the Condensed Consolidated Financial Statements
1. Description of the Company
Her Imports, (previously known as EZJR, Inc.), (“the Company” or “Her”), was incorporated on August 14, 2006 under the laws of the State of Nevada.
Corporate Structure and Business
HER is a retailer of Human Hair Extensions and related haircare and beauty products headquartered in Las Vegas, Nevada. The Company sells its products at consultation studios and on its Website, www.herimports.com. As of September 30, 2017, the Company operated 24 retail locations, all of which are in the U.S. These locations are primarily in “executive offices suites” such as Regus PLC, where furniture, administrative staff and security are provided. The Company then stocks the location with products and point-of-sale equipment. These locations are leased on a short-term basis (primarily one year or less). Three leases, including our corporate office, have leases longer than one year. This allows the Company to open and close its consultation studios with a minimal amount of time and expense. At the consultation studio, the customer is provided with a personal, one-on-one consultation. Additionally, the Company has one “super-store” in Greenbelt Maryland where we have several consultants as well as a waiting room.
The Company has one wholly owned subsidiary, Her Marketing Concepts, Inc. (“Her Marketing”), a Nevada Corporation. All employees of the Company are employed by Her Marketing, using a Professional Employer Organization otherwise known as a PEO. Also, on rare occasions, certain media purchases were made by Her Marketing; however, this practice has been discontinued.
Agreement with Cabello Real Ltd.
On November 28, 2016, the Company entered into an Asset Share Purchase & Business Agreement with Cabello Real Ltd. (“Cabello”), a private United Arab Emirates company to acquire the exclusive U.S. rights to the Her Imports trademark. In addition to these rights, the Company also purchased certain other assets owned by Cabello including customer lists and various digital content. In exchange for these rights, and other digital assets, the Company issued to Cabello 10,000,000 shares of non-voting, non-cumulative, callable preferred stock (subsequently revised to 5,000,000) with a dividend rate of $0.144 per share per annum and a liquidation preference of $2.00 per share. In addition, the Cabello received 7,500,000 shares of common stock. Both the preferred stock and common stock issued were unregistered. Additionally, the Company applied with the State of Nevada for the approval of the Certificate of Designations, Preferences, and Rights of Callable Non-cumulative Preferred Stock. The Certificate designated 5,000,000 as Callable Non-cumulative Preferred Stock at a par value of $.001 per share. Cabello is controlled by Mr. Jonathan Terry, who is the Company’s principal shareholder who is now actively involved in its daily operations.
On January 12, 2017, the Company changed its name from EZJR, Inc. to Her Imports.
Agreements with Her Imports, LLC, Her Holding, Inc., and termination of the Agreement
On October 1, 2014, the Company entered into a Marketing and Selling Agreement (the “Agreement”) with Her Imports, LLC (“LLC”), a retailer of human hair extensions and related products. Under the agreement, the Company was to custom design LLC’s ecommerce Websites and generates customer leads through email marketing campaigns, online advertising and social media and various affiliate marketing campaigns. Finally, the Company was to sell LLC’s products as well as other products to these customers.
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In addition to the Company selling the LLC’s products online, LLC’s products were sold at independent retail store locations. As part of the agreement with Her, the Company reimbursed LLC for the expenses of these store locations, employee costs, connectivity expenses and certain other expenses as agreed upon. All retail store sales were made by the Company and are processed through a Point-of-Sale (POS) system implemented by the Company. Additionally, the Company reimbursed LLC for specific customer service costs, warehousing and fulfillment expenses. Finally, the Company paid LLC a 10% royalty on net sales. In return, LLC provided 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 LLC to be offset against any royalty payments. On March 7, 2015, the Agreement was transferred to Her Holding, Inc. (“Holding”). As part of the assignment LLC transferred all rights, obligations and interest in the Agreement. Effective September 1, 2015, the Company issued 2,000,000 shares of restricted common stock valued at $2,200,000 to 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 previously were paid by LLC.
On November 28, 2016, the Agreement with Holding was terminated and simultaneously, the Company entered into an Asset Share Purchase & Business Agreement with Cabello described above. Additionally, the Company hired certain LLC and Holding employees and assumed three location leases in the name of LLC. At the time of the termination of the Agreement, the Company wrote off $977,066 in unamortized prepaid royalties and $362,448 of advances to Holding that were forgiven in return for termination of the Agreement. This resulted in a non-cash loss on termination of the Agreement of $1,339,514.
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 software program (“Platform”) 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 agreed to service and maintain the software for a period of two years. For the Platform and service and maintenance, the Company issued Leader 5,000,000 shares of common stock valued at $0.10 per share for a total of $500,000. 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 based on the fair market value of a service maintenance contract provided to other Third Parties. This allocation was booked as a prepaid at the date of the acquisition and was amortized on a straight-line basis over the two-year term of the agreement. This agreement expired in May 2016. On October 13, 2016, the Company entered into a five-year software maintenance agreement on the Platform in exchange for 1,500,000 shares of the Company’s common stock valued at $375,000 based on the fair market value of a service maintenance contract provided to other Third Parties which approximates the fair market value of the shares at the time they were issued.
Leader is controlled by Mr. Aymen Boughanmi who until recently acted together with Mr. Jonathan Terry who together at that time owned 80.8% of the company. Currently, leader owns on record 4,972,951 shares of 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 MIP, 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 5,000,000 common shares of the Company’s stock at the fixed price of $0.10 per share. Once Leader has acquired the 5,000,000 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 500,000 shares of the Company’s common stock at $0.10 per share. Since September 30, 2014, to the date of these financial statements 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 and the selling of human hair extensions and related products. On July 31, 2017, the agreement was assigned by Leader to Cabello.
| 7 |
Agreement with Cabello Real RDE
On April 20, 2017, the Company entered into a Marketing and Selling Agreement with Cabello Real FDE, owner of a hair care product line called OSIworks, whereby the Company can exclusively purchase, market and sell OSIworks’ products in the United States. Under the agreement the Company will pay Cabello a royalty of 2% of net sales. Cabello Real FDE is also controlled by Jonathan Terry, the Company’s principal shareholder. During the three and nine months ended September 30, 2017 the Company recognized royalty expense of $5,286 and $11,180, respectively related to the agreement.
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.
Basis of Presentation of the Condensed Consolidated Financial Statements
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with the requirements of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the condensed consolidated financial statements of the Company as of September 30, 2017 and December 31, 2016, and for the three and nine months ended September 30, 2017 and 2016.
On January 31, 2017, the Company effected a 1-for-2 reverse stock split effective January 31, 2017. The par value was not adjusted as a result of the reverse stock split. All references to numbers of shares of our common stock and per-share information in the accompanying financial statements and in these notes to the condensed consolidated financial statements have been adjusted retroactively to reflect the split.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company evaluates its estimates on an ongoing basis, including those related to the fair values of stock based awards, income taxes and contingent liabilities, among others. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates and such differences could be material to the consolidated financial position and results of operations.
Cash
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, 2017, and December 31, 2016, the Company’s cash consisted of cash on deposit with banks.
Concentration of Credit Risk
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.
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Receivables
Receivables 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 with the exception of certain holdback, 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, 2017 and December 31, 2016. The Company has an allowance for doubtful accounts based on chargeback claims at the balance sheet date.
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, 2017 and December 31, 2016.
The Company believes the carrying amounts of cash and cash equivalents, accounts receivable, other current assets, accounts payable, and other accrued liabilities are a reasonable approximation of the fair value of those financial instruments because of the nature of the underlying transactions and the short-term maturities involved.
Inventories
Inventory is booked at cost or net realizable value 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 twelve 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
| September 30, 2017 | December 31, 2016 | |||||||
| Deposits on Products | $ | 70,973 | $ | - | ||||
| Security Deposits | 37,343 | 32,950 | ||||||
| Total | $ | 108,316 | $ | 32,950 | ||||
Intangibles
Intangible assets are comprised primarily of trademarks that represent the Company’s exclusive ownership of the HER trademarks in the US and are inclusive all related social media sites and domain names in the US., all used in connection with (consisting of the name, Her Imports and the Her Imports Logo) the manufacture, sale and distribution of human hair extensions and related beauty products. In accordance with Financial Accounting Standards Board Accounting Standard Codification 350 (FASB ASC 350), intangible assets with indefinite lives are not amortized but instead are measured for impairment at least annually, or when events indicate that an impairment exists through the use of discounted cash flow models. The Company calculates impairment as the excess of the carrying value of its indefinite-lived assets over their estimated fair value. If the carrying value exceeds the estimate of fair value a write-down is recorded. For the three and nine months ended September 30, 2017 and there were no impairments recorded.
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Impairment Assessments of Intangibles
As described in Note 1, on November 28, 2016, the Company entered into an Asset Share Purchase & Business Agreement with Cabello to acquire the exclusive U.S. rights to the Her Imports trademark as well as other assets. The value of the trademark at the time of its purchase was estimated to be $8,200,000. 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 the trademark through September 30, 2017.
Property, Equipment and Software, net
Property equipment and software 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 improvements | remaining life of the lease |
On May 28, 2014, the Company purchased from Leader, for 5,000,000 shares of common stock, an eCommerce software program totaling $350,000. The software is amortized over five years. Amortization expense for the both the three and nine months ended September 30, 2017 and 2016 was $17,500 and $52,500, respectively. 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 months ended September 30, 2017 and 2016.
Revenue Recognition
The Company, through the Her Imports retail locations and its eCommerce Website, www.herimports.com, sells a variety of hair extensions and related products.
Revenue is recognized at the “point of sale” in the stores. Customers pay for the products using either cash, a debit card or a credit card. All sales are final. In the case of cash sales at the store, the store manager makes a nightly deposit of the cash. For credit card and debit sales, the Company recognizes the sale when the card is charged and approved. Sales tax collected from customers is excluded from revenue and is included in accrued liabilities on our Consolidated Balance Sheets.
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Product purchases on the Company’s Website are paid for using either debit cards, credit cards, or PayPal Revenue for online product sales are recognized upon shipment of the product. Also included in revenue is shipping revenue from our e-commerce customers. Sales taxes collected from retail customers are excluded from reported revenues.
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.
Reverse Stock Split
All references to numbers of shares of our common stock and per-share information in the accompanying financial statements have been adjusted retroactively to reflect the Company’s 1-for- 2 reverse stock split effected on January 31, 2017. The par value was not adjusted because of the reverse stock split.
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. There was no stock based compensation for the three and nine months ended September 30, 2017 and 2016.
Recent Accounting Pronouncements
Except as noted below, the Company has considered all recent accounting pronouncements and has concluded that there are no recent accounting pronouncements that may have a material impact on its Consolidated Financial Statements, based on current information.
In February 2016, the FASB issued ASU No. 2016-02, Leases. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. We are still assessing the impact of this ASU on our Consolidated Financial Statements, but we expect that it will result in a substantial increase in our long-term assets and liabilities. We will adopt the ASU beginning in the first quarter of fiscal 2019.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. We will adopt the ASU beginning in the fourth quarter of 2017
In January 2017, the FASB issued ASU No. 217-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. The amendments simplify the subsequent measurement of goodwill and eliminate the two-step goodwill impairment test. The ASU is effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not anticipate any material impact on the Consolidated Financial Statements.
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). The new revenue recognition standard (“ASC 606”) provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This Topic defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The two permitted transition methods under the new standard are the full retrospective method or the modified retrospective method. The new standard is effective for annual reporting periods beginning after December 15, 2017, and accordingly we are required to adopt this standard effective January 1, 2018, the beginning of our fiscal year. We have reviewed ASC 606 and have initially determined that it will not have any material effect on our revenue recognition. However, we will continue to review ASC 606 and evaluate the potential impact the adoption of this ASUs may have on our financial statements and related disclosures. We expect this review to be completed by the end of 2017.
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3. Property, Equipment and Software
Property and equipment consisted of the following:
| September 30, 2017 | December 31, 2016 | |||||||
| Software | $ | 463,311 | $ | 359,315 | ||||
| Computers and equipment | 99,592 | 67,878 | ||||||
| Furniture | 30,391 | 28,349 | ||||||
| Leasehold improvements | 20,833 | 19,476 | ||||||
| subtotal | 614,127 | 475,018 | ||||||
| Accumulated depreciation and amortization | (307,974 | ) | (218,493 | ) | ||||
| Property, equipment and software, net | $ | 306,153 | $ | 256,525 | ||||
Depreciation and amortization expense on property, plant, equipment and software for the three and nine months ended September 30, 2017 was $35,334 and $92,440, respectively. Depreciation and amortization expense on property, plant, equipment and software for the three and nine months ended September 30, 2016 was $24,987 and $73,179, respectively.
4. Sales tax payable
The Company is delinquent in filing sales tax returns for certain states (including the remittance of taxes), for which the Company has transacted business. The Company has recorded tax obligations plus potential interest and penalties estimated to be approximately $126,355, computed through September 30, 2017, which are included in accounts payable and accrued liabilities on the balance sheet. The Company is in the process of becoming fully compliant.
5. Related Party Transactions
Related Party Accounts Receivable and Payable
As discussed in Note 1, on September 1, 2015, the Company issued 2,000,000 shares of common stock to Her Holding resulting in Her Holding having a 12.2% interest in the Company. During the time of the agreement the Company made payments on the part of Her Holding that were partially offset by royalties earned by Her Holding under the Marketing and Selling Agreement with Her Holding also described in Note 1. On November 28, 2016, the Company forgave $362,447 of an advance made to Her Holding as part of the termination of the agreement with Her Holding.
At September 30, 2017 and December 31, 2016, the Company had a receivable from Cabello, its principal stockholder, of $43,752 and $26,612 that resulted from payments made by the Company on behalf of Cabello. The Company has the right to offset this receivable against any future dividend payments owed Cabello related to the preferred stock described in Note 1. As described in Note 11, subsequent to September 30, 2017, two dividends of $60,000 each were declared and paid. For further information on related party transactions, see Note 1.
Royalty Expense
During the three months and nine month ended September 30, 2017, royalty expense was $5,286 and $11,180, respectively, related to royalties on products sold under the brand name OSIworks. 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, 2016, $216,844 and $762,087, respectively, of royalty expense was the result of the amortization of the intangible asset described in Note 1, above.
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6. Commitments and Contingencies
Leases
At September 30, 2017, the Company had leased 26 different facilities including its corporate headquarters, active retail locations, storage facility and offices for customer service. Future lease obligation for these facilities are as follows:
.
| Year | Amount | |||
| 2017 (remaining three months) | $ | 83,295 | ||
| 2018 | 126,250 | |||
| 2019 | 37,800 | |||
| 2020 | 12,600 | |||
| Total | $ | 259,945 | ||
Rent expense for the three months ended September 30, 2017 and 2016 was $150,167 and $102,274, respectively. Rent expense for the nine months ended September 30, 2017 and 2016 was $475,674 and $313,351, respectively.
Concentrations
As of September 30, 2017, the Company had only ten qualified vendors that provide it with its hair extension products. The Company sources its hair care products from one vendor. There are numerous suppliers of styling tools as this is a commodity product. During the three months ended September 30, 2017, the Company purchased hair products from four different vendors, however, three vendors accounted for approximately 96.6% of all hair products purchased. During the nine months ended September 30, 2017, the Company purchased hair products from six different vendors, however, two vendors accounted for approximately 92.1% of all hair products purchased.
Legal Proceedings
From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Company’s business. On or about September 5, 2015, the Company received a summons naming it in a civil action against Her Imports, LLC, Her Imports New York, LLC, Her Holding, Inc. and EZJR, Inc. (now Her Imports) from a former independent contractor of Her Imports, LLC. The complaint claims unpaid wages and overtime wages in violation of New York Labor Law, among other things. No specific damages are mentioned in the complaint. The Company subsequently answered the complaint and denied any wrongdoing as EZJR had no relationship with the contractor, whatsoever. At this point in the litigation it is impracticable to foresee the outcome, however, the Company believes it has meritorious defense and is vigorously defending this litigation.
7. Promissory Notes
On September 15, 2016, the Company purchased 150,000 common shares of Her Imports from Admanxoffers.com by issuing a promissory note for $60,000 payable monthly in equal installments of $5,000 until fully paid on October 1, 2017. 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, 2017 the note was fully paid. At December 31, 2016, the remaining outstanding balance on the note was $43,805. For the three months and nine month ended September 30, 2017, interest expense on the note was $161 and $1,195, respectively.
8. Stockholders’ Equity
On January 31, 2017, the Company effected a 1-for-2 reverse stock split effective January 31, 2017. The par value was not adjusted as a result of the reverse stock split. All references to numbers of shares of our common stock and per-share information in the accompanying financial statements and in these notes to the condensed consolidated financial statements have been adjusted retroactively to reflect the split.
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On January 12, 2017, the Company entered into a Business Purchase Agreement with EnzymeBioSystems, Inc. (“EnzymeBio”), a Nevada corporation, whereby the Company entered into an agreement to purchase 100% ownership of EnzymeBio’s wholly owned subsidiary, Share Acquisition Corp. (“SAC”), a Nevada corporation in exchange for approximately 55,000 shares of the Company’s common stock and $25,000 cash. On February 28, 2017, EnzymeBio agreed to spin-off SAC as a dividend. Pursuant to the Business Purchase Agreement and Nevada Revised Stature 92A.180 (Merger of a subsidiary into parent or parent into subsidiary), SAC was to be acquired and merged into the Company. Restricted common shares of the Company were to be exchanged on a pro-rata one-for-one ownership basis. After the exchange took place, SAC would be collapsed into the Company and subsequently dissolved with the Nevada Secretary of State. The Company agreed to acquire SAC for the sole purpose to increase its shareholder base. As of the date of these financial statements, the $25,000 had been paid, however, the share exchange did not take place and the agreement was not consummated. The Company has now been informed by its legal counsel that this transaction cannot be concluded under current Securities Laws. The Company has informed EnzymeBio of this and has requested that the $25,000 payment be returned. As a result, the $25,000 payment is recorded under Other Asset on the balance sheet.
As described in Note 1, on November 28, 2016, the Company entered into an Asset Share Purchase & Business Agreement with Cabello to acquire the exclusive U.S. rights to the Her Imports trademark. In exchange for these rights, and other digital assets, the Company issued to Cabello 10,000,000 shares of unregistered non-voting, non-cumulative, callable preferred stock (subsequently revised to 5,000,000 shares) and 7,500,000 unregistered common stock with a combined value of $8,200,000. All shares of Callable Preferred Stock rank superior to all the Company’s preferred stock and common stock currently outstanding and hereafter issued, as to distributions of assets upon liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary (with the exception of a merger), including the payment of dividends. The callable preferred stock is subject to a monthly dividend payment equal to a rate of $0.144 per share of preferred stock per annum. The declaration and payment of the dividend on a monthly basis is subject to the approval of the Company’s Board of Directors. Such dividend is non-cumulative should the Company not pay the dividend. The Corporation has a right of first refusal to purchase the callable preferred stock, should the shareholder decide to sell all or part of their callable preferred stock. The callable preferred stock has no voting rights. Through September 30, 2017, the Board of Directors has declared and approved, preferred stock dividends of $540,000 ($60,000 each month) to Cabello related to the 5,000,000 shares of callable, non-voting, non-cumulative preferred stock. Because the dividends on the preferred stock are non-cumulative and as this discretion of the Company, these preferred shares are considered to be equity.
At September 30, 2017 and December 31, 2016, the Company had 5,000,000 shares of preferred stock authorized and outstanding and 70,000,000 shares of common stock authorized and 24,899,788 issued and outstanding.
As described in Note 7, above, on September 15, 2016 the Company purchased and retired 150,000 shares of the Company’s common stock from Admax for a promissory note in the amount of $60,000. Subsequently, on November 25, 2016, the Company purchased and retired an additional 250,000 of its common stock from Admax for cash in the amount of $25,000.
As described in Note 1, on October 13, 2016, the Company entered into a five-year maintenance agreement on its eCommerce platform with Leader in exchange for 1,500,000 shares of the Company’s common stock valued at $375,000 based on the fair market value of a service maintenance contract provided to other Third Parties which approximates the fair value of the common stock at the time it was issued.
9. Stock Based Compensation
Changes in the Company’s outstanding stock options during the nine months ended September 30, 2017 were as follows:
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| Weighted | ||||||||
| Number of | Average | |||||||
| Options | Price | |||||||
| Outstanding at December 31, 2016 | - | $ | - | |||||
| Granted | 300,000 | 1.78 | ||||||
| Exercised | ||||||||
| Forfeited of expired | ||||||||
| Outstanding at September 30, 2017 | 300,000 | $ | 1.78 | |||||
| Exercisable at September 30, 2017 | - | $ | - | |||||
The weighted average remaining contractual term and aggregate intrinsic value of outstanding options as of September 31, 2017 was 4.76 years and $518,130, respectively.
10. 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 23.1% was used to calculate the provision for taxes based on income for the nine months ended June 30, 2017 and 38.25% for the nine months September 30, 2016. The reason for the decrease in the effective tax rate in 2017 is a permanent book versus tax difference related to the amortization of the trademark which is deductible for tax purposes but is not amortized for financial statement purposes. For financial reporting purposes, the provision for income taxes is based on pre-tax income of $724,247 for the nine months ended September 30, 2017 and a pre-tax loss of $99,273 for the nine months ended September 30, 2016, respectively. The provision for income taxes for the three and nine months ended September 30, 2017 and 2016 consisted of the following:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| U.S. Federal | $ | 78,811 | $ | 33,008 | $ | (146,947 | ) | $ | 55,041 | |||||||
| U.S. State | (2,051 | ) | 4,964 | (21,949 | ) | 8,295 | ||||||||||
| Total | 76,760 | 37,972 | (168,896 | ) | 63,336 | |||||||||||
| Deferred | - | - | - | - | ||||||||||||
| Total benefit (provision) for income taxes | $ | 76,760 | $ | 37,972 | $ | (168,896 | ) | $ | 63,336 | |||||||
11. Subsequent Events
On October 2, 2017, by Unanimous Written Consent, the Board of Directors approved a $60,000 dividend related to 5,000,000 shares of Callable Preferred Stock owned by Cabello Real Ltd., of which $20,000 was offset against amounts owed by Cabello to the Company. The dividend of was paid on October 2, 2017.
On November 1, 2017, by Unanimous Written Consent, the Board of Directors approved a $60,000 dividend related to 5,000,000 shares of Callable Preferred Stock owned by Cabello Real Ltd. The dividend was paid on November 6, 2017.
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Her Imports 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 report contains forward-looking statements including our liquidity, anticipated capital asset requirements and anticipated growth and plans for funding our operations. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods.
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include a deterioration in general or regional economic, market and political conditions, failure to raise capital, ineffective marketing, unanticipated federal legislation or regulation that increases our cost of compliance, failure to implement our business plan and competition.
Any forward-looking statement made by us speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
The following discussion and analysis compares our results of operations for the three and nine months ended September 30, 2017 and September 30, 2016. 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, 2016 filed with the Securities and Exchange Commission on April 17, 2017.
Business Organization and Overview
We are a retailer of Human Hair Extension and related haircare and beauty products headquartered in Las Vegas, Nevada. We sell our products at consultation studios throughout the U.S. and on our Website at www.herimports.com. Additionally, by way of our proprietary eCommerce platform and strategic leveraging of social media buys, we convert prospects into customers while developing long-term personal relationships and loyal customers. Our consultation studios are primarily leased on a short-term basis (one year or less). This allows the Company to open and close locations with a minimal amount of time and expense. At these consultation studios, the customer is provided with a personal, one-on-one consultation. Additionally, the Company has one “super-store” in Greenbelt Maryland where we have a number of consultants as well as a waiting room. Finally, the Company operated three mall kiosks, on a test basis, where we displayed and sell a limited amount of hair extensions but also hair-care and styling products. These kiosks exposed foot traffic to the Her Imports brand. Where necessary, the customers were referred to a consultation studio where a confidential and personal, one-on-one consultation is desired. These kiosks were closed during the quarter ending September 30, 2017.
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Seasonality
In the opinion of our management, the business areas in which we operate are subject to seasonal fluctuations during holidays and personal income tax filing season. We believe our quarterly revenues are highest in the late Winter and Spring when our customers receive income tax refunds. As such, past quarterly results are not indicative of future results and may be subject to seasonal fluctuations.
Results of Operations
Discussion of three months ended September 30, 2017 and 2016
Product Sales
Product sales for the three months ended September 30, 2017 were $3,668,040 representing a 21.8% increase from revenues of $3,010,915 for the three months ended September 30, 2016. These sales were derived primarily from the sale of human hair extensions and related hair care products under the brands “Her Imports” or “OSIworks.” These sales were made either online or at Her Imports’ consultation studios. Consultation studio sales decreased by 10.0% to $2,049,358 for the three months ended September 30, 2017 when compared to $2,277,094 for the three months ended September 30, 2016. The reason for the decrease is that we closed a number of studios during the quarter and placed a greater emphasis on online sales. This decrease was offset by an increase in online sales. Online sales increased by 120.6% to $1,618,682 for the three months ended September 30, 2017 from $733,821 for the three months ended September 30, 2016. This continued a trend that began in the second quarter of this year as we moved away from retail expansion to an emphasis on online sales and a launch of a new eCommerce Website as well as a sales promotion that was implemented with new marketing techniques utilizing our customer database.
Cost of Products Sold, Gross Profit and Gross Margins
Cost of products sold for the three months ended September 30, 2017 were $1,996,633 representing a 27.4% increase from cost of products sold of $1,567,465 for the three months ended September 30, 2016. Accompanying this increase was a decrease in gross margins to 45.6% for the three months ended September 30, 2017 from a gross margin of 47.9% for the three months ended September 30, 2016. As a result, gross profit increase to $1,671,407 or 15.8% from gross profit of $1,443,450 for the three months ended September 30, 2017.
Operating Expenses
Operating expenses consist of royalty expense, selling expense and general and administrative expense and increased by 5.6% when comparing the three months ended September 30, 2017 to the same period for 2016. Total operating expenses for the three months ended September 30, 2017 were $1,628,538, compared to $1,542,386 for the three months ended September 30, 2016. Royalty expense decrease by $283,839 because royalties are no longer paid on product sales, with the exception of OSIworks, due to the termination of the royalty agreement. This decrease was offset by increases in both selling expense and general and administrative expense. Selling expense for the three months ended September 30, 2017 increased $180,266 or 16.7% for the three months ended September 30, 2017 when compared to the same 2016 period. The increase in selling expense was primarily attributable to an increase in consultation studio operating expenses due to the addition of new locations and kiosks and was offset by a decrease in advertising and Web development expense. There were 35 consultation studios open at some time during the three months ended September 30, 2017 compared to 22 consultation studios open in the same period for 2016. General and administrative expenses for the three months ended increased by $189,725 or 108.8% for the three months ended September 30, 2017 when compared to the same period last year. This increase was primarily due to increased professional fees, investor relations expense, customer service expense, Board of Director expense and travel expense.
Income (loss) from operations
The above resulted in income from operations of $42,869 for the three months ended September 30, 2017 compared to a loss from operations of $98,936 for the three months ended September 30, 2016.
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Other income and expense
For the three months ended September 30, 2017, other expense of $2,512 consisted of interest expense of $351, interest income of $1, and a loss on abandonment of fixed assets of $2,162 related to the closing of three mall kiosks. This compares to other expense of $337 consisting of interest expense for the three months ended September 30, 2016.
Provision for income taxes
For the three months ended September 30, 2017, the tax for tax benefit was $76,760 compared to a tax benefit of $37,972 for the three months ended September 30, 2016. These provisions are based on estimated income for the entire year. An approximate estimated blended tax rate of 23.1% was used to calculate the provision for taxes based on income for 2017 and was used 38.2% for 2016. The reason for the decrease in the effective tax rate in 2017 is a permanent book versus tax difference related to the amortization of the trademark which is deductible for tax purposes but is not amortized and expensed for financial statement purposes.
Net income (loss) attributable to company
As a result of the above, net income attributable to company for the three months ended September 30, 2017 was $117,116 compared to net loss attributable to company of $61,301 for the three months ended September 30, 2016.
Results of Operations
Discussion of nine months ended September 30, 2017 and 2016
Product Sales
Product sales for the nine months ended September 30, 2017 were $12,652,837 representing a 19.3% increase from revenues of $10,610,039 for the nine months ended September 30, 2016. These sales were derived primarily from the sale of human hair extensions and related hair care products under the brands “Her Imports” or “OSIworks.” These sales are made either online or at Her Imports’ consultation studios. Consultation studio sales increased by 6.1% to $8,470,835 for the nine months ended September 30, 2017 when compared to $7,988,580 for the nine months ended September 30, 2016. The reason for the increase was new consultation studios open in December 2016 the first quarter of 2017. There were 36 consultation studios open at some time during the nine months ended September 30, 2017 compared to 22 consultation studios open in the same period for 2016. Online sales increased by 59.9% to $4,172,063 for the nine months ended September 30, 2017 from $2,609,270 for the nine months ended September 30, 2016. The primary reason for the increase was the launch of a new eCommerce Website, sales promotions offered during the third quarter of 2017 and an emphasis on monetizing our customer data base that we have focused on building since January 2016. Wholesale sales decreased by $4,267 when comparing the nine months ended September 30, 2017 to the nine months ended September 30, 2016. All wholesale sales occurred during the first quarter of both 2017 and 2016
Cost of Products Sold
Cost of products sold for the nine months ended September 30, 2017 were $6,889,965, representing a 23.1% increase from cost of products sold of $5,597,174 for the nine months ended September 30, 2016. This increase was the result of higher sales as well as higher product costs. Gross margin decreased to 45.5% for the nine months ended September 30, 2017 from a gross margin of 47.2% for the nine months ended September 30, 2016.
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, 2017 were $5,031,231, representing a 2.8% or $146,564 decrease from $5,177,795 for the nine months ended September 30, 2016. This decrease is primarily attributable to a decrease in royalty expense of $1,004,936 due to the fact that we no longer pay royalties on our product sales, with the exception of OSIworks, due to the termination of the royalty agreement with Her Holding Inc. This decrease was partially offset by an increase in both selling expense and general and administrative expense. Selling expense for the nine months ended September 30, 2017 increased $523,050 or 14.8% when compared to the same period in 2016. The increase in selling expense was attributable to an increase in store operating expenses due to the addition of new consultation studios and kiosks, and travel expense related to the opening of new locations and was offset by a decrease in advertising expense. There were 36 consultation studios and kiosks open at some time during the nine months ended September 30, 2017 compared to 22 consultation studios open at some time in the same period for 2016. The decrease in advertising expense resulted from a move away from traditional media advertising into online advertising such as FacebookTM and GoogleTM. General and administrative expenses for the nine months ended increased $335,322 or 52.5% for the nine months ended September 30, 2017 when compared to the same period last year. Salaries and consulting fees, customer service expense, Board of Director and shareholder expense, investor relation expense, audit fees and other consulting expenses contributed to increased general and administrative expense.
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Income (Loss) from Operations
The above resulted in income from operations of $731,641 for the nine months ended September 30, 2017 compared to a loss from operations of $164,931for the nine months ended September 30, 2016.
Other Income and Expense
For the nine months ended September 30, 2017, other expense of $7,394 consisted of interest expense of $5,302, interest income of $70, and a loss on abandonment of fixed assets of $2,162 related to the closing of three mall kiosks. This compares to other expense of $774 consisting of interest expense of $842 and interest income of $68 for the nine months ended September 30, 2016.
Benefit (Provision) for Income Taxes
For the nine months ended September 30, 2017, the provision for income tax was $168,896 compared to a tax benefit of $63,336 for the nine months ended September 30, 2016. These provisions are based on estimated income for the entire year. An approximate estimated blended tax rate of 23.1% was used to for the calculation for 2017 and 38.25% for the calculation for 2016. The reason for the decrease in the effective tax rate in 2017 is a permanent book versus tax difference related to the amortization of the trademark, which is deductible for tax purposes but is not amortized and expensed for financial statement purposes.
Net Income (Loss) Attributable to Company
As a result of the above, net income attributable to company, for the nine months ended September 30, 2017, was $555,351 compared to net loss attributable to company of $102,369 for the nine months ended September 30, 2016.
Liquidity and Capital Resources
We had a working capital surplus of $1,726,662 and $1,729,689 at September 30, 2017 and December 31, 2016, respectively, representing a $3,027 increase in our working capital. As of November 7, we had $104,554 in cash.
Our primary use of cash is the purchase of inventory and the payment of dividends on outstanding callable non-cumulative preferred stock. We anticipate that inventory will continue to increase as our sales grow, as we add additional SKU’s to our product line and when we open new retail operations, subject to the occurrence of any material risks, trends and uncertainties stated above. We currently plan to fund our growth through earnings, however, we are currently negotiating with various financial institutions to obtain a credit facility related to the purchase of inventory. Additionally, it is likely that during the coming year, we will raise additional working capital through the sale of equity in order to fund our anticipated growth. We believe we have sufficient working capital to pay our expenses for the next twelve months and anticipate paying monthly dividends of $60,000 on the preferred stock until such time that we call the preferred stock.
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the nine months ended September 30, 2017 totaled $581,431 and resulted primarily from net income attributable to company of $555,351, offset by a net change in operating assets and liabilities of ($68,521). The most significant change in operating assets and liabilities were increases of $182,203 in inventories, $75,366 in deposits, $91,133 in receivables, $106,203 in accounts payable and accrued liabilities and $165,213 in income tax liability. Non-cash items were $92,439 of depreciation and amortization and $2,162 of loss on abandonment of fixed assets.
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Net cash used in operating activities during the period ending September 30, 2016 totaled $254,858 and resulted from a net loss attributable to company of $102,368 and a net change in operating assets and liabilities of ($987,756), both offset by non-cash items of $835,266. The most significant changes in operating assets and liabilities were increases of $642,545 in inventories, $316,950 in related party receivables and $164,013 of accounts payable and accrued liabilities.
Net Cash Used in Investing Activities
Net cash used in investing activities during the nine months ended September 30, 2017 totaled $169,229, including $110,000 for the development of a new eCommerce Website, $34,229 for the purchase of retail location equipment and an investment in subsidiary of $25,000.
Net used in investing activities during the nine-months ended September 30, 2016 totaled $25,592, from purchases of fixed assets.
Net Cash Used in Financing Activities
Net cash used in financing activities during the nine months ended September 30, 2017 totaled $583,805 resulting from payments of preferred dividends of $540,000 and repayments on notes payable of $43,805.
Net cash used in financing activities during the period ended September 30, 2016 was $24,115, resulted from repayments on notes payable.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Related Party Transactions
For information on related party transactions and their financial impact, see Note 5 to the Unaudited Consolidated Financial Statements.
Critical Accounting Policies and Estimates
In response to the SEC’s financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, the Company has selected its most subjective accounting estimation processes for purposes of explaining the methodology used in calculating the estimate, in addition to the inherent uncertainties pertaining to the estimate and the possible effects on the Company’s financial condition. These estimates involve certain assumptions that if incorrect could create a material adverse impact on the Company’s results of operations and financial condition. There were no material changes to our principal accounting estimates during the period covered by this report.
Revenue Recognition: Revenue is recognized at the “point of sale” in the stores. Customers pay for the products using either cash, a debit card or a credit card. In the case of cash sales at the store, the store manager makes a nightly deposit of the cash. For cash sales, we recognize the sale when the deposit is recorded into our account by the bank. For credit card and debit sales, we recognize the sale when the card is charged and approved. Allowances for sales returns are recorded as a reduction of net sales in the periods in which the related sales are recognized. Sales tax collected from customers is excluded from revenue and is included in accrued expenses on our Consolidated Balance Sheets.
Product purchases on the Website are paid for using either debit cards, credit cards, PayPal, or an independent financing company. Revenue for Website product sales are recognized upon shipment of the product. Also included in revenue is shipping revenue from our e-commerce customers. Sales taxes collected from retail customers are excluded from reported revenues.
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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. See Note 1 to the Unaudited Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in rules and forms adopted by the SEC, and that such information is accumulated and communicated to management, including the Chief Executive Officer, to allow timely decisions regarding required disclosures.
Management, with the participation of the Chief Executive Officer and Chief Financial Officer, who is also a member of our Board of Directors, have evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017. Based on such evaluation, the Chief Executive Officer concluded that, as of September 30, 2017, 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, 2017, 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, 2017. 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. Through most of the year we did 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. The Company recently added new directors and has formed an audit committee of independent directors.
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.
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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.
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, 2016.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
None.
The exhibits listed in the accompanying “Index to Exhibits” are filed or incorporated by reference as part of this Form 10-Q.
INDEX TO EXHIBITS
| Exhibit | Incorporated by Reference | Filed
or Furnished | ||||||||
| No. | Exhibit Description | Form | Date | Number | Herewith | |||||
| 2.1 | Acquisition and Plan of Merger | 10-12G | 10/29/09 | 2.1 | - | |||||
| 3.1 | Articles of Incorporation | SB-2 | 6/14/07 | 3.1 | - | |||||
| 3.1(a) | Certificate of Amendment to Articles of Incorporation | 8-K | 1/12/17 | 10.18 | - | |||||
| 3.2 | Bylaws | SB-2 | 6/14/07 | 3.2 | - | |||||
| 10.1 | Replacement Asset Share Purchase & Business Agreement | 10-K | 4/17/17 | 10.19 | - | |||||
| 10.2 | Marketing and Selling Agreement between Her Imports and Cabello Real FDE dated April 20, 2017 | 8-K | 4/27/17 | 10.20 | - | |||||
| 10.3 | 2017 Equity Incentive Plan | 8-K | 9/19/17 | 4.1 | - | |||||
| 10.4 | Notice of Cancellation of Marketing and Selling Agreement between EZJR, Inc. and Her Holdings, Inc. dated November 28, 2016 | 8-K | 12/31/16 | 10.16 | - | |||||
| 31.1 | Certification of Principal Executive Officer and Principal Financial Officer (302) | Filed | ||||||||
| 32.1 | Certification of Principal Executive and Principal Financial Officer (906) | Furnished** | ||||||||
| 101.INS | XBRL Instance Document | Filed | ||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | Filed | ||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | Filed | ||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | Filed | ||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | Filed | ||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | Filed | ||||||||
Copies of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our shareholders who make a written request to our Corporate Secretary at 8250 W. Charleston Blvd., Suite 110, Las Vegas, NV 89117.
** This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.
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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 9, 2017 | By: | /s/ Barry Hall |
| Name: | Barry Hall | |
| Title: | Executive Chairman, Chief Executive Officer and Chief Financial Officer | |
| (Principal
Executive Officer, Principal Financial Officer and Principal Accounting Officer) |
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