INNOVATIVE DESIGNS INC - Quarter Report: 2013 July (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended July 31, 2013

OR

For the transition period from _______ to ________.

Commission File Number: 000-51791

INNOVATIVE DESIGNS, INC.

(Exact Name of Registrant as Specified in its Charter)

124 Cherry Street

Pittsburgh, Pennsylvania 15223

(Address of Principal Executive Offices, Zip Code)

(412) 799-0350

(Issuer’s Phone Number Including Area Code)

N/A

(Former Name or Former Address, if changed since last report)

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 and 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 web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). YES x       NO ¨

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” and “smaller reporting Company” in Rule 12b-2 of the Exchange Act.

(Check One)

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).           YES ¨          NO x

As of September 3, 2013, there were 19,005,743 shares of the Registrant’s common stock, par value $.0001 per share, outstanding.

Transitional Small Business Disclosure Format: YES ¨          NO x

Innovative Designs, Inc.

Index

Form 10-Q for the Quarter Ended July 31, 2013

ITEM 1. CONDENSED FINANCIAL STATEMENTS

INNOVATIVE DESIGNS, INC.

CONDENSED BALANCE SHEETS

July 31, 2013 (Unaudited) and October 31, 2012

The accompanying condensed notes are an integral part of these financial statements.

INNOVATIVE DESIGNS, INC.

CONDENSED STATEMENTS OF OPERATIONS

Three and Nine Month Periods Ended July 31, 2013 and 2012 (Unaudited)

The accompanying condensed notes are an integral part of these financial statements.

INNOVATIVE DESIGNS, INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

July 31, 2013 (Unaudited) and October 31, 2012

The accompanying condensed notes are an integral part of these financial statements.

INNOVATIVE DESIGNS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying condensed notes are an integral part of these financial statements.

INNOVATIVE DESIGNS, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

Three and Nine Month Periods Ended July 31, 2013 and 2012 (Unaudited)

Inventory consists principally of purchased finished goods. Inventory is stated at the lower of cost or market on a first-in, first-out basis. The Company has decided to discontinue the manufacturing of its hunting and swimming line of apparel. The Company has booked a reserve against this inventory at October 31, 2012 of $65,000. Based upon management’s review, the Company decreased the reserve to $58,000, during the quarter ended April 30, 2013, due to the continued sale of the remaining hunting apparel. Management will continue to evaluate its obsolete inventory reserve throughout the year and make adjustments as needed.

Innovative Designs, Inc. (the “Company”) calculates net income (loss) per share in accordance with FASB Accounting Standard Codification (“ASC”) Topic 260 “Earnings per Share”. Basic earnings (loss) per share is calculated by dividing income (loss) by the weighted average number of common shares outstanding for the period. During the periods presented, the Company only has common stock outstanding. As a result diluted earnings per share was not calculated.

The Company only has one manufacturer that produces the apparel on behalf of the Company, located in Indonesia. The Company will send deposits to the manufacturer for future production of the apparel based on approved purchase orders between the Company and the manufacturer. Once finished purchase orders are received by the Company, the deposits associated with those purchase orders are transferred into inventory. As of July 31, 2013 and October 31, 2012, the Company had $119,602 and $44,514, respectively, on deposit for the production of apparel.

INNOVATIVE DESIGNS, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

Three and Nine Month Periods Ended July 31, 2013 and 2012 (Unaudited)

The Company accounts for income taxes in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 740 “Income Taxes”, which requires an asset and liability approach for financial reporting purposes.

Deferred income taxes are provided for differences between the tax bases of assets and liabilities and the financial reporting amounts at the end of the period, and for net operating loss and tax credit carryforwards available to offset future taxable income. Changes in enacted tax rates or laws result in adjustments to recorded deferred tax assets and liabilities in the periods in which the tax laws are enacted or tax rates are changed. The Company will continue to evaluate its income tax obligation throughout the year and will record a tax provision when it is necessary.

The Company pays shipping and handling costs on behalf of customers for purchased merchandise. These costs are billed back to the customer through the billing invoice. The shipping and handling costs associated with merchandise ordered by the Company are included as part of in inventory as these costs are allocated across the merchandise received. The shipping and handling costs associated with customer orders was approximately $26,000 and $54,000 for the nine month periods ending July 31, 2013 and 2012, respectively. These amounts are included in both revenue and selling, general and administrative expenses.

On February 4, 2013, the Company issued an aggregate of 30,000 shares of its common stock to three individuals for professional services. These shares issued were valued at $.30 a share or an aggregate price of $9,000. We believe that Section 4(2) of the Securities Act of 1933, as amended, was available because the sale did not involve a public offering and there was no general solicitation or general advertising involved in the sale. We placed legends on the stock certificates stating that the securities were not registered under the Securities Act and set forth the restrictions on their transferability and sale.

On June 29, 2013, the Company issued 40,000 shares of its common stock to one individual for professional services. These shares issued were valued at $.40 a share or an aggregate price of $16,000. We believe that Section 4(2) of the Securities Act, as amended, was available because the sale did not involve a public offering and there was no general solicitation or general advertising involved in the sale. We placed legends on the stock certificates stating that the securities were not registered under the Securities Act and set forth the restrictions on their transferability and sale.

INNOVATIVE DESIGNS, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

Three and Nine Month Periods Ended July 31, 2013 and 2012 (Unaudited)

The Company entered into five Note Payable Agreements, with private lenders, shareholders, and an officer of the Company, during the three month period ended July 31, 2013, totaling $255,000. These borrowings were used to fund operations during the quarter.

During 2012, the Company filed a civil complaint in which we asserted that the defendants made deceptive claims in the advertising and promotions that were aimed at our Arctic Armor products. The Company was then named as a defendant in a countersuit that asserted libel, slander, and torturous interference. During June, 2013, a settlement was reached regarding the open litigation. The Company dropped the suit in Pennsylvania, and the defendant dropped the suit in Minnesota. The parties have entered a mutual non-disparagement agreement. As a result, the Company has removed the contingent liability of $190,000 associated with the countersuit.

The Company has evaluated subsequent events in accordance with Accounting Standards Codification Topic 855, “Subsequent Events”, through September 13, 2013, which is the date financial statements were available to be issued. With the exception of the matters discussed below, no subsequent event items were identified by the Company.

On August 15, 2013 the Company received a short-term note payable for $25,000 from a private lender, at 10% interest for 6 months.

INNOVATIVE DESIGNS, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

The following information should be read in conjunction with the consolidated financial statements and the notes thereto and in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended October 31, 2012.

Disclosure Regarding Forward-Looking Statements

Certain statements made in this report, and other written or oral statements made by or on behalf of the Company, may constitute “forward-looking statements” within the meaning of the federal securities laws. When used in this report, the words “believes,” “expects,” “estimates,” “intends” and similar expressions are intended to identify forward-looking statements. Statements regarding future events and developments and our future performance, as well as our expectations, beliefs, plans, intentions, estimates or projections relating to the future, are forward-looking statements within the meaning of these laws. Examples of such statements in this report include descriptions of our plans and strategies with respect to developing certain market opportunities and our overall business plan. All forward-looking statements are subject to certain risks and uncertainties that could cause actual events to differ materially from those projected. We believe that these forward-looking statements are reasonable; however, you should not place undue reliance on such statements. These statements are based on current expectations and speak only as of the date of such statements. We undertake no obligations to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise.

Background

Innovative Designs, Inc. (hereinafter referred to as the “Company”, “we or “our”) was formed on June 25, 2002. We market and sell clothing products such as outdoor apparel, and cold weather gear called “Arctic Armor” that are made from INSULTEX, a material with buoyancy, scent block and thermal resistant proprieties. We also market our House Wrap product line which is a building material with thermal qualities. House Wrap is also made from INSULTEX. We obtain INSULTEX through a license agreement with the owner and manufacturer of the material. Since our formation we have devoted our efforts to:

INNOVATIVE DESIGNS, INC.

Results of Operations

Comparison of the Three Month Period Ended July 31, 2013 with the Three Month Period Ended July 31, 2012.

The following table shows a comparison of the results of operations between the three month periods ended July 31, 2013 and July 31, 2012:

Revenues for the quarter ended July 31, 2013 were $11,117 compared to revenues of $7,165 for the quarter ended July 31, 2012. As a result of the warmer winter that was experienced, our customers are ordering later in the year. Approximately 53% of our sales for the period were for our cold weather products, hunting apparel accounted for approximately 11% of sales and House Wrap for approximately 29% of sales for the period. During the three month period ending July 31, 2013, we settled a litigation matter which allowed us to remove a $190,000 contingent liability. As this is a non-cash item, our net loss from operations for the three months ended July, 31, 2013 was $134,684.

Our selling, general and administrative expenses were $113,527 for the three months ended July 31, 2013 compared to $83,528 for the three months ended July 31, 2012. Part of the increase from the period ending July 31, 2012, was an increase in business tax and licenses of approximately $10,000 and an increase in professional fees of approximately $11,000.

We are again offering to our customers our Early Order Booking (“EOB”) option. Under the EOB program, our customers may place an order for future fulfillment prior to paying and the Company will guarantee inventory and provide free shipping with payment terms of 2% 30 days net 60 days. The customer has the ability to change the order plus or minus ten percent. Should a customer cancel such order, the Company reserves the right to no longer supply product to such customer. The EOB order is not recorded as a sale until it is shipped.

INNOVATIVE DESIGNS, INC.

As of September 9, 2013, the Company had received orders under the EOB program of approximately $200,000.

Results of Operations

Comparison of the Nine Month Period Ended July 31, 2013 with the Nine Month Period Ended July 31, 2012.

The following table shows a comparison of the results of operations between the nine month periods ended July 31, 2013 and July 31, 2012:

Revenues for the nine months ended July 31, 2013 were $361,173 compared to revenues of $604,407 for the nine months ended July 31, 2012. The decrease is attributable, in large part, to the warm winter. However, management is also of the opinion that the actions alleged in its complaint against the defendants in the action currently before the court in the Western District of Pennsylvania have also resulted in lost sales of our Arctic Armor products. Also, due to the warmer winter that was experienced, our customers are ordering later in the year.

Our selling, general and administrative expenses were $400,634 for the nine months ended July 31, 2013 compared to $493,500 for the nine months ended July 31, 2012.

INNOVATIVE DESIGNS, INC.

Liquidity and Capital Recourses

During the quarter ended July 31, 2013, we funded our operations from revenues from sales and short-term advances. During the quarter, we received five short-term advances totaling $255,000 from private lenders.

Short Term: We will continue to fund our operations from sales and short term borrowings from shareholders and others and the possible sale of our securities. We currently have no commercial credit facilities available to us. We continue to pay our creditors when payments are due.

Long Term: The Company will continue to fund its operations from revenues, borrowings from private parties and the possible sale of our securities. We have ceased trying to obtain commercial lending. Should we not be able to rely on the private sources for borrowing, our operations would be severely effected as we would not be able to fund our purchase orders to our suppliers for finished goods.

Our House Wrap product continues to await the International Code Council’s certification of the lab which certifies the R value of House Wrap. Once such certification is obtained, we believe that the R value of House Wrap will be increased such that large home builders will be able to use the product in their home construction. House Wrap is currently being offered, online, by Lowes, Home Depot and Tool King.

INNOVATIVE DESIGNS, INC.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

In June, 2013, we settled litigation involving a civil complaint we filed in July 2012, in the District Court for the Western District of Pennsylvania against Striker Brands and Korky’s Outpost, LLC, asserting deceptive claims aimed at our Arctic Armor products, the defendants filed a counterclaim asserting libel and slander and tortuous interference. In addition, the defendants filed an action in the District Court for Ramsey County, Second Judicial District, State of Minnesota alleging interference with prospective business advantage and defamation. They also named an independent sales agent in addition to the Company. The settlement involved the Company withdrawing its complaint and the defendants doing the same.

ITEM 3. QUANTITATATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we are not required to provide the information otherwise required by this Item.

ITEM 4T. CONTROLS AND PROCEDURES

Management has developed and implemented a policy and procedures for reviewing, on a quarterly basis, our disclosure controls and procedures. During the quarter ended July 31, 2013, our principle executive/financial officer concluded that these controls and procedures were ineffective. At this time we do not have the financial resources to employ a financial staff with accounting and financial expertise, once we have the necessary financial resources, we plan to hire and designate an individual responsible for identifying reportable developments and to implement procedures designed to remediate the material weakness by focusing additional attention and resources in our internal accounting functions. During the first quarter ended January 31, 2013, the Company was not able to close the books and records in a timely fashion. Consequently, the Company was unable to file its Form 10-Q within the timeline established by the SEC. There were no reclassifications made during the third quarter of 2013.

Changes in Internal Control Over Financial Reporting

During the most recent fiscal quarter, there were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13(a)-15 or 15d-15 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

INNOVATIVE DESIGNS, INC.

ITEM 6. EXHIBITS

SIGNATURES

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.