INNOVATIVE DESIGNS INC - Quarter Report: 2017 July (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended July 31, 2017

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 ☒   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 ☒   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)

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

As of September 14, 2017, there were 25,747,310 shares of the Registrant’s common stock, par value $.0001 per share, outstanding.

Transitional Small Business Disclosure Format:          YES ☐ NO ☒

Innovative Designs, Inc.

Index

Form 10-Q for the Quarter Ended July 31, 2017

INNOVATIVE DESIGNS, INC.

CONDENSED BALANCE SHEETS

July 31, 2017 (Unaudited) and October 31, 2016

ASSETS 

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

INNOVATIVE DESIGNS, INC.

CONDENSED STATEMENTS OF OPERATIONS

Three and Nine Month Periods Ended July 31, 2017 and 2016 (Unaudited)

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

INNOVATIVE DESIGNS, INC.

 CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

July 31, 2017 (Unaudited) and October 31, 2016

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

INNOVATIVE DESIGNS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

Nine Month Periods Ended July 31, 2017 and 2016 (Unaudited)

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

INNOVATIVE DESIGNS, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS 

Nine Month Period Ended July 31, 2017 and 2016 (Unaudited)

Inventory consists principally of purchased apparel inventory and House Wrap which is manufactured by the Company. Inventory is stated at the lower of cost or net realizable value on a first-in, first-out basis. Innovative Designs, Inc. (the “Company”) has decided to discontinue the selling of its hunting and swimming line of apparel. The Company has booked a reserve against this inventory at July 31, 2017 and October 31, 2016 of $40,000. Management will continue to evaluate its obsolete inventory reserve throughout the year and make adjustments as needed.

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

The Company accounts for income taxes in accordance with ASC Topic 740 “Income Taxes”, which requires an asset and liability approach for financial reporting purposes.

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

INNOVATIVE DESIGNS, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS 

Nine Month Period Ended July 31, 2017 and 2016 (Unaudited)

The Company pays shipping and handling costs on behalf of customers for purchased apparel merchandise. These costs are billed back to the customer through the billing invoice. The shipping and handling costs associated with merchandise ordered by the Company are included as part of inventory as these costs are allocated across the merchandise received. With House Wrap orders, the customer pays the shipping cost. The shipping and handling costs associated with customer orders was approximately $16,000 and $25,000 for the nine month periods ended July 31, 2017 and 2016, respectively.

During the quarter ended April 30, 2017, the Company issued stock to one director for services. The stock was issued at a price of $0.25 per share. The Company issued 30,000 shares for services in February 2017 valued at $7,500. Pursuant to Rule 12b-15 under the Securities and Exchange Act of 1934, as amended, this Form 10-Q includes new certifications by our principal executive officer and principal financial officer under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.

During the quarter ended July 31, 2017, the Company issued stock to one shareholder for services. The stock was issued at a price of $0.30 per share. The Company issued 100,000 shares to the stockholders for services in April 2017 valued at $30,000. The Company also issued 30,000 shares of stock to an individual valued at $0.34 per share for services in May 2017 valued at $10,200. Pursuant to Rule 12b-15 under the Securities and Exchange Act of 1934, as amended, this Form 10-Q includes new certifications by our principal executive officer and principal financial officer under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.

Additionally for the quarter ended July 31, 2017, the Company sold stock for a price ranging from $0.18-$0.22 per share. The Company sold 217,000 shares of stock in June and July of 2017 for an aggregate price of $40,590. We believe that Section 4(2) of the Securities Act of 1933, as amended, was available because these transactions did not involve a public offering and there was no general solicitation or general advertising involved in this transactions. We placed legends on the stock certificates stating that the securities were not registered under the Securities Act and set forth the restrictions on their transferability and sale.

On July 12, 2015 the Company reached an agreement with Ketut Jaya to purchase the machinery and equipment utilized to produce the INSULTEX material. The purchase price is $700,000 which was to be paid in four installments. The first installment of $300,000 was to be paid at the execution of the agreement. The second installment of $200,000 was to be paid when the machinery and equipment is ready to be shipped to the United States. The third installment of $100,000 is to be paid once the machinery and equipment is producing INSULTEX, and the fourth and final installment of $100,000 is to made after the first commercial production run of INSULTEX is completed. As of July 31, 2017, the Company has made payments of $500,000 in accordance with the agreement, and made a $100,000 pre-payment as the machine is not yet producing INSULTEX. Additionally, the Company has incurred $17,000 of additional expenses related to shipping, site improvements and installation of the equipment.

INNOVATIVE DESIGNS, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS 

Nine Month Period Ended July 31, 2017 and 2016 (Unaudited)

We have organized our operations into two segments. We rely on an internal management reporting process that provides segment information for purposes of making financial decisions and allocating resources.

The following tables present our business segment information for the nine month period ended July 31, 2017 and 2016: 

On November 4, 2016, the Federal Trade Commission (FTC) filed a complaint against the Company in the U.S. District Court Western District of Pennsylvania, number 16-1669. In the complaint, the FTC alleges, that, among other matters, the Company does not have substantiation of claims made by the Company regarding the R value and energy efficiency of its INSULTEX House Wrap products. The complaint asks as redress of rescission of revenue the Company received from the sale of House Wrap and a permanent injunction. The parties are currently in the discovery phase.

INNOVATIVE DESIGNS, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS 

Nine Month Period Ended July 31, 2017 and 2016 (Unaudited)

The Company strongly denies the allegation and intends to vigorously defend itself. It is the Company’s belief that the complaint is based on improper testing of the INSULTEX products using the wrong type of testing equipment.

The Company has evaluated subsequent events in accordance with ASC Topic 855, “Subsequent Events”, through September 14, 2017, which is the date financial statements were available to be issued. The Company identified the below subsequent event.

During August 2017, the Company entered into a notes payable agreement with Riccelli Properties for $40,672.

INNOVATIVE DESIGNS, INC.  

General

The following information should be read in conjunction with the 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, 2016.

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 properties. 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:

In an attempt to increase global business we recently entered into two separate agreements to market INSULTEX to the military market of India and to enter the apparel market in the United States.

INNOVATIVE DESIGNS, INC.  

Results of Operations

Comparison of the Three Month Period Ended July 31, 2017 with the Three Month Period Ended July 31, 2016.

Revenues for the three month period ended July 31, 2017 were $41,811 compared to revenues of $159,643 for the three month period ended July 31, 2016. The decrease is caused by the decrease in our apparel sales and the sales in our House Wrap product line. The apparel sales were adversely affected by warm weather. In December 2016, we voluntarily ceased advertising our House Wrap products as a result of the legal action brought by the Federal Trade Commission (“FTC”). See Note 9 of the Notes to the Condensed Financial Statements appearing elsewhere in this Report for a description of our segment products sales. Our net loss for the three month period ended July 31, 2017 was ($186,966). During the period revenue from apparel sales was $3,484. Revenue from House Wrap sales was $38,327.

Our selling, general and administrative expenses were $183,868 for the three month period ended July 31, 2017 compared to $184,999 for the three month period ended July 31, 2016. Professional fees for the period were $82,258, and consisted primarily of legal fees related to the FTC matter. We expect our professional fees to continue to be substantial during the course of this legal matter.

INNOVATIVE DESIGNS, INC.

Comparison of the Nine Month Period Ended July 31, 2017 with the Nine Month Period Ended July 31, 2016.

The following table shows a comparison of the results of operations between the nine month periods ended July 31, 2017 and July 31, 2016:

Revenues for the nine month period ended July 31, 2017 were $250,183 compared to revenues of $497,807 for the nine month period ended July 31, 2016. The decrease is caused, by the decrease in our apparel sales and the sales in our House Wrap product line. The apparel sales were adversely affected by warm weather. In December 2016, we voluntarily ceased advertising our House Wrap products as a result of the legal action brought by the Federal Trade Commission (“FTC”). See Note 9 of the Notes to the Condensed Financial Statements appearing elsewhere in this Report for a description of our segment products sales. During the nine month period ended July 31, 2017 House Wrap sales totaled $89,168 in comparison with $301,858 during the nine month period ended July 31, 2016. Our net loss for the nine month period ended July 31, 2017 was ($476,092).

Our selling, general and administrative expenses were $562,080 for the nine months ended July 31, 2017 compared to $580,953 for the nine month period ended July 31, 2016. The decrease was a result, in part, by lower seasonal help expense and less advertising and promotional expense. We do not expect our seasonal help expense or advertising and promotional expenses to increase in the current fiscal year ending October 31, 2017. Our professional fees for this period ended July 31, 2017, were $225,363 compared to professional fees of $201,202 for the nine month period ended July 31, 2016. The increase is a result of the legal fees related to the ongoing legal matter involving the Company and the FTC.

INNOVATIVE DESIGNS, INC.

Liquidity and Capital Resources

During the period ended July 31, 2017, we funded our operations from revenues from sales.

Short Term: We will continue to fund our operations from sales and the sale of our securities. We continue to pay our creditors when payments are due. We will require more funds to be able to order the material for our INSULTEX products and to purchase equipment needed for the manufacture of the INSULTEX product. The Company reached an agreement with the manufacturer of the INSULTEX material to purchase a machine capable of producing the INSULTEX material. Also included in the proposed agreement will be the propriety formula that creates INSULTEX. The Company took delivery of the equipment in December 2015. The Company will have to have the machine installed and ensure that it can be operated in compliance with all environmental rules and regulations. The Company has not made an estimate of the cost required for bringing the operation of the machine into compliance with the environmental regulations but it is considered to be a substantial amount. We are in the permitting stage relating to environmental issues necessary to begin the installation of the equipment. The Company has currently made deposits of $600,000 on the equipment. The Company has incurred $17,000 of additional expenses related to shipping. The Company will produce INSULTEX under its own brand name. See Note 8 of the Notes to the Condensed Financial Statements.

Long Term: The Company will continue to fund its operations from revenues, borrowings from private parties and the possible sale of our securities. Should we not be able to rely on the private sources for borrowing and /or increased sales, our operations would be severely affected as we would not be able to fund our purchase orders to our suppliers for finished goods and our efforts to produce our own INSULTEX would be delayed.

INNOVATIVE DESIGNS, INC.

PART II – OTHER INFORMATION

The Company is engaged in a matter with the Federal Trade Commission. A Form 8-K filed November 4, 2016, describing this matter is incorporated herein by reference.

During the quarter ended April 30, 2017, the Company issued stock to one director for services. The stock was issued at a price of $0.25 per share. The Company issued 30,000 shares for services in February 2017 valued at $7,500. Pursuant to Rule 12b-15 under the Securities and Exchange Act of 1934, as amended, this Form 10-Q includes new certifications by our principal executive officer and principal financial officer under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.

During the quarter ended July 31, 2017, the Company issued stock to one shareholder for services. The stock was issued at a price of $0.30 per share. The Company issued 100,000 shares to the stockholders for services in April 2017 valued at $30,000. The Company also issued 30,000 shares of stock to an individual valued at $0.34 per share for services in May 2017 valued at $10,200. Pursuant to Rule 12b-15 under the Securities and Exchange Act of 1934, as amended, this Form 10-Q includes new certifications by our principal executive officer and principal financial officer under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.

Additionally for the quarter ended July 31, 2017, the Company sold stock for a price ranging from $0.18-$0.22 per share. The Company sold 217,000 shares of stock in June and July of 2017 for an aggregate price of $40,590. There were a total of three investors all of whom were existing stockholders. We believe that Section 4(2) of the Securities Act of 1933, as amended, was available because these transactions did not involve a public offering and there was no general solicitation or general advertising involved in this transactions. We placed legends on the stock certificates stating that the securities were not registered under the Securities Act and set forth the restrictions on their transferability and sale.

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

Management has developed and implemented a policy and procedures for reviewing, on a quarterly basis, our disclosure controls and procedures. During the period ended July 31, 2017, 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, second and third quarters of 2017, 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 for the period ended January 31, 2017, April 30, 2017 and July 31, 2017 within the timeline established by the SEC and was required to seek an extension for filing the form.

INNOVATIVE DESIGNS, INC.

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.

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.