INNOVATIVE DESIGNS INC - Annual Report: 2022 (Form 10-K)

U.S. SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

FORM 10-K

Commission file number: 000-51791

Innovative Designs, Inc.

(Exact name of registrant as specified in its charter)

(412) 799-0350

(Registrant’s telephone number including area code)

Securities to be registered pursuant to Section 12(b) of the Exchange Act:

________________

________________

Securities registered or to be registered pursuant to Section 12(g) of the Exchange Act:

(Title of Class)

Common Stock, $.0001 par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

☐ Yes ☒ No

Indicate by check mark if the registrant is not required to file reports pursuant to section 13 or Section 15 (d) of the Act.

☐ Yes ☒ No

Check whether the issuer (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 past 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 for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark if disclosure of delinquent filers to Item 405 of Regulation S-K (sec. 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (Check One)

Emerging reporting 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 Exchange Act).

Yes ☐ No ☒

The issuer’s revenues for its most recent fiscal year were $ 263,293.

The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter was $3,298,951. This calculation does not reflect a determination that certain persons are affiliates of the registrant for any other purposes.

The number of shares of the registrant’s common stock outstanding on February 8, 2023, was 35,262,560.

Transitional Small Business Disclosure Format: Yes ☐ No ☒

The Company was incorporated in the State of Delaware on June 25, 2002. We operate in two separate business segments: a house wrap for the building construction industry and cold weather clothing. Both of our segment lines use products made from Insultex, which is a low-density polyethylene semi-crystalline, closed cell foam in which the cells are totally evacuated. with buoyancy, scent block, and thermal resistant properties. We have a license agreement directly with the owner of the Insultex technology. In December 2015, we took delivery of equipment capable of producing Insultex. Given the time and cost of bringing the equipment into production mode and our current financial condition until we are able to begin manufacturing Insultex, we will continue to operate under the license agreement for the manufacture of Insultex used in our products.

Other companies are free to purchase Insultex from us assuming that it is a company within the distribution jurisdiction that we have, which is worldwide with the exception of Korea and Japan. Other than Korea and Japan, we are the sole worldwide supplier/distributor of the Insultex material.

We offer the following products containing Insultex:

We also offer a product that helps restore the waterproof character of the outer side of our Arctic Armor clothing. In addition, we offer cold weather headgear and a base insulation clothing product.

We no longer manufacture our apparel products containing Insultex. We only sell from our existing inventory. Our Inultex House Wrap product is manufactured in the United States through third-party manufacturers. 

For financial information regarding each segment, please see Note 10 of the Notes to Financial Statements appearing elsewhere in this Report.

The Insultex License and Manufacturing Agreement

Under the terms of the agreement between us and the Ketut Group, Ketut Group agrees to promptly deliver to Innovative Designs, Inc. within twenty-eight (28) days of receiving an order, all Insultex ordered by us. Under the terms of the agreement, we are required to pay a fixed amount per meter of Insultex. This fixed amount will not change under the agreement for a period of ten (10) years after the date of the agreement was signed, which was April 1, 2006. The agreement provides that after the ten (10) year period, the price of the Insultex shall be adjusted for a subsequent ten (10) year term, no more than twelve percent (12%) for the subsequent ten (10) year period. We order Insultex from time to time as needed and are not required to purchase any minimum amount of Insultex during the term of the agreement, and we are not required to make any minimum annual payment. However, should we place an order; any quantity ordered must be a minimum of 100,000 yards of Insultex. We are not required to pay any part of any sublicense fee that we receive from third party sub-licensees, and we are not required to pay any fees to the Ketut Group. This agreement will be in full legal force and effect for an initial term of ten (10) years from the date of its execution. We have the option to renew this agreement for up to three (3) successive terms of ten (10) years each by giving notice of our intention to so renew not less than ninety (90) days prior to the expiration of the then-current term. The Company has exercised the first ten-year renewal option. We purchased the equipment capable of producing Insultex from the Ketut Group.

COLD WEATHER CLOTHING PRODUCTS

Arctic Armor Line

Our Arctic Armor line products are intended for use by the following consumer groups that are in the Company’s target market for these products: We are currently only selling these products form our existing inventory.

Website and Retailers

We sell both wholesale and retail products on our web site. Our web site, located at www.idigear.com, contains information on our products, technical information on Insultex insulation, e-commerce capabilities with “shopping cart”, wholesaler information and order forms, company contact information, and links to retailers that carry our products. We have obtained the services of BA Web Productions who assists us in designing and continually developing our website. Our web site features a “wholesaler only” area, allowing our wholesalers access to information, ordering, and reordering. Our products are offered and sold by retailers, distributors and through our web site in all states and Canada. Except for products sold through our web site, others who purchase our products do so at wholesale prices which they plan to sell at their retail prices or use within their industry.

Sales

We sell our products online, to distributors and through independent sales agents and agencies. Once we have made contact with a potential sales agency or solo agent, we evaluate their existing accounts, the capacity and potential for them to effectively push our products. We also look at their current product lines through the sales channel. Our primary market area is the outdoor industry which includes all activity done in cold weather. These activities include recreational such as hunting, ice fishing, snowmobiling, and industries such as oil and gas, utilities and construction. Once we agree to bring on an independent sales agent or agency, we enter into a standard agreement.

A typical sales representative agreement will have a term of one year with the right of either party to terminate upon thirty days written notice. We do not provide any free samples of our products and all sales expenses are the sole obligation of the sales agent.

Certain retailers buy directly from us. We have no verbal or written agreements with them. These retailers purchase our products strictly on a purchase order basis. During our last fiscal year, we sold our products to such retailers as Canadian Tire Corporation Limited. Some of our distributors during the last fiscal year were Pro Fishing Supplies and Fleece Corner. We distribute our products to the following:

Swimeez Products

We distribute our Swimeez products through our web site.

Hunting Apparel Line

We distribute our hunting apparel through our web site.

Arctic Armor Line

We distribute the Arctic Armor Line through our web site, to retailers and to distributors across the United States and Canada. These products are also marketed to utility companies, oil/gas pipeline workers, railroad workers, police and first responders, and to construction workers.

During our last fiscal year, one customer accounted for more than ten percent of our cold weather clothing products sales, Pro Fishing Supplies (13.0%).

HOUSE WRAP

House Wrap

In early January 2008, we announced that we had completed our research and development effort on a new use for Insultex as a house wrap for the home building construction industry. This house wrap provides barrier protection plus moisture vapor transmission and the feature of approximately R-3 and R-6 value insulation. The Insultex House Wrap was designed to specifically add enhanced insulating characteristics. In addition, the House Wrap is priced competitively with existing house wraps that do not provide any insulation. The development efforts were conducted by our own personnel and an outside consultant. In December 2016, we temporarily suspended any advertising for our House Wrap product line as we were in litigation with the Federal Trade Commission (“FTC”). The litigation has concluded as to the matters set forth in the FTC complaint and in March 2021, we resumed advertising for our House Wrap products.

Insultex House Wrap

During our last fiscal year two customers accounted for more than ten percent of our total sales of our House Wrap product, A-Team Building Supplies, LLC (41.0%) and Jerry’ Home Improvement Center (10.2%).

Competition

Many companies offer a type of house wrap some with insulating properties. These companies have large operations and are well financed. Some of the larger companies are DuPont, and Kimberly Clark. The Company expects to face intense competition with others who have much greater resources in the building construction supply industry.

Our marketing program consists of the following:

MARKETING COMPONENT

Website Development and Internet Marketing

We contract with marketing consultants to:

(a) increase visitation to our website.

(b) link with other established websites.

(c) issue press releases to on-line publications.

(d) conduct banner advertising.

(e) develop arrangements with online retailers that purchase our products on a wholesale basis.

Sales Representatives

Our Vice President of sales and marketing works to:

(a) sell our merchandise to retail chain stores.

(b) initiate relationships with local and national recreational organizations; and

(c) provide support to our distributor representatives

Contract with Manufacturer

We utilize the services of sales agencies to represent our products in the United States and Canada.

Design and Develop

We presently use our own staff for services related to literature, displays, develop brochures, point-of-sale displays, mailers, media materials, and literature and sales tools for our sales representatives and manufacturer representatives. At such time as we have sufficient funding, we intend to contract out some of these services. We no longer manufacture the R-3 House Wrap.

Establish Wholesale

We are and continue to develop relationships or distribution relationships with retail points for our products to retail chain outlets and mass merchandisers to sell our products. We currently have five domestic distributors and one international. Each distributor has a certain territory. Our domestic distributors collectively cover the following jurisdictions; Texas, Oklahoma, Louisiana, North and South Dakota, Minnesota, Iowa, Michigan, Ohio, Pennsylvania, New York, West Virginia, Maryland and Virginia. Our international distributor territory covers the UK, EU the Commonwealth countries except for Canada and Africa.

We ship wholesale product orders by United Parcel Service or trucking companies. Retail orders from our website are shipped United Parcel Ground Service or Federal Express overnight. The costs of shipping our finished goods are paid by our customers. We have not instituted any formal arrangements or agreements with United Parcel Service, Federal Express or trucking companies, and we do not intend to do so.

Insultex is used in all our Arctic Armor finished goods, except for our headwear.

Any apparel inventory we maintain is stored at our warehousing facility. Our warehouse facility has the capacity to hold 250,000 units of finished products in inventory. Our House Wrap inventory is stored in our facility and in the facility that manufactures it.

In 2004, we were granted a trademark for our name “idigear” with the United States Patent and Trademark Office.

In 2007, we were granted the mark “Insultex” by the United States Patent and Trademark Office.

In 2011, we were granted a trademark for “Insultex House Wrap” by the United States Patent and Trademark Office.

The Company has rights under a U.S Patent tiled “Composite Fabric Material and Apparel Made Therefrom” which issued April 30, 2013.

The Company has rights under a U.S. Paten titled “Composite Materials” which issued February 21, 2017, published on September 5, 2013.

The Company caused to have filed a utility paten application on December 18, 2009, titled “Composite House Wrap” which claimed priority to provisional patent application titled “Composite House Wrap” on December 18, 2008. A patent application was published on June 24, 2010. Although no patent issued from this original disclosure, this publication prevents third parties from patenting concepts obvious over these original teaching of the Company.

The Company caused to have filed a utility patent application on May 31, 2017, titled “Process for Forming Closed Cell Expanded Low density Polyethylene Foam and Products Formed Thereby”, published January 24, 2018.. The Company then caused to have filed a utility patent application on July 31, 2020, which application was published February 11, 2021. In January 2023, the U.S Patent and Trademark Office issue a Notice of Allowance and a patent shall issue in due course.

Additional patent applications o other property concepts are also being pursued,

Our production costs are limited to the invoices we receive for Insultex from Ketut Group and our House Wrap product from the manufacturer.

Although we are not aware of the need for any government approval of our principal products, we may be subject to such approvals in the future.

United States and foreign regulations may subject us to increased regulation costs, and possibly fines or restrictions on conducting our business. We are subject, directly or indirectly, to governmental regulations pertaining to the following government agencies:

United States Customs Service

We are required to pay a 6.5% importation duty to the United States Customs Service on all imported products. We import Insultex from Indonesia from the Ketut Group, in accordance with our agreement with the Ketut Group.

United States Department of Labor’s Occupational Safety and Health Administration

Because our sub-manufacturers manufacture our completed products, we and our sub-manufacturers will be subject to the regulations of the United States Department of Labor’s Occupational Safety and Health Administration.

We are not aware of any governmental regulations that will affect the Internet aspects of our business. However, due to increasing usage of the Internet, a number of laws and regulations may be adopted relating to the Internet covering user privacy, pricing, and characteristics and quality of products and services. Furthermore, the growth and development of Internet commerce may prompt more stringent consumer protection laws imposing additional burdens on those companies’ conducting business over the Internet. The adoption of any additional laws or regulations may decrease the growth of the Internet, which, in turn, could decrease the demand for Internet services and increase the cost of doing business on the Internet. These factors may have an adverse effect on our business, results of operations, and financial condition.

Moreover, the interpretation of sales tax, libel, and personal privacy laws applied to Internet commerce is uncertain and unresolved. We may be required to qualify to do business as a foreign corporation in each such state or foreign country. Our failure to qualify as a foreign corporation in a jurisdiction where we are required to do so could subject us to taxes and penalties. Any such existing or new legislation or regulation, including state sales tax, or the application of laws or regulations from jurisdictions whose laws do not currently apply to our business, could have a material adverse effect on our business, results of operations and financial condition.

We currently have no costs associated with compliance with environmental regulations. Because we do not manufacture our products, but rather they are manufactured by our sub-manufacturers, we do not anticipate any costs associated with environmental compliance. Moreover, the delivery and distribution of our products will not involve substantial discharge of environmental pollutants. However, there can be no assurance that we will not incur such costs in the future.

We estimate that all of our revenues will be from the sale of our products. We will sell our products at prices above our original cost to produce our products. We expect our product prices to be lower than network marketing companies, but higher compared with retail establishments that directly manufacture their own products.

Products that are sold directly by our website will be priced according to our Manufacturer Suggested Retail Prices. Our wholesale clients will purchase our products at our wholesale prices. We recommend that our retailer clients sell our products at the Manufacturer Suggested Retail Prices that we provide to them which are the same prices for products on our website; however, they are not required to do so and may price our products for retail sale at their discretion. We have established M.A.P. (minimum advertised pricing) on our Arctic Armor™ suit in an attempt to allow all retailers and distributors carrying the line to obtain reasonable gross margin dollars.

We currently have a total of two full time employees. We hire part-time personnel as needed.

We have no collective bargaining or employment agreements.

Reports and Other Information to Shareholders

We are subject to the informational requirements of the Securities Exchange Act of 1934. Accordingly, we file annual, quarterly and other reports and information with the Securities and Exchange Commission. You may read and copy these reports and other information we file at the Securities and Exchange Commission’s public reference rooms in Washington, D.C., New York, New York, and Chicago, Illinois. Our filings are also available to the public from commercial document retrieval services and the Internet worldwide website maintained by the Securities and Exchange Commission at www.sec.gov.

Lack of Sufficient Operating Funds-Going Concern

Our independent registered public accounting firm for the fiscal year ended October 31, 2022, has included an explanatory paragraph in their opinion that accompanies our audited financial statements for the fiscal year ended October 31, 2022, indicating that as a result of the Company having had net losses and negative cash flows and an accumulated deficit there is substantial doubt about the Company’s ability to continue as a going concern. Because we are not able to generate sufficient funds from sales and because we are unable to access commercial sources of credit, we are consistently underfunded. As a result, our growth is very limited, and we have difficulty in sustaining our current level of operations. We are not able to initiate adequate marketing programs, hire additional staff, develop new products or have flexibility in ordering Insultex from our manufacturer. Additionally, we must replace our quality control testing equipment for our House Wrap product line which we estimate may cost $100,000.. In the past, we have depended on borrowings from our CEO and other private parties, primarily stockholders in the private sale of our common stock or debt. Should we not be able to continue to rely on these sources of funding and increase our revenue stream to at least meet our current level of operations and to purchase new testing equipment the ability of the Company to continue as a going concern will be adversely affected.

Competition

The markets served by the Company are highly competitive. Competitive pricing pressure could result in loss of customers or decreased profit margins. Competition by product type includes the following:

The markets for our products are increasingly competitive. Our competitors have substantially longer operating histories, greater brand name and company name recognition, larger customer bases and greater financial, operating, and technical resources than us. Because we are financially and operationally smaller than our competitors, we will encounter difficulties in capturing market share. Our competitors are able to conduct extensive marketing campaigns and create more attractive pricing of their target markets than we are.

Some of our biggest competitors for our House Wrap product line are;

Some of our biggest competitors in the Arctic Armor™ line are:

We compete in the following ways:

Arctic Armor Line

We emphasize the following characteristics and advantages of our Arctic Armor line products:

Insultex provides a scent barrier which we had a permeation test performed on at the Texas Research Institute Austin, Inc. The product was subjected to gas stimulant for an eight-hour period. The product was tested for permeation of the gas every three minutes for the duration of the test with almost no detection of the gas throughout the test. The testing was based upon accepted industry practices as well as the test method used.

HOUSE WRAP

Our House Wrap product

Our products have the following disadvantages in comparison to the products of our competitors:

There can be no assurance that we will be able to compete in the sale of our products, which could have a negative impact upon our business.

We do not expect our business to be dependent on one or a few customers or retailers; however, there is no assurance that we will not become so dependent.

Cyclicality

The Company’s Arctic Armor apparel sales fluctuate based on temperature and weather conditions. Our products are suitable primarily for cold weather conditions. This will cause a cyclical effect on sales. It also makes our revenues totally dependent on cold weather for this product line. For the fiscal year ended October 31, 2022, our cold weather products accounted for approximately 25% of our total revenue.

Material Acquisition

The Company has only one supplier of Insultex, the special material which is manufactured within the apparel of our cold weather products and our House Wrap product. Additionally, we have one manufacturer that produces the apparel on behalf of the Company, located in Indonesia. Currently, we are only selling apparel from our inventory. Any delays in getting Insultex will adversely affect our revenue stream. Once we have our own equipment operating, we will be able to produce Insultex. We intend to use such Insultex for our House Wrap product.at the present time.

Geographic Concentration

Most of the Company’s sales for its cold weather clothing products to retailers are concentrated in colder climates of the United States and Canada. To the extent that any regional economic downturn impacts these regions, the Company will be adversely affected.

Management

The Company is dependent on the management of Joseph Riccelli, our Chief Executive Officer. The loss of Mr. Riccelli’s services could have a negative effect on the performance and growth of the Company for some period of time.

Penny Stock Considerations

Our shares are “penny stocks” as that term is generally defined in the Securities Exchange Act of 1934 as equity securities with a price of less than $5.00. Our shares may be subject to rules that impose sales practice and disclosure requirements on broker-dealers who engage in certain transactions involving a penny stock.

Under the penny stock regulations, a broker-dealer selling a penny stock to anyone other than an established customer or “accredited investor” must make a special suitability determination regarding the purchaser and must receive the purchaser’s written consent to the transaction prior to the sale, unless the broker-dealer is otherwise exempt. Generally, an individual with a net worth, exclusive of one’s residence, in excess of $1,000,000 or annual income exceeding $200,000 individually or $300,000 together with his or her spouse is considered an accredited investor. In addition, under the penny stock regulations the broker-dealer is required to:

Because of these regulations, broker-dealers may encounter difficulties in their attempt to sell shares of our stock, which may affect the ability of shareholders or other holders to sell their shares in the secondary market and have the effect of reducing the level of trading activity in the secondary market. These additional sales practice and disclosure requirements could impede the sale of our securities if our securities become publicly traded. In addition, the liquidity for our securities may be adversely affected, with a corresponding decrease in the price of our securities.

ITEM 1B Unresolved Staff Comments.

None.

We lease warehouse space for our inventory and raw materials at 124 Cherry Street, Etna, Pennsylvania. We also use this space as our principal executive offices. This facility encompasses 13,000 square feet of storage space on the first floor and 2,000 square feet for our sales department offices located on the second floor. We have entered into a verbal agreement with the owner of the building and we pay $3,500 per month for the space. This facility is composed of: (a) warehouse and storage areas including four (4) shipping bays and a distribution area consisting of square footage to store upward of 250,000 finished goods products; and (b) four (4) offices, one (1) conference room, with presentation area and sample display and (2) bathrooms totaling approximately 2,000 square feet located on the second floor. Mr. Frank Riccelli is the brother to our Chief Executive Officer and the owner of the property. The condition of our leased property is good and suitable for our needs.

PART II

Our Common Stock is traded on the OTCQB tier under the symbol IVDN. As of January 30, 2023, we had 249 holders of record of our common stock (not including beneficial holders of stock held in street names).

We have one class of stock outstanding. We have no shares of our preferred stock outstanding.

Dividends

We have not declared any cash dividends on our stock since our inception and do not anticipate paying such dividends in the foreseeable future. We plan to retain any future earnings for use in our business. Any decisions as to future payment of dividends will depend on our earnings and financial position and such other factors as the Board of Directors deems relevant.

Recent Sales of Unregistered Securities.

On October 5, 2022, we issued 125,000 shares of our Common Stock to a marketing consultant for services.

Subsequent to the period we sold 500,000 Units to one investor in a private placement and received $110,000 in proceeds. Each Unit contained one share of Common Stock and one common stock purchase warrant. The warrant has a term of two years with an exercise price of $.45. The common stock also has piggy-back registration rights for one year. Each Unit cost $. 22.

The Company relied in Section 4(2) of the Securities Act of 1933, as amended and Regulation D, Rule 506 (c) promulgated thereunder. The securities are “restricted securities” as that term is defined under the Securities Act and each stock certificate bears a legend restricting their transferability.

As a smaller reporting company, under SEC regulations, we are not required to furnish selected financial data.

General

The following information should be read in conjunction with the financial statements and the notes thereto appearing elsewhere in this report.

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. (hereafter referred to as the “Company”, “we” or “our”) produces and sells a house wrap product using Insultex a material with thermal resistance and buoyancy properties. We also offer a cold weather product line called “Artic Armor” which also uses Insultex. We no longer produce any Artic Armor products. We are only selling form our existing inventory. We obtain Insultex through a license agreement with the owner and manufacturer of the material. In December 2015, we took delivery of equipment capable of producing our own Insultex. At such time as we have sufficient funding, we intend put the equipment into production and use the Insultex from this equipment in the production of our House Wrap product and for the sale of Insultex to others.

Results of Operations

Comparison of the fiscal year ended October 31, 2022, with the fiscal year ended October 31, 2021.

The following table shows a comparison of the results of operations between the fiscal years ended October 31, 2022 and October 31, 2021:

Results of Operations

Revenues for the fiscal year ended October 31, 2022, were $ 258,734 compared to revenues of $225,601 for the comparable period ending October 31, 2021. House Wrap product revenue totaled $ 193,302 for the period compared to $169,375 for fiscal year ended October 31, 2022. Nearly all of the remaining revenues were derived from our Arctic Armor and related product lines which totaled $65,432 for the period compared to revenues of $56,226 for the fiscal year ended October 31, 2021. Revenues are net of returns and discounts. We continue to work on rebuilding our House Wrap product line brand after doing no advertising during the time of the FTC litigation, November 2016 to July 2021, and the effect of the litigation on our House Wrap products acceptance, and the use of Insultex in other applications in the marketplace.

Selling, general and administrative expense increased from $411,716 in fiscal year 2021, to $666,239 in the fiscal year ending October 31, 2022. This increase reflects, in part, $53,000 more for advertising and marketing, a payroll increase of $75,000, a reinstatement fee of $14,000 for listing on the OTCQB and stock base compensation to our directors of $71,000 and $75,000 in stock based compensation to a marketing consultant. Profession fees decreased during the period by $17,000 as the FTC litigation wound down.

Our cost of sales increased from $96,728 as of October 31, 2021, to $118,997 as of October 31, 2022.

Liquidity and Capital Resources

During the fiscal year ended October 31, 2022, we funded our operations from revenues, a legal settlement and the private sales of our common stock. During the period, we received $260,000 from a settlement with the FTC for legal fees incurred in connection with the FTC litigation. Subsequent to the period, we receive $110,000 from the sale of our Common Stock. We will continue to fund our operations from revenues, private borrowings and the sale of our common stock until we are able to produce sales sufficient to cover our cost structure or to secure commercial lending arrangements.

On July 12, 2015, the Company reached an agreement with Ketut Jaya to purchase machinery and equipment utilized to produce the INSULTEX material. The purchase price is $700,000 and to be made in four installments. The first installment of $300,000 is to be made at the execution of the agreement. The second installment of $200,000 is to be made when the machinery and equipment is ready to be shipped to the United States. The third installment of $100,000 is to be made once the machinery and equipment is producing INSULTEX, and the fourth and final installment of $100,000 is to be made after the first commercial production run of INSULTEX is completed. As of October 31, 2016, the Company has made payments of $600,000. In addition to the final payments, the Company will have to have the equipment and machines installed and ensure that the machine can be operated in compliance with environmental regulations. The Company has not made an estimate of the costs required for bringing the machine into compliance, but it is considered to be substantial. Given the expected time and cost of bringing the equipment into production mode and our current financial condition we are unable to estimate when we will be able to do so.

We also must purchase new quality control testing equipment for our House Wrap product line which we estimate will cost approximately $100,000. However, we have not as yet received a quote from the vendor. We have placed a $7,000 deposit with the vendor. Once the equipment is built it will have to go through a certification process.

During the period we paid $144,666 on our loans.

Short Term: We funded our operations with revenues from sales, private sales of our common stock and from a legal settlement. We could not access commercial lines of credit during our last fiscal year.

The Company intends to repay these debt obligations with funds it generates from revenues, from the possible sale of its securities either debt or equity, from advances from our stockholders or others. Because we cannot currently access commercial lending facilities, should we not be able to continue to obtain funding from these sources should our revenues decrease, our operations would be severely affected as we would not be able to fund our purchase orders to our suppliers for finished goods. The Company continues to pay its creditors when payments are due.

Long Term: The Company will continue to fund operations from revenues, borrowings and the possible sale of its securities. Should we not be able to continue to rely on these sources our operations would be severely affected as we would not be able to fund our purchase orders to our suppliers for finished goods.

As a smaller reporting company under SEC Regulation, we are not required to provide this information.

INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

To the Shareholders and the

Board of Directors of Innovative Designs, Inc.

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Innovative Designs, Inc. (the Company) as of October 31, 2022 and 2021, the related statements of operations, changes in stockholders’ equity and cash flows, for each of the years in the two year period ended October 31, 2022, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as October 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended October 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

Substantial Doubt About the Company’s Ability to Continue as a Going Concern

The accompanying financial statements have been prepared assuming that that Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company had net losses and negative cash flows from operations for the years ended October 31, 2022 and 2021 and an accumulated deficit at October 31, 2022 and 2021. These factors raise substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance date of these financial statements. Management’s plans are described in Note 2. The financial statements do not include adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition

Critical Audit Matter Description

The Company’s recognition of revenue involves the evaluation against five criteria described by generally accepted accounting principles. With regards to the Company’s transaction classes the primary criteria is the satisfaction of their performance obligations.

How the Critical Audit Matter Was Addressed in the Audit

Our procedures related to the Company meeting their performance obligations included evaluation of initial sale transaction documentation, shipping records, and invoices.

RW Group, LLC

We have served as the Company's auditor since 2021.

Kennett Square, PA

February 13, 2023

5020

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

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

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

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

INNOVATIVE DESIGNS, INC.

NOTES TO THE FINANCIAL STATEMENTS

Years Ended October 31, 2022 and 2021

Nature of Operations - Innovative Designs, Inc. (the “Company”), which was incorporated in the State of Delaware on June 25, 2002, markets cold weather recreational and industrial clothing products, as well as house wrap, which are made from INSULTEX, a low density foamed polyethylene, a material with buoyancy, scent block, and thermal resistant properties. Our clothing and housewrap is offered and sold by retailers, distributors, and companies throughout the United States and Canada.

We operate two reportable segments: Apparel and House Wrap. Our apparel segment offers a wide variety of extreme cold weather apparel and related items. Our House Wrap segment offers our INSULTEX House Wrap which has an R-value of 3 and an R-value of 6 and our own seam tape.

Basis of Accounting - The financial statements are prepared using the accrual basis of accounting in which revenues are recognized when earned and expenses are recognized when incurred.

Fiscal Year End - The Company’s fiscal year ends on October 31. The fiscal years ending October 31, 2022 and 2021 are referred to as 2022 and 2021, respectively, throughout the Company’s financial statements.

Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results may differ from these estimates and assumptions.

Cash and Cash Equivalents - The Company defines cash and cash equivalents as those highly liquid investments purchased with a maturity of three months or less.

Revenue Recognition - The Company recognizes recognize revenue upon transfer of control of promised goods or services to customers in an amount that reflects the consideration we expect to receive for those goods or services, including any variable consideration. Revenue is derived from sales of the Company’s recreational products, such as Arctic Armor, and our house wrap line of products. Sales of these items are recognized when the items are shipped. The Company offers a 5-day return policy and no warranty on its products. All sales outside the United States are entered into using the U.S. dollar as its functional currency.

Fair Value of Financial Instruments - The carrying value of cash and cash equivalents, accounts receivable, of these instruments. The fair value of the Company’s debt instruments approximates their fair values as the interest is tied to or approximates market rates.

Estimated Uncollectable Accounts - Management evaluates its receivables on a quarterly basis to assess the validity of remaining receivables. Management has determined that there is significant doubt regarding the receivable balance over 90 days and applied an allowance of $5,860 for the fiscal years ended October 31, 2022 and 2021.

Other Income - Management during fiscal year 2022 reevaluated certain disputed accounts payable amounts and have determined that accrued professional fees of $111,000 were not longer payable. Therefore, the Company during fiscal year 2022 have recorded it as income. In addition, the Company received $260,000 for costs recovered for defending a lawsuit. Total other income is $371,000 and $33,652 in 2022 and 2021, respectively.

Inventory - Inventory consists primarily of finished goods. Inventory is stated at the lower of cost or net realizable value and is valued based on first-in-first-out. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

During the fiscal year ended October 31, 2010, the Company discontinued its hunting and swimming lines of apparel. A reserve balance of approximately $75,468 was recorded as of October 31, 2022 and 2021. The reserve is evaluated on a quarterly basis and adjusted accordingly.

Deposits on Inventory - 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. The Company has deposits of $80,000 and $0 on inventory as of October 31, 2022 and 2021, respectively.

Property and Equipment - Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to income as incurred. Additions, improvements and major replacements are capitalized. The cost and accumulated depreciation related to assets sold or retired are removed from the accounts and any gain or loss is credited or charged to income.

For financial reporting purposes, depreciation is primarily provided on the straight-line method over the estimated useful lives of depreciable assets, which range from 5 to 7 years.

Deposits on Equipment - On July 12, 2015, the Company reached an agreement with Ketut Jaya to purchase the machinery and equipment utilized to produce the INSULTEX material. The purchase price is $700,000 and to be made in four installments. The first installment of $300,000 is to be made at the execution of the agreement. The second installment of $200,000 is to be made when the machinery and equipment is ready to be shipped to the United States. The third installment of $100,000 is to be made once the machinery and equipment is producing INSULTEX, and the fourth and final installment of $100,000 is to be made after the first commercial production run of INSULTEX is completed. As of October 31, 2018, 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. During 2019, the Company determined the shipping costs of $17,000 were impaired and these costs were written down.

During 2022, the company has made a separate deposit on a different piece of equipment of $7,370.

Total deposits on Equipment as of October 31, 2022 and 2021 were $607,370 and $600,000.

Impairment of Long-lived Assets - Management of the Company considers the valuation and depreciation of property and equipment. Management considers both the current and future levels of undiscounted cash flow generated by the Company and the continuing value of property and equipment to determine when and if an impairment has occurred. Any write-downs due to impairment are charged to operations at the time the impairment is identified. No such write-downs due to impairment have been recorded in 2022 and 2021.

Income Taxes - 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.

In addition, ASC 740 clarifies the accounting for uncertainty in tax positions and requires that a company recognize in its financial statements the impact of a tax position, only if it is more likely than not of being sustained upon examination, based on the technical merits of the position. The Company recognized no material adjustments to the liability for unrecognized income tax benefits.

The Company’s policy regarding the classification of interest and penalties recognized in accordance with ASC 740 is to classify them as income tax expense in its financial statements, if applicable.

The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.

Concentration of Credit Risk - The Company maintains its cash and cash equivalents with a financial institution which management believes to be of high credit quality. Their accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 in coverage. The balances in these accounts may, at times, exceed the federally insured limits. The Company has not experienced any losses on the deposits and management believes the Company is not exposed to any significant credit risk related to these accounts. The Company had uninsured cash balances as of October 31, 2022 and 2021.

Shipping and Handling - Shipping costs associated with acquiring inventories are charged to cost of goods sold when incurred. 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 and are included in revenue at the time the merchandise is shipped. The shipping and handling costs associated with customer orders was $24,791 and $7,723 for the fiscal years ended October 31, 2022 and 2021, respectively.

Net Income Per Common Share - The Company calculates net income per share in accordance with ASC Topic 260 “Earnings per Share”. Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding for the period. In 2021, the Company issued a convertible debt instrument and has calculated diluted earnings per share.

Stock-Based Compensation - The Company accounts for stock-based compensation in accordance with ASC Topic 718 “Compensation - Stock Compensation”. In accordance with the provisions of ASC 718, share-based payment transactions with employees are measured based on the fair value of the nonequity instruments issued on the grant date or on the fair value of the liabilities incurred. Share-based payments to nonemployees are measured and recognized using the fair-value method, based on the fair value of the equity instruments issued or the fair value of goods or services received, whichever is more reliably measured.

Recent Accounting Standards Update – Recently, various new ASUs were issued by the FASB. Management has determined, based on their review, the following ASUs issued recently that will be applicable to the Company. Management will continue to monitor the issuance of updates throughout the year to determine if the update will have an impact on the Company’s financial statements and should it have an impact, the update will be disclosed in the notes to the financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases”, which added a requirement than an entity, when acting as a lessee, should recognize in the balance sheet a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For public business entities, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 including interim periods within fiscal years beginning after December 15, 2019. Management has adopted the guidance.

 
These financial statements have been prepared on a going concern basis, which implies that the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company had net losses of $225,489 and $322,732 and a negative cash flow from operations of $99,685 and $46,576 for the years ended October 31, 2022 and 2021, respectively. In addition, the Company has an accumulated deficit of $10,335,579. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements. Managements plans include continued sales, sales of Company stock, and borrowings from private parties. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 
During the quarter ended April 30, 2019, the Company implemented Accounting Standards Update 2016-02, leases. Under the new guidance, a lessee must record a liability for lease payments (referred to as the lease liability) and an asset for the right to use the leased asset during the lease term (referred to as the right of use asset) for all leases, regardless of whether they are designated as finance or operating leases. This election requires the lessee to recognize lease expense on a straight-line basis over the lease term. The right of use assets and corresponding right of use liabilities have been recorded using the present value of the leases.

Property and equipment are summarized by major classifications as follows:

 
Depreciation expense for the fiscal years ended October 31, 2022 and 2021 was $1,490 and 33,308, respectively.

Borrowings at October 31, 2022 and 2021 consisted of the following:

Maturities of long-term debt are as follows:

DUE TO STOCKHOLDERS

In February 2012, the Company entered into a note payable with Roberta Riccelli for $8,000. This loan was to be used to fund operations of the Company. This loan is due on demand, including interest at 10% for 120 days. This note was extended through a verbal agreement. The loan balance as of October 31, 2022 and 2021 was $3,000.

In January 2013, the Company entered into a note payable with Corinthian Development for $20,000. This loan was to be used to fund operations of the Company. This loan is due on demand, including interest at 10% with an original repayment date of May 2013. This note was extended through a verbal agreement. The loan balance at October 31, 2022 and 2021 was $10,000.

During August 2017, the Company entered into a note payable agreement with Riccelli Properties, which is wholly owned and operated by the Company’s CEO, Joseph Riccelli, in the amount of $40,672. This amount reflects payments made by Riccelli Properties on the Small Business Association promissory note. Riccelli Properties sold the real estate that was collateral on the promissory note. The note has a term of 6 months and an interest rate of 10%. The loan balance at October 31, 2022 and 2021 was $12,464 and $17,964, respectively.

In August 2019, the Company entered into a note payable with its CEO, Joseph Riccelli, for $36,500. This loan was to be used to fund operations of the Company. This loan has no set maturity date. The loan balance at October 31, 2022 and 2021 was $-0- and $12,500, respectively.

In December 2019, the Company entered into a note payable with its CEO, Joseph Riccelli, for $38,000. This loan was to be used to fund operations of the Company. This loan is due on demand, including interest at 10% with an original repayment date of November 2013. This note was extended through a verbal agreement. The loan balance at October 31, 2022 and 2021 $18,500 and $29,000, respectively.

In December 2020, the Company entered into a note payable agreement with Lawrence Fraser for $200,000. This loan is secured by one of Company’s patent. The term of the loan is three years and with an interest rate of 12% per annum. The loan is to be repaid in yearly installments payable in December annually until maturity December 2023. The loan balance at October 31, 2022 and 2021 $133,334 and $200,000, respectively.

In May 2021, the Company issued a convertible promissory note to Antonio Costa for $50,000. The term of the note is one year with an interest rate of 8% per year. The principal of the loan and any accrued but unpaid interest may be converted into shares of the Company’s common stock. The conversion rate is one share of Company’s common stock for every $.50 of principal and unpaid interest. The loan balance at October 31, 2022 and 2021 $-0- and $50,000, respectively.

NOTES PAYABLE

In July 2005, the Company was approved for a low interest promissory note from the U.S. Small Business Administration in the amount of $280,100. In January 2006 the Company amended the promissory note with the Small Business Administration increasing the principal balance to $430,500. The note bears an annual interest rate of 2.9% and matures on July 13, 2035. Monthly payments, including principal and interest, of $1,820 are due monthly. A payment was made on the note of $40,672 during the year ended October 31, 2017 due to the sale of real estate by Riccelli Properties that was collateral on the promissory note. The loan balance was $84,675 and $90,350 at October 31, 2022 and 2021, respectively. This note is guaranteed by the Company’s CEO.

On April 16, 2006, the Company entered into an Exclusive License and Manufacturing Agreement (the “Agreement”) with the Ketut Group, with an effective date of April 1, 2006, whereby the Company acquired an exclusive license to develop, use, sell, manufacture and market products related to or utilizing INSULTEX™, Korean Patent Number, (0426429) or any INSULTEX Technology. At the behest of the Board of Directors, the INSULTEX trademark was chosen as the mark to identify the product utilized by Innovative since its inception and was originally registered by Joseph Riccelli on February 17, 2005. The new trademark, intended to avoid confusion arising from the use of the old Eliotex trademark in association with a new, subsequent, different and separately-patented product, was assigned by Mr. Riccelli to the Company on April 25, 2006, with that assignment to become effective upon final approval of the Statement of Use by the United States Patent and Trademark Office. The License was awarded by the Korean inventor, an individual who is part of the Ketut Group, and the manufacturer of INSULTEX™. The Company received an exclusive forty (40) year worldwide license, except for Korea and Japan, with an initial term of ten (10) years and an option to renew the License for up to three (3) successive ten (10) year terms. The first ten-year option was exercised. Additionally, the Company was granted the exclusive rights to any current or future inventions, improvements, discoveries, patent applications and letters of patent which the Ketut Group controls or may control related to INSULTEX™. Furthermore, the Company has the right to grant sub-licenses to other manufacturers for the use of INSULTEX™ or any INSULTEX Technology.

Revenues from two customers were approximately 35% and 55% of the Company’s revenues for the fiscal years ended October 31, 2022 and 2021, respectively.

The Company only has one supplier of INSULTEX, the special material which is manufactured for the Company. Additionally, the Company only has 1 one manufacturer that produces house wrap on behalf of the Company in Massachusetts.

In prior years, the Company incurred net operating losses and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets. For the 2021 tax year, fiscal year end October 31, 2022, the Company had net operating loss carryforwards of approximately $7,630,000 for tax purposes. The carryforwards are available to offset taxable income of future periods and begin to expire after the Company’s 2037 tax year, fiscal year end October 31, 2038. Effective for tax years ending in 2019 or later, net operating losses cannot be carried back but can be carried forward to future tax years indefinitely. Realization of the deferred tax benefit related to the carryforward is dependent upon the Company generating sufficient taxable income in the future, against which the loss can be offset, which is not guaranteed.

Deferred income taxes reflect the net tax effect of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as tax benefits of net operating loss carryforwards. The significant components of the Company’s deferred tax assets and liabilities relate to the following:

For financial reporting purposes, the Company has incurred losses in previous years. Based on the available objective evidence, including the Company’s previous losses, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company provided for a full valuation allowance against its net deferred tax assets as of October 31, 2022 and 2021, respectively.

The effective income tax rate varied from the statutory Federal tax rate as follows:

The Company’s effective tax rate is lower than what would be expected if the federal statutory rate were applied to income (loss) before taxes, primarily due to net operating loss carryforwards.

The Company leases its executive offices/warehouse space from Frank Riccelli, a stockholder and brother of our Chief Executive Officer, for $3,500 per month. The lease is based on a verbal agreement with month to month terms. For the fiscal years ended October 31, 2022 and 2021 rent expense totaled $42,000 and $24,500, respectively.

We have organized our operations into two 2 segments as discussed in Note 1 to the financial statements. 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 fiscal years ending October 31, 2022 and 2021: