Company Quick10K Filing
Quick10K
Her Imports
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-K 2016-04-13 Annual: 2016-04-13
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2018-10-31 Officers
8-K 2018-08-24 Officers, Amend Bylaw, Exhibits
8-K 2018-06-15 Leave Agreement, Sale of Shares, Amend Bylaw
8-K 2018-04-27 Other Events
8-K 2018-03-29 Amend Bylaw
8-K 2018-02-08 Shareholder Rights, Amend Bylaw, Exhibits
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SOFO Sonic Foundry 8
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HHER 2018-12-31
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Procedings.
Item 4. Mine Safety Disclosure
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Purchase of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Item 8. Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance.
Item 11. Executive Compensation
Item 12. Sercurity Ownership of Certan Beneficial Owners and Management
Item 13. Certain Relationships and Related Transaction, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules.
Item 16. Form 10-K Summary
EX-23.1 ex23-1.htm
EX-31.1 ex31-1.htm
EX-32.1 ex32-1.htm

Her Imports Earnings 2018-12-31

HHER 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 form10-k.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Period Ended December 31, 2018

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ___________

 

Commission File Number: 000-53810

 

HER IMPORTS

(Exact name of registrant as specified in its charter)

 

 

 

Nevada   30-0802599
(State or Other Jurisdiction   (I.R.S. Employer
of Incorporation or Organization)   Identification No.)

 

8861 W. Sahara Ave., Suite 210, Las Vegas, NV   89117
(Address of principal executive offices)   (Zip Code)

 

702-544-0195

(Registrant’s telephone number, including area code)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

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 [X] No [  ]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [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 “larger accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company [X]
    Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]

 

The aggregate market value of the voting stock held by non-affiliates amounted to $841,205 on April 15, 2019

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

As of April 15, 2019, the registrant’s outstanding common stock consisted of 8,584,135 shares, $0.001 par value. Authorized – 70,000,000 common shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

 

   
 

 

INDEX

Table of Contents

Her Imports

Index to Form 10-K

For the Year Ended December 31, 2018

 

  Page
  Number
PART I 3
   
TITLE  
   
ITEM 1. BUSINESS 3
   
ITEM 1A. RISK FACTORS 8
   
ITEM 2. PROPERTIES 8
   
ITEM 3. LEGAL PROCEEDINGS 9
   
ITEM 4. MINE SAFETY DISCLOSURE 10
   
PART II 10
   
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 10
   
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
   
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 20
   
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 20
   
ITEM 9A. CONTROLS AND PROCEDURES 20
   
PART III 22
   
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 22
   
ITEM 11. EXECUTIVE COMPENSATION 23
   
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 25
   
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE 25
   
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 26
   
PART IV 27
   
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 27
   
ITEM 16. FORM 10-K SUMMARY 28
   
SIGNATURES 29

 

2
 

 

PART I

 

In this Form 10-K, the “Company”, “we”, “us”, and “us” refer to Her Imports.

 

For further clarification as further described below, the following entities are referred to herein, as follows:

 

IVPSA Corporation is referred to herein as “IVPSA”

 

EZJR, Inc. is referred to herein as “Old EZJR”

 

Her Marketing Concepts, Inc. is referred to herein as “Her Marketing”

 

EZJR Acquisition Corporation is referred to herein as the “Sub”

 

Leading Edge Financial is referred to herein as “LEF”

 

OwnerWiz Realty Inc. is referred to herein as “OWR”

 

OW Marketing, Inc. is referred to herein as “OWM”

 

Her Marketing Concepts, Inc. is referred to herein as “Her Marketing”

 

AdMaxOffers.com LLC is referred to herein as “Admax”

 

Cabello Real Ltd. or Cabello Real FZE are collectively referred to herein as “Cabello”

 

Her Imports, LLC is referred to herein as the “LLC”

 

Leader Act Ltd HK is referred to herein as “Leader”

 

Her Holding, Inc. is referred to herein as “Her Holding”

 

ITEM 1. BUSINESS

 

History and Organization

 

Overview

 

We were incorporated in Nevada on August 14, 2006 under the name IVPSA Corporation (“IVPSA”). On July 25, 2008, IVPSA Corporation entered into an Acquisition Agreement and Plan of Merger with EZJR, Inc. (“Old EZJR”). Immediately upon the effectiveness of the merger, Old EZJR ceased to exist and IVPSA changed its name to EZJR, Inc. (“EZJR). On January 12, 2017, we changed our name from EZJR, Inc. to Her Imports (“Her”).

 

We are a retailer of Human Hair Extensions and related haircare and beauty products headquartered in Las Vegas, Nevada. We sell our products at consultation studios and on our Website, www.herimports.com. As of December 31, 2018, we operated 16 retail locations, all of which were in the U.S.

 

3
 

 

We have one wholly-owned subsidiary, Her Marketing Concepts, Inc. (“Her Marketing”), a Nevada Corporation. All our employees are employed by Her Marketing, using a Professional Employer Organization otherwise known as a PEO.

 

Corporate History

 

On November 28, 2016, we entered into an Asset Share Purchase & Business Agreement with Cabello Real Ltd. (“Cabello”), a private United Arab Emeritus company, to acquire the exclusive U.S. rights to the Her Imports trademark. In exchange for these rights, and other digital assets, we issued to Cabello 10,000,000 shares of our unregistered non-voting, non-cumulative, callable preferred stock and 1,250,000 shares of our unregistered common stock. In addition to conveyance of the Her Imports trademark rights, we purchased certain other assets owned by Cabello, including customer lists and various digital content.

 

On January 31, 2017, the Company effected a 1-for-2 reverse stock split effective January 31, 2017. The par value was not adjusted as a result of the reverse stock split. On April 9, 2018, the Company effected a 1-for-6 reverse stock split effective April 9, 2018. All references to numbers of shares of our common stock and per-share information in the accompanying consolidated financial statements and in these notes to the consolidated financial statements have been adjusted retroactively to reflect these splits.

 

Business

 

We are a retailer of Human Hair Extensions and related haircare and beauty products headquartered in Las Vegas, Nevada. We sell our products at consultation studios and on our eCommerce Website, www.herimports.com. As of December 31, 2018, we operated 16 retail locations, all of which are in the U.S (one of which was closed on that date and another that closed subsequently). These locations are primarily in “executive offices suites” such as Regus PLC, where furniture, administrative staff and security are provided. We then stock the location with products and point-of-sale equipment. These locations are leased on a short-term basis (primarily one year or less). This allows us to open and close our consultation studios with a minimal amount of time and expense. At the consultation studio, the customer is provided with a personal, one-on-one consultation with a Her beauty expert. Additionally, we have one larger location in Greenbelt Maryland where there are several consultants as well as a waiting room. We stock each of our leased locations with products and point-of-sale equipment. Six leases, including our corporate office, had leases longer than one year at the time they were entered.

 

Our goal is to expand our retail locations into additional markets to the extent funding and operation logistics make such expansion feasible. Additionally, we plan to expand the product offerings in our studios and on our website. However, since the beginning of 2018 we have eliminated [9] retain location to conserve capital.

 

eCommerce Platform

 

On May 28, 2014, we entered an Asset Purchase Agreement with Leader Act Ltd HK, (“Leader”) a private Hong Kong corporation to purchase an ecommerce Platform (“Platform”) software program developed and owned by Leader. The Platform entails all aspects of interaction that a company has with its customer, whether it is sales or service-related, provides a greater understanding of the customer and helps manage customer data and all interaction with the customer. Under the terms of the Asset Purchase Agreement, Leader agreed to service and maintain the software for a period of two years. For the Platform and service and maintenance, we issued Leader 5,000,000 restricted shares of common stock valued at $0.10 per share. This agreement expired in May 2016. On October 13, 2016, we entered into a five-year maintenance agreement on the Platform with Leader in exchange for 500,000 shares of our common stock valued at $375,000.

 

In January 2018, the Company converted to a new cloud-based eCommerce platform from its server-based eCommerce platform. The primary reason for the change was to allow the Company to optimize its mobile marketing efforts. In the past, marketing efforts have focused on traditional media, email, and search. However, due to the proliferation of smart phones and social media it is much more effective, while less expensive, to reach our customers using mobile marketing using SMS messaging and social platforms such as Facebook and Snapchat. Furthermore, advances in eCommerce shopping carts to cloud-based platforms allow for significant customization that was not previously available. The Company can interface with the shopping cart using various self-developed “mini-CRMs” depending on the marketing promotion and platform.

 

4
 

 

As a result of the change, the Company incurred a one-time charge of $383,542 from the write-off of the previous CRM and the prepaid maintenance agreement associated with it.

 

Media Investor Purchaser Agreement

 

On June 29, 2014, the Company entered into a Media Investor Purchaser Agreement (“MIP”) with Leader, a shareholder. On July 31, 2017, the MIP was assigned by Leader to Cabello, a principal shareholder. Prior to signing the MIP Leader advanced the Company $50,000 which the MIP allowed to be converted to 83,333 shares of common stock at $.60 per share. That left up to 9,500,000 shares of common stock that Cabello could purchase at $0.05 per share from its portion of the funds generated by the offers it creates. Contrary to customary practice, the MIP did not provide for any adjustment in the event of a future reverse split, so the Company’s 2017 reverse split did not affect the number of shares purchasable or the exercise price. This highlighted an unfair agreement which adversely affected the Company. This problem was exacerbated since Cabello is a related party. From April 19 to April 20, 2018, Cabello ran a program to sell a variety of the Company’s hair products. This program generated approximately $150,000 in revenue, however, a final accounting of the results of the program was never completed. Instead, on June 20, 2018 the Company issued to Cabello 4,500,000 shares of restricted common stock in exchange for cancelation of the MIP and forgiveness of any monies owed to Cabello for program in April. This cancellation resulted in a non-cash expense of $3,397,500 based on the estimated value of the stock issued in exchange for the cancellation of the MIP.

 

Agreement with Cabello Real FZE

 

On April 20, 2017, the Company entered into a Marketing and Selling Agreement with Cabello Real FZE, owner of a hair care product line called OSIworks, whereby the Company exclusively purchases, markets and sells OSIworks’ products in the United States. Under the agreement the Company pays Cabello a royalty of 2% of net sales. Cabello Real FZE is also controlled by Jonathan Terry, the Company’s principal shareholder. During the years ending December 31, 2018 and December 31, 2017 the Company recognized royalty expense of $13,329 and $14,675, respectively, related to the agreement.

 

Growth Strategy

 

Our growth strategy consists of the following key elements:

 

  Expand our geographic reach. Having consolidated our operations during 2018 we plan to add new retail locations the United States and abroad as market demand dictates.
  Broaden our addressable market. Currently our market consists primary of African American women. We believe that we can expand our business by addressing the needs of other ethnic groups in the U.S.
  Expand our product offering. We plan to add new styles of hair extensions and wigs as the market demands. Additionally, we plan to offer a broader range of haircare, beauty products and products specially addressing the hair extension and wig markets.

 

Products

 

Currently, the products we sell fall into three general categories as follows:

 

  Human hair extensions and related human hair products. Our hair extensions come in a variety of styles for a variety of uses. We currently focus on products that are woven into existing hair on the human scalp. However, recently, we have begun sourcing and selling products often referred to as “clip-ins” that can temporarily be installed and then removed for later reuse. Finally, we are now exploring selling full, high quality wigs.
  Hair care products. We currently sell eight different hair care products, all under the brand OSIworks. The products include various shampoos and conditioners, specifically designed and formulated for use with human hair extensions. Additionally, we also sell an adhesive to be used in extension installation called Cling. Cling is not water soluble and, as a result, allow the wearer of hair extension to participate in activities such as swimming, water sports and jogging without fear that the installation of the extensions may be affected.
  Beauty products and related accessories. We sell a variety of beauty related accessories including silk bonnets, styling tools, and makeup. Styling tools include flatirons and curling irons and are sold under the brand Her Imports. Makeup is sold under the brand Skin & Yang.

 

5
 

 

Customers

 

Our customers tend to be African-American women who wish to have longer hair. We sell other product offerings to other ethnic groups to expand our customer base.

 

Customer Acquisition

 

We obtain customers through two primary channels, online marketing and traditional media. In the future it is our intension to focus on online marketing including mobile marketing and social media.

 

Online Marketing.

 

To acquire customers, we are currently using a variety of low-cost marketing tactics including:

 

  Social Media including Instagram, Twitter, Facebook and YouTube.
  Using email and text messaging to our existing customer base and potential customers who have registered on our website.

 

Traditional Media

 

In addition to the above, during 2016, we acquired a significant number of social media “followers” by using radio advertising. While this method of obtaining customers was significantly more expensive than our current approach, we did build our database of potential customers that we are now leveraging through social media. However, it appears that local radio appears to be the most cost effective in smaller markets. During 2018 we again attempted to use traditional media including radio and billboard to promote our products. However, the results of these campaigns did not yield sufficient results to continue these campaigns. In the future, we plan to further explore additional other traditional forms of attracting new customers, including, but not limited to, celebrity endorsements, public relations and events.

 

Competitors

 

Hair Extensions. There are many competitors that sell hair extensions including individuals, salons, mall kiosks and online stores.

 

Some of our competitors include:

 

AliExpress

Queen Virgin Remy

Go Naked Hair

Bella Dream Hair

Extensions Plus

Bellami Hair

Indique Hair

 

Certain of these competitors have physical locations while the majority only sell online. Some competitors only sell low-quality synthetic hair. We believe that we sell the highest quality product at a competitive price, primarily because we only sell 100% human hair.

 

6
 

 

Our competitive disadvantages are:

 

  Many of our competitors sell inferior products at lower prices.
  Customers have a difficult time differentiating between vendors of human hair extensions.
  We do not currently address all geographical areas in the U.S. with our consultation studios.

 

We intend to compete against our competitors through the following methods:

 

  Offering superior products to our customers.
  Educating our customers regarding quality issues for human hair extensions.
  Providing accessory products to our customers.
  Expanding our geographical reach by opening new retail locations.
  Providing a superior online shopping experience to our customers

 

Seasonality

 

The business areas in which we operate are subject to seasonal fluctuations due to the ability of our customers to pay for products, which ability correspond to product demand. Our revenues have historically been better during tax season which falls at the end of the first quarter through the beginning of the second quarter, while our revenues have experienced declines in the latter part of summer. As such, past quarterly results are not indicative of future results and may be subject to seasonal fluctuations.

 

Patents, Trademarks, Franchises, Concessions, Royalty Agreements

 

On November 28, 2016, we purchased the Her Imports trademark for exclusive use in the United States. With the exception of the Her Imports trademark, we have no trademarks, patents, licenses, franchises, concessions, or royalty agreements. We rely on a combination of trade secret and confidentiality procedures and contractual provisions to protect our proprietary technology and our brand. We will rely on copyright laws to protect our future computer programs and our proprietary databases.

 

Government Regulations

 

We are subject to a number of laws and regulations that affect companies conducting business on the Internet, many of which are still evolving and could be interpreted in ways that could harm our business. Numerous laws and regulatory schemes have been adopted at the national and state level in the United States. Our business is subject to the CAN-SPAM Act as defined below and similar laws adopted by a number of states, which regulate unsolicited commercial emails, create criminal penalties for emails containing fraudulent headers and control other abusive online marketing practices.

 

Similarly, the Federal Trade Commission, has guidelines that impose responsibilities on us with respect to communications with consumers and impose fines and liability for failure to comply with rules with respect to advertising or marketing practices they may deem misleading or deceptive or involve unfair trade practices. Many states have “little FTC Acts” which provide for triple damages and attorney’s fees resulting from unfair trade practices.

 

Need for any Government Approval of Products or Services

 

Our services do not require government approval.

 

Costs and Effects of Environmental Laws

 

We are not subject to any costs or effects of environmental laws.

 

Research and Development

 

Since our inception, we have spent no funds on research and development.

 

7
 

 

Source and Availability of Raw Materials

 

Inapplicable

 

Number of Employees

 

As of April 15, 2019, we had 27 full-time employees and 20 part-time employees.

 

ITEM 1A. RISK FACTORS

 

Not applicable to smaller reporting companies. However, our principal risk factors are described in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not Applicable.

 

ITEM 2. PROPERTIES

 

We do not own any real property. We lease or rent the following facilities:

 

Location  Square Ft.   Use
Las Vegas, NV   1,346   Corporate Headquarters
Las Vegas, NV   1,266   Retail Location & Storage
Lanham, MD   3,784   Warehouse
Greenbelt, MD   5,000   Retail Location
Baltimore, MD   285   Retail Location
Atlanta, GA   121   Retail Location
Arlington, VA   195   Retail Location
Brooklyn, NY   400   Retail Location
Chicago, Il   105   Retail Location
Houston, TX   144   Retail Location
Dallas, TX   160   Retail Location
Los Angeles, CA   170   Retail Location
Oakland, CA   121   Retail Location
Long Beach, CA   133   Retail Location
Charlotte, NC   106   Retail Location
Raleigh, NC   85   Retail Location
Virginia Beach, VA   86   Retail Location
Memphis, TN   95   Retail Location

 

8
 

 

Our leases are typically for a period of three to twelve months. At December 31, 2018, the Company leased or rented 18 different facilities including its corporate headquarters, active retail locations, storage facility and offices for customer service. One of these leases terminated on December 31, 2018. Future lease obligation for these facilities are as follows:

 

Year   Amount 
2019   $282,240 
2020    159,292 
2021    148,804 
2022    120,045 
2023    24,808 
Total   $735,189 

 

We believe the above facilities are suitable for our operations.

 

ITEM 3. LEGAL PROCEDINGS.

 

From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Company’s business.

 

On or about September 5, 2015, the Company received a summons naming it in a civil action against Her Imports, LLC, Her Imports New York, LLC, Her Holding, Inc. and EZJR, Inc. (now Her Imports) from a former independent contractor of Her Imports, LLC. The complaint claims unpaid wages and overtime wages in violation of New York Labor Law, among other things. No specific damages are mentioned in the complaint. The Company subsequently answered the complaint and denied any wrongdoing as EZJR had no relationship with the contractor, whatsoever. At this point in the litigation it is impracticable to foresee the outcome, however, the Company believes it has meritorious defense and is vigorously defending this litigation. On February 16, 2018, a magistrate judge ruled that EZJR, Her Holding and Her Imports, LLC acted as a joint employer. The judge also found that genuine issues of material fact exist as to “whether plaintiff qualifies as an ‘employee’ under the law or was an ‘independent contractor’.” While the Company disagrees with the ruling that it was a joint employer, it has decided to proceed to trial on the basis that the plaintiff was an independent contractor, while reserving the right to appeal the decision.

 

On or about On March 13, 2018, the Company received a summons in a civil action alleging that it had violated the Telephone Consumer Protection Act of 1991 (TCPA). In the complaint, an individual who provided his phone number to the Company to obtain certain discounts on the Company’s products, claims that the Company sent several text messages to his cell phone without prior written consent. The suit was filed by on behalf of the plaintiff and others similarly situated. On or about June 5, 2018 the Company received a second summons in a civil action also alleging that it had violated the TCPA. In the complaint, an individual who provided her phone number to the Company to obtain certain discounts on the Company’s products, claims that the Company sent several text messages to her cell phone without prior written consent. The suit was filed by on behalf of the plaintiff and others similarly situated. In both instances our review of the circumstance surrounding the claim are that the actions are not justified and as such we made the decision to intend to vigorously defend the Company against these actions. In the case of the first action we have filed a response denying the allegations. In the case of the second action we have file a motion to dismiss or consolidate this action with the first based on what is known “the-first-to-file rule.” To date there has been no ruling on this motion.

 

On January 12, 2017, the Company entered into a Business Purchase Agreement with EnzymeBioSystems, Inc. (“EnzymeBio”), a Nevada corporation, whereby the Company entered into an agreement to purchase 100% ownership of EnzymeBio’s wholly owned subsidiary, Share Acquisition Corp. (“SAC”), a Nevada corporation in exchange for approximately 9,167 shares of the Company’s common stock and $25,000 cash. On February 28, 2017, EnzymeBio agreed to spin-off SAC as a dividend. Pursuant to the Business Purchase Agreement and Nevada Revised Stature 92A.180 (Merger of a subsidiary into parent or parent into subsidiary), SAC was to be acquired and merged into the Company. Restricted common shares of the Company were to be exchanged on a pro-rata one-for-one ownership basis. After the exchange took place, SAC would be collapsed into the Company and subsequently dissolved with the Nevada Secretary of State. The Company agreed to acquire SAC for the sole purpose to increase its shareholder base. The Company paid the $25,000, however, the share exchange did not take place and the agreement was not consummated. The Company was subsequently informed by its legal counsel that this transaction cannot be concluded under applicable securities laws. The Company informed EnzymeBio of this and requested that the $25,000 payment be returned. As a result, the $25,000 payment was recorded under Other Asset on the balance sheet. EnzymeBio refused to return the $25,000 and, as a result, on March 13, 2018 the Company filed a legal complaint against those parties which included a demand for the $25,000 as well as legal fees and specific damages the Company incurred as a result of their actions. In June 2018, the defendants responded to the complaint denying the allegation and also filed a counterclaim against the Company and its Chief Executive Officer. Subsequently, the defendants stipulated and all charges against the Company and its Chief Executive Officer were dismissed. On and effective October 30, 2018 all parties involved in the lawsuit agreed to a settlement and mutual release. Under the settlement agreement, the Company agreed to dismiss that lawsuit. In return, certain shareholders of the Company agreed to return to the Company 72,324 shares of the Company’s common stock upon the filing by the Company of a Form 15 with the U.S. Securities and Exchange Commission. The returned common stock was retired. Additionally, the shareholders agreed to place 120,000 shares of common in an attorney trust account and that such shares will be surrendered for retirement to the Company on January 1, 2020 should the Company refrain from trading its stock other than on the Pink Open Market operated by OTC Markets Group Inc.

 

9
 

 

ITEM 4. MINE SAFETY DISCLOSURE

 

Not applicable

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND PURCHASE OF EQUITY SECURITIES

 

Market Information

 

Our common stock is quoted on the Pink Open Market under the symbol “HHER”. As of March 12, 2019, there were approximately 120 shareholders of record. We believe that additional beneficial owners of our common stock hold shares in street name.

 

Dividends

 

To date we have not paid any dividends on our common stock. In the future we intend to follow a policy of retaining earnings, if any, to finance the growth of the business and do not anticipate paying any cash dividends in the foreseeable future. The declaration and payment of future dividends on the Common Stock will be the sole discretion of the Board of Directors and will depend on our profitability and financial condition, capital requirements, statutory and contractual restrictions, future prospects and other factors deemed relevant.

 

During 2018 and 2017, we paid a total of $720,000 in each year in dividends on 5,000,000 shares of non-voting, non-cumulative, callable preferred stock at a dividend rate of $0.144 per annum.

 

Issuer Purchases of Equity Security Securities

 

In the fourth quarter of 2018, we did not purchase any of our outstanding equity securities.

 

Recent Sales of Unregistered Securities

 

None.

 

ITEM 6. SELECTED FINANCIAL DATA

 

A smaller reporting company is not required to information otherwise required by this item.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis compares our results of operations for the periods ended December 31, 2018 and 2017. Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues, costs and expenses during the reporting periods. Actual results could differ materially from these estimates.

 

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Executive Overview

 

Our primary business purpose is to raise the self-esteem of young urban women by providing high quality beauty products at affordable prices to help our customers achieve their beauty goals while building a loyal customer base that we further monetize through a variety of affiliate partners.

 

Results of Operations

 

DISCUSSION OF THE YEAR ENDED DECEMBER 31, 2018 COMPARED TO THE YEAR ENDED DECEMBER 31, 2017

 

Revenues

 

Revenues for the year ended December 31, 2018 were $12,143,242 reflecting a decrease of $3,925,877 or 24.4% compared to $16,069,119 for the year ended December 31, 2017. The decrease in revenues was the result of a $3,597,904 decrease in studio revenue and a decrease of $322,196 in online revenue partially offset by an increase of $4,223 of wholesale revenue. The decrease in studio revenue was the direct result of retail location closings during 2018 as well as three mall kiosks that we open during 2017 but ultimately closed due to underperformance. The decrease in online revenue was the result of a greater competition from other online competitors.

 

Cost of revenues

 

Cost of products sold consists of the actual cost of the product, incoming freight, shipping expense to customers, merchant fees, shipping supplies and cost of packaging for the sale of human hair extension and related products. For the year ended December 31, 2018, the cost of product sold was $6,960,243, reflecting a decrease of $1,655,838 or 19.2% compared to $8,616,081 for the year ended December 31, 2017. The decrease in cost of sales was primarily a lower unit sales volume; however, a unit increase in the cost of human hair extensions also contributed.

 

Gross profit

 

For the year ended December 31, 2018, gross profit on products sold was $5,182,999 with a gross margin of 42.7%. For the year ended December 31, 2017, gross profit was $7,453,038 with a gross margin of 46.4%. The decrease of $2,270,039 in gross profit is attributable to lower unit sales, higher merchant fees, and uncollected installment sales.

 

Operating Expenses

 

Total operating expenses for the year ended December 31, 2018 was $5,414,099, reflecting a decrease of $1,087,231 or 16.7% when compared to $6,501,330 for the year ended December 31, 2017. The decrease was a result of a decrease of $1,112,071 selling expense primarily due to studio and kiosk closures. Also contributing to the decrease was a decrease in royalty expense of $$1,346 resulting from the lower sales of OSIworks products partially offsetting the decrease was an increase in general and administrative expense of $26,186 which was due to an increase in board of directors’ expenses.

 

Operating Loss

 

Because of the foregoing, we achieved an operating loss of $231,100 for the year ended December 31, 2018 in comparison to operating profit of $951,708 for the year ended December 31, 2017.

 

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Other income and expense

 

During the year ended December 31, 2018 we had interest expense of $36,713 and a non-cash loss on abandonment of fixed assets of $384,454 which primarily resulted from abandonment of our CRM software. Additionally, we booked a non-cash impairment of $3,560,000 to our trademark and non-cash contract termination expense of $3,397,500 related to common stock issued to terminate the MIP agreement with our controlling shareholder. All of the above resulted in total other expense of $7,378,666 for the year ended December 31, 2018.

 

During the year ended December 31, 2017 we had interest income of $70, interest expense of $8,703 and a non-cash loss on abandonment of fixed assets of $7,260 which primarily resulted from closing three mall kiosks during the year. This resulted in net other expense of $15,893.

 

Provision for income taxes

 

We and our subsidiary are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. An estimated blended tax rate of 2.9% has been used to calculate the benefit for income before taxes of $132,203 for the year ended December 31, 2018. An estimated blended tax rate of 1.2% has been used to calculate the provision for income before taxes of $11,036 for the year ended December 31, 2017, which consists solely of state taxes due to the utilization of a Net Operating Loss Carryforward for Federal tax purposes. In 2017 and for fourteen years thereafter there will be a permanent book versus tax difference of $546,667 each year related to the amortization of the trademark, which is deductible for tax purposes but is not amortized and expensed for financial reporting purposes.

 

As of December 31, 2018, we had a tax loss carryforward of approximately $5,832,269 which can be used to offset future Federal income taxes. This carryforward expires in 2038.

 

Net income (loss)

 

As a result of the above, net loss attributable to company, for the year ended December 31, 2018, was $7,477,563 compared to net income attributable to company of $924,779 for the year ended December 31, 2017.

 

Liquidity and Capital Resources

 

We had a working capital surplus of $1,185,408 and $2,002,059 at December 31, 2018 and 2017, respectively, representing a $816,651 decrease in our working capital. As of April 13, 2018, we had approximately $172,000 in cash on hand as a result of our return to profitability.

 

Our primary use of cash is the purchase of inventory and the payment of dividends on outstanding callable non-cumulative preferred stock. We anticipate that inventory may increase as a result of sales growth and the addition of more SKU’s to our product line and when we open new retail operations. We currently plan to fund our growth through earnings, however, have obtained a credit facility related to the purchase of inventory. We believe we have sufficient working capital to pay our expenses for the next twelve months and anticipate paying monthly dividends of $60,000 on the preferred stock until such time that we call the preferred stock.

 

Net Cash Provided by Operating Activities

 

Net cash provided by operating activities for the year ended December 31, 2018 totaled $447,587 and resulted from a net loss of $7,477,563 offset by charges of $3,560,000 from impairment of intangible, $3,395,000 of contract termination expense, and a decrease in inventories of $655,141 and receivables of $103,372. These were offset by a decrease in accounts payable and accrued liabilities ($176,182) and income tax liability ($134,432) and an increase in a related party receivable of $96,867. The charges resulting from the impairment of the intangible and the termination expense had no impact on cash.

 

Net cash provided by operating activities for the year ended December 31, 2017 totaled $569,224 and resulted primarily from net income attributable to company of $924,779, offset by a net change in operating assets and liabilities of ($521,290). The most significant change in operating assets and liabilities were increases of $288,300 in inventories, $163,442 in deposits, and $120,194 in receivables. Non-cash items were $129,945 of depreciation and amortization, $28,530 of stock-based compensation and $7,260 of loss on abandonment of fixed assets.

 

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Net Cash Used in Investing Activities

 

Net cash used in investing activities during the year ended December 31, 2018 totaled $34,440 of purchases of fixed assets.

 

Net cash used in investing activities during the year ended December 31, 2017 totaled $148,144, including $110,000 for the development of a new eCommerce Website, and $38,144 for the purchase of retail location equipment and office equipment.

 

Net Cash Used in Financing Activities

 

Net cash used in financing activities during the year ended December 31, 2018 totaled $495,411 resulting from payments of preferred dividends of $720,000 and repayments on notes payable of $2,059,481 which were offset by the issuance of notes payable of $2,284,070.

 

Net cash used in financing activities during the year ended December 31, 2018 totaled $586,415 resulting from payments of preferred dividends of $720,000 and repayments on notes payable of $43,805 which were offset by the issuance of notes payable of $177,390.

 

Capital Resource Considerations

 

Although we do not anticipate the need to purchase significant additional material capital assets in order to carry out our business, it may be necessary for us to purchase a new point-of-sale system with enhance inventory management should our sales grow as anticipated.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results or operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Related Party Transactions

 

For information on related party transactions and their financial impact, see Note 5 to the Consolidated Financial Statements.

 

Critical Accounting Policies and Estimates

 

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses. Management bases estimates on historical experience and other assumptions it believes to be reasonable under the circumstances and evaluates these estimates on an on-going basis. Actual results may differ from these estimates under different assumptions or conditions.

 

The following critical accounting policies reflect the significant estimates and judgments used in the preparation of our consolidated financial statements. With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent consolidated results of operations. For more information on our accounting policies, please refer to the Notes to Consolidated Financial Statements in this annual report on Form 10-K.

 

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Revenue Recognition

 

  We recognize sales made in our stores at the point of sale, and sales through our e-commerce business at an estimated date of receipt by the customer. Amounts billed to customers for shipping and handling sales are classified as other revenues. We make estimates of future sales returns related to current period sales. Management analyzes historical returns, current economic trends and changes in customer acceptance of our products when evaluating the adequacy of the reserve for sales returns.
     
    Customers pay for the products using either cash, a debit card or a credit card. All sales are final. In the case of cash sales at the studio, the studio manager makes a nightly deposit of the cash, rounded down to the nearest dollar. For cash sales, we recognize the sale at the time the customer tenders payment in cash. For credit card and debit sales, the Company recognizes the sale when the card is charged and approved.
     
   

Products purchased on the Company’s Website are primarily paid for using either debit cards, credit cards, or PayPal Revenue for online product sales are recognized upon shipment of the product.

 

From time to time, the Company partners with third-party financing companies which provide our customers the ability to pay over time. These arrangements are between the third-party financing company and the customer and, hence, there is no recourse against the Company. In these instances, revenue is recorded at the time of sale when the customer makes the purchase at a retail location and at the time of shipment when the purchase is made online.

     
  Employee discounts are classified as a reduction of revenue.
     
  Sales tax collected from customers is excluded from revenue and is included in accrued liabilities on our Consolidated Balance Sheets to the extent it has not been paid to the various state taxing authorities as of the financial reporting date.

 

Inventory Valuation

 

Merchandise inventories are carried at the lower of average cost or market value. We evaluate all our inventories to determine excess inventories based on estimated future sales. Excess inventories may be disposed of through our e-commerce business and stores. Based on historical results experienced through various methods of disposition, we write down the carrying value of inventories that are not expected to be sold at or above cost. Additionally, we reduce the cost of inventories based on an estimate of lost or stolen items each period.

 

Intangible Assets

 

Indefinite-lived intangible assets, such as the Her trade name is not subject to amortization. The Company assesses the recoverability of indefinite-lived intangibles whenever there are indicators of impairment, or at least annually in the fourth quarter. If the recorded carrying value of an intangible asset exceeds its estimated fair value, the Company records a charge to write the intangible asset down to its fair value. Any definite-lived intangibles, are amortized on a straight-line basis over their useful life.

 

We estimate the enterprise fair value based on a combination of an income approach, specifically the discounted cash flow, a market approach, and a transaction approach. If the recorded carrying value of the intangible asset exceeds its estimated fair value in the first step, an impairment charge is recorded to write intangible asset down to its fair value. For the year ended December 31, 2018, based on expert analysis and advice we determined that there was an impairment to the carrying value of our trademark in the amount of $3,560,000. For the year ended December 31, 2017 there were no impairments recorded.

 

Long-lived Asset Impairment

 

We are exposed to potential impairment if the book value of our assets exceeds their expected undiscounted future cash flows. The major components of our long-lived assets are software, store fixtures, equipment and leasehold improvements. We test for impairment during the fourth quarter, and the net book value is reduced to fair value if it is determined that the sum of expected discounted future net cash flows is less than net book value. These assumptions and estimates are necessarily subjective and based on management’s best estimates based on the information available at the time such estimates are made.

 

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In 2018 we wrote of software no longer being utilized, resulting in a charge of $383,542. We did not recognize any impairment charges related to software during the year ended December 31, 2017. During the years ended December 31, 2018 and 2017 charge of $912 and $7,260, respectively, due to abandonment of certain fixed assets.

 

Income Taxes

 

An asset and liability method is used to account for income taxes. Deferred tax assets and deferred tax liabilities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred taxes are measured using current enacted tax rates in effect in the years in which those temporary differences are expected to reverse. Inherent in the measurement of deferred taxes are certain judgments and interpretations of enacted tax law and published guidance.

 

We maintain valuation allowances where it is more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in the valuation allowances are included in our tax provision in the period of change. In determining whether a valuation allowance is warranted, we evaluate factors such as prior earnings history, expected future earnings, carry-back and carry-forward periods and tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset.

 

With respect to uncertain tax positions that we have taken or expect to take on a tax return, we recognize in our financial statements the impact of tax positions that meet a “more likely than not” threshold, based on the technical merits of the position. The tax benefits recognized from uncertain positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon effective settlement.

 

Share-based Compensation

 

The fair value of employee share-based awards is recognized as compensation expense in the statement of operations. Determining the fair value of options at the grant date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility and the expected dividend yield. Upon grant of awards, we also estimate an amount of forfeitures that will occur prior to vesting. If actual forfeitures differ significantly from the estimates, share-based compensation expense could be materially impacted.

 

Recent Pronouncements

 

Except as noted below, the Company has considered all recent accounting pronouncements and has concluded that there are no recent accounting pronouncements that may have a material impact on its consolidated financial statements, based on current information.

 

In July 2018, the FASB issued ASU 2018-10 Leases (Topic 842), Codification Improvements and ASU 2018-11 Leases (Topic 842), Targeted Improvements, to provide additional guidance for the adoption of Topic 842. ASU 2018-10 clarifies certain provisions and correct unintended applications of the guidance such as the application of implicit rate, lessee reassessment of lease classification, and certain transition adjustments that should be recognized to earnings rather than to stockholders’ equity. ASU 2018-11 provides an alternative transition method and practical expedient for separating contract components for the adoption of Topic 842. In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842) which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases with terms greater than 12 months. ASU 2018-11, ASU 2018-10, and ASU 2016-02 (collectively, “the new lease standards”) are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect the new lease standards will have on its Consolidated Financial Statements; however, the Company anticipates recognizing assets and liabilities arising from any leases that meet the requirements under the new lease standards on the adoption date and including qualitative and quantitative disclosures in the Company’s Notes to the Consolidated Financial Statements.

 

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In July 2018, the FASB issued ASU 2018-09, Codification Improvements. The amendments in ASU 2018-09 affect a wide variety of Topics in the FASB Codification and apply to all reporting entities within the scope of the affected accounting guidance. The Company has evaluated ASU 2018-09 in its entirety and determined that the amendments related to Topic 718-740, Compensation-Stock Compensation-Income Taxes, are the only provisions that currently apply to the Company. The amendments in ASU 2018-09 related to Topic 718-740, Compensation-Stock Compensation-Income Taxes, clarify that an entity should recognize excess tax benefits related to stock compensation transactions in the period in which the amount of the deduction is determined. The amendments in ASU 2018-09 related to Topic 718-740 are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company does not expect the adoption of the new standard to have a material impact on the Company’s Consolidated Financial Statements.

 

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This standard amends Accounting Standards Codification 740, Income Taxes (ASC 740) to provide guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (the Tax Reform Act) pursuant to Staff Accounting Bulletin No. 118, which allows companies to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. As described in the footnotes to the Annual Report on Form 10-K, the Company’s accounting for the tax effects of enactment of the Tax Reform Act is being assessed; however, in certain cases, as described below, we made a reasonable estimate of the effects on our existing deferred tax balances and valuation allowance. The Company has not completed the accounting with regard to the tax effects associated with an intra-entity transfer of certain intellectual property rights with the enactment of Tax Reform Act. Our accounting for the intra-entity transfer reflects the utilization of net operating losses on the basis of the laws in effect before the Tax Reform Act. The Company is evaluating the impact under Tax Reform Act on the Company’s global business structure. In all aspects, the Company will continue to make and refine calculations as additional analysis is completed. The Company expects to complete the accounting assessment during the one-year measurement period provided by SAB 118.

 

Cautionary Note Regarding Forward-Looking Statements

 

This report includes forward-looking statements including statements regarding plans for our business operations and our liquidity.

 

All statements other than statements of historical facts contained herein, including statements regarding our future financial position, liquidity, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.

 

The results anticipated by any or all of these forward-looking statements might not occur. Important factors, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements are contained in the Risk Factors that follow. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise. For more information regarding some of the ongoing risks and uncertainties of our business, see the Risk Factors below.

 

Risk Factors

 

Investing in our common stock involves a high degree of risk. You should carefully consider the following Risk Factors before deciding whether to purchase or sell securities of Her. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations or our financial condition. If any of the events discussed in the Risk Factors below occur, our business, consolidated financial condition, results of operations or prospects could be materially and adversely affected. In such case, the value and marketability of the common stock could decline.

 

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Risks Relating to Our Business

 

Although we were profitable in 2017, we lost money from operations in 2018 and we cannot assure you that we will sustain profitability in the future.

 

We generated operating profit of approximately $952,000 for the year ended December 31, 2017 and incurred a loss from operation of approximately $231,000 for the year ended December 31, 2018. We can provide no assurance that we will become profitable in the future. If we cannot continue to generate sufficient revenues to operate profitably, we may be forced to cease, limit or suspend operations, or we may be required to raise capital to maintain or grow our operations. There is no assurance that we will be able to raise such capital.

 

If our largest shareholder chooses to cease providing services to the Company, our results of operations may be adversely affected.

 

Our largest shareholders, Cabello Real Ltd. and Cabello Real FZE (collectively, “Cabello”) is indirectly controlled by Mr. Patrick Terry. A significant portion of the Company’s revenues are generated by the online marketing efforts of Mr. Terry. We do not pay Mr. Terry or Cabello any compensation for these marketing services and neither Cabello nor Mr. Terry is not subject to any non-compete agreement. Although Mr. Terry, through Cabello, has a large interest in the Company’s success in order to see appreciation from his large share ownership and continued payments of dividends in connection with his preferred stock ownership ($60,000 per month), he has no obligation to continue providing these services or competing with the Company if he deems it more beneficial to Cabello. In such event, we would be required to find an alternative marketing partner which may take time and such alternative might not be as effective. If we were to lose the services of Mr. Terry, our results of operations may be adversely affected.

 

If we continue to see an increase in the number of competitors within our industry, we may see a decrease in market share and our sales will be adversely affected.

 

The hair care and beauty product industries are highly competitive and have limited barriers to entry, especially from an online retail standpoint. The recent decline in online revenue may be attributable to competitive factors. In every locale in which we currently operate a physical retail space, there are competitors offering similar products. In many cases, we face one or more competitors within the locale in which we operate, including companies operating salons as departments within department stores, salon chains, independently owned salons, as well as retailers specifically dealing in hair extension and hair care products. This competition could have a material adverse effect on our business, operations, and financial position. Any net loss of market share to these competitors could negatively affect sales volume of the Company. In turn, this would reduce the Company’s revenue and profits and could have a material adverse effect on the business, results of operations, and financial position of the Company.

 

If we are unable to maintain working relationships with our suppliers, we will be unable to meet our customers’ orders, and our business operations will be adversely affected.

 

The Company sells 100% authentic human hair extensions; a much higher quality product than the synthetic hair products many of our competitors offer. However, because we purchase and import 100% authentic human hair, we are dependent upon our relationship with our suppliers to provide us with sufficient material supply, which we, in turn, package, process, and sell to our customers via physical retail stores and online sales. Because we use 100% authentic human hair, and we do not manufacture synthetic hair ourselves, our suppliers’ ability to acquire sufficient quantities of human hair is crucial. The price of qualified raw materials can be highly volatile due to several factors, including a general shortage of materials, an unexpected increase in demand for materials, disruptions in suppliers’ business operations, and competitive pressure among suppliers to increase the price of materials. Suppliers may also choose, from time to time, to extend lead times or limit supplies due to a shortage in materials. Additionally, any significant price increase in materials that cannot be passed onto the consumer could have a material adverse effect on our financial condition or business operations. Although we presently have no reason to believe that it will occur, if major suppliers were to cancel their distribution agreements with us, thereby interrupting our supply chain, it would cause a reduction in the sale of products until the Company found a suitable alternative supplier. Any such interruption would have an adverse effect on our business and results of operations.

 

If our customers experience a significant decrease in income, many of them will reduce their purchases of our products, and our revenues will be adversely affected.

 

Beauty products, by their nature, are largely elastic goods, the sale of which are dependent upon the consumer’s relative disposable income and their ability to purchase “luxury” goods and products. A negative shift in the income level of a significant portion of our consumer base, which could at any point be caused by a variety of economic factors, would potentially cause a significant decrease in the demand for our products. This is somewhat reflected by the fact that our revenues have historically been significantly better during tax season, when consumers have an influx of disposable income. In the event there is downturn in the economy or increase in unemployment, our revenues will be adversely affected.

 

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If we are unable to distinguish our products as having higher quality than those of our competitors, customers will opt to purchase more inexpensive options, and our revenues will be adversely affected.

 

The continued success of our business will depend upon our ability to create and expand brand awareness. The markets for hair extension and related hair care and beauty products are already highly competitive, with many well-known brands already holding a significant market share. Our ability to compete effectively and generate revenue will continue to be based upon our ability to create awareness of our products and distinguish them from those of our competitors. We must continue to establish Her Imports as a marquis provider of quality, 100% human hair products, at a competitive price, differing from our competitors who offer products of lesser quality, mostly comprised of synthetic hair. If we are not successful at differentiating our superior products, our revenues and results of operations will be adversely affected.

 

Because our future growth and profitability will depend in large part upon the effectiveness of our marketing and advertising efforts, if those efforts are unsuccessful we may not be profitable in the future.

 

Our future growth and profitability will depend in large part upon our media performance, including our ability to:

 

  Create greater awareness of our products;
  Identify the most effective and efficient level of spending in each market and specific media vehicle;
  Determine the appropriate creative message and media mix for advertising, marketing and promotional expenditures; and
  Effectively manage marketing costs (including creative and media).

 

Our marketing expenditures may not result in increased revenue or generate sufficient levels of brand name and program awareness. If our media performance is not effective, our future results of operations and financial condition will be adversely affected.

 

If the government were to pass additional regulations regarding the import, manufacture, distribution, or sale of our products, overhead costs to satisfy corresponding compliance requirements will increase, which will have an adverse impact on our business operations.

 

Presently, the import and sale of our 100% human hair products is not burdened by significant regulation or government scrutiny. There is limited public health risk related to our product, and there is little reason to believe that the current political climate warrants concern of additional regulation. However, should the government decide to pass sweeping regulatory reform, it could potentially have significant impacts on our need to increase quality control and compliance measures, which would in turn require an increase in product price and likely negatively affect sales, thereby resulting in decreased revenues and profit margins.

 

If we do not expand our geographical footprint by expanding our physical retail operations, we may yield significant market share to our competitors, adversely impacting our results of operations.

 

We presently lease 16 retail locations throughout the United States, including our corporate headquarters and inventory properties both located in Las Vegas, Nevada, a warehouse in Lanhan, Maryland and contract customer support representatives located in Toronto, Canada and the Philippines. While we derive significant revenue from online sales, there is are inherent benefits from both sales and marketing standpoints to having physical retail locations. As the success of our business continues to rely on our ability to distinguish our quality products from those of our competitors, expanding our physical footprint may bolster those efforts. We will continue to examine the potential benefits of expanding our physical presence via additional retail spaces in the future. If we are unsuccessful, our revenues and results of operations will be adversely affected.

 

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Risks Related to Our Common Stock

 

Because the market for our common stock is limited, persons who purchase our common stock may not be able to resell their shares at or above the purchase price paid by them.

 

Our common stock trades on the OTC Pink Marketplace which is not a liquid market. With some limited exceptions, there has not been an active public market for our common stock. We cannot assure you that an active public market for our common stock will develop or be sustained in the future. If an active market for our common stock does not develop or is not sustained, the price may decline.

 

Because we are subject to the “penny stock” rules, brokers cannot generally solicit the purchase of our common stock which adversely affects its liquidity and market price.

 

The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock on the “pink sheets” market has been substantially less than $5.00 per share and therefore we are currently considered a “penny stock” according to SEC rules. This designation requires any broker-dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules limit the ability of broker-dealers to solicit purchases of our common stock and therefore reduce the liquidity of the public market for our shares.

 

Moreover, as a result of apparent regulatory pressure from the SEC and the Financial Industry Regulatory Authority, a growing number of broker-dealers decline to permit investors to re-sell shares of penny stocks like Her. This may have had and may continue to have a depressive effect upon the common stock price.

 

Due to factors beyond our control, our stock price may be volatile.

 

Any of the following factors could affect the market price of our common stock:

 

short selling or manipulative conduct by market makers and others,
   
our failure to generate recurring sustainable revenue,
   
our failure to achieve and maintain profitability,
   
actual or anticipated variations in our quarterly results of operations,
   
announcements by us or our competitors of significant contracts, new products, acquisitions, commercial relationships, joint ventures or capital commitments,
   
disclosure of any adverse results in litigation,
   
the loss of major customers or product or component suppliers,
   
the loss of significant business relationships,
   
our failure to meet financial analysts’ performance expectations,
   
changes in earnings estimates and recommendations by financial analysts, or
   
changes in market valuations of similar companies.

 

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs and divert our management’s time and attention, which would otherwise be used to benefit our business.

 

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An investment in Her Imports may be diluted in the future as a result of the issuance of additional securities or the exercise of options, warrants or convertible notes.

 

In order to raise additional capital to fund our strategic plan, we may issue additional shares of common stock or securities convertible, exchangeable or exercisable into common stock from time to time, which could result in substantial dilution to any person who purchases our common stock. We cannot assure you that we will be successful in raising funds from the sale of common stock or other equity securities.

 

In the future, we may issue preferred stock without the approval of our shareholders, which could make it more difficult for a third party to acquire us and could depress our stock price.

 

Our Board may issue, without a vote of our shareholders, one or more series of preferred stock that have more than one vote per share. This could permit our board of directors to issue preferred stock to investors who support us and our management and permit our management to retain control of our business. Additionally, issuance of preferred stock could block an acquisition resulting in both a drop in our stock price and a decline in interest of our common stock.

 

If our common stock becomes subject to a “chill” or a “freeze” imposed by the Depository Trust Company, or DTC, your ability to sell your shares may be limited.

 

The DTC acts as a depository or nominee for street name shares or stock that investors deposit with their brokers. Although through DTC our common stock is eligible for electronic settlement rather than delivery of paper certificates, DTC in the last several years has imposed a chill or freeze on the deposit, withdrawal and transfer of common stock of issuers whose common stock trades on the OTC Markets. Depending on the type of restriction, it can prevent shareholders from buying or selling our shares and prevent us from raising money. A chill or freeze may remain imposed on a security for a few days or an extended period of time (in at least one instance a number of years). While we have no reason to believe a chill or freeze will be imposed against our common stock, if it were your ability to sell your shares would be limited.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

 

Inapplicable to Smaller Reporting Companies.

 

ITEM 8. FINANCIAL STATEMENTS

 

The financial statements are included as a separate section following the signature page to the Form 10-K.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

Not applicable.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our disclosure controls and procedures, as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in rules and forms adopted by the SEC, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

 

Management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Form 10-K. Based on such evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of December 31, 2018, our disclosure controls and procedures were not effective. Our disclosure controls and procedures were not effective because of the “material weaknesses” described below under “Management’s Report on Internal Control over Financial Reporting,” which are in the process of being remediated as described below under “Management Plan to Remediate Material Weaknesses.”

 

20
 

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

  pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
     
  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our Board of Directors; and
     
  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

 

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable, not absolute, assurance that the objectives of the control system are met and may not prevent or detect misstatements. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Further, over time control may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate.

 

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In making its assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, Internal Control – Integrated Framework (2013). Based on its assessment, management has concluded that we had certain control deficiencies described below that constituted material weaknesses in our internal controls over financial reporting. As a result, our internal control over financial reporting was not effective as of December 31, 2018.

 

A “material weakness” is defined under SEC rules as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls. As a result of management’s review of the investigation issues and results, and other internal reviews and evaluations that were completed after the end of fiscal year 2018 related to the preparation of management’s report on internal controls over financial reporting required for this annual report on Form 10-K, management concluded that we had material weaknesses in our control environment and financial reporting process consisting of the following:

 

  However, during the year the outside Board of Directors and, hence, the Audit Committee was disbanded which eliminated oversight in the establishment and monitoring of required internal controls and procedures
     
  Insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements.
     
  While we have implemented monitoring of cash sales and deposit on a daily basis, during 2018 there were occasional lapses in these controls.

 

  Due to our small size, it is often difficult to provide for segregation of duties which is essential for a robust control environment.

 

21
 

 

We do not believe the material weaknesses described above caused any meaningful or significant misreporting of our financial condition and results of operations for the fiscal year ended December 31, 2018.

 

Management Plan to Remediate Material Weaknesses

 

Management continually attempts to consider remediation of the material weaknesses described above, however due to limited resources and t extremely small administrative staff (two people) preventive control measures are difficult to implement.

 

We are committed to continuing to improve our internal control processes and will continue to diligently and vigorously review our financial reporting controls and procedures. As we continue to evaluate and work to improve our internal control over financial reporting, we may determine to take additional measures to address control deficiencies.

 

Changes in Internal Control over Financial Reporting

 

During the past year we have implemented several procedures and internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act), however, such controls were not in effect during the entire year and therefore we do not believe that these controls have yet materially affected our internal controls over financial reporting.

 

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only the management’s report in this annual report.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

 

Identification of Directors and Executive Officers.

 

The following table sets forth certain information regarding our current directors and executive officers.

 

Name   Age   Position
Barry Hall   70   Chairman of the Board, Chief Executive Officer and Chief Financial Officer

 

Biographies of Directors/Officers

 

Mr. Barry Hall, Executive Chairman of the Board of Directors Chief Executive Officer and Chief Financial Officer

 

Mr. Hall was appointed to the Board as Executive Chairman and as Chief Financial Officer on January 28, 2014 and was appointed as Chief Executive Officer on May 15, 2015. From July 2007 to date Mr. Hall has served as the President of Carlaris LV Inc. (“Carlaris”) and its predecessor, Carlaris, Inc. Carlaris provided consulting services to the Company until February 2017 pursuant to a consulting agreement between Carlaris and the Company, dated December 1, 2015. It again provided consulting services from October 1, 2017 to December 31, 2018. Mr. Hall was appointed a director as the result of his financial and executive skills.

 

22
 

 

Family Relationships

 

There are no family relationships among the Company’s directors and/or executive officers.

 

Board responsibilities

 

Because we only have one director who is our sole executive officer, our Board of Directors (the “Board”) performs no oversight function. Its duties are limited to approving matters required by state law..

 

Code of Ethics

 

The Board has adopted a Code of Business Conduct and Ethics (the “Code of Ethics”) that applies to all of the Company’s employees, including the Company’s Chief Executive Officer and Chief Financial Officer. Although not required, the Code of Ethics also applies to the Company’s directors. The Code of Ethics provides written standards that we believe are reasonably designed to deter wrongdoing and promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, full, fair, accurate, timely and understandable disclosure and compliance with laws, rules and regulations and the prompt reporting of illegal or unethical behavior. We will provide a copy, without charge, to anyone that requests one in writing to Her Imports, 8861 W. Sahara Ave, Suite 210, Las Vegas, NV 89117 Attention: Corporate Secretary.

 

Communication with our Board of Directors

 

Although we do not have a formal policy regarding communications with the Board, shareholders may communicate with the Board by writing to us at Her Imports, 881 W. Sahara Ave, Suite 210, Las Vegas, NV 89117 Attention: Corporate Secretary. Shareholders who would like their submission directed to a member of the Board may so specify, and the communication will be forwarded, as appropriate.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our directors, executive officers, and persons who own more than 10% of our common stock to file initial reports of ownership and changes in ownership of our common stock and other equity securities with the SEC. These individuals are required by the regulations of the SEC to furnish us with copies of all Section 16(a) forms they file. Based solely on a review of the copies of the forms furnished to us, and written representations from reporting persons that no Forms 5 were required to report delinquent filings, we believe that all filing requirements applicable to our officers, directors and 10% beneficial owners were complied with during 2018.

 

ITEM 11. EXECUTIVE COMPENSATION

 

The following information is related to the compensation paid, distributed or accrued by us to our Chief Executive Officer (principal executive officer) and the two other most highly compensated executive officers serving as of December 31, 2018 whose compensation exceeded $100,000, which we refer to as “Named Executive Officers.” With the exception of Ms. Tolanda Shorter and Mr. Barry Hall, no other executive officer serving as of December 31, 2018 received compensation of at least $100,000.

 

23
 

 

Summary Compensation Table

 

Name  Principal
Position
  Year   Salary   Bonus   Option Awards   All Other
Compensation
   Total 
Barry Hall (1)  CEO & CFO   2018   $180,000    -0-    -0-   $-0-   $180,000 
   CEO & CFO   2017    110,192    -0-    -0-   $62,700   $172,892 
                                  
Tolanda Shorter (2)  President   2018   $122,637    -0-    -0-   $4,000   $126,637 
       2017   $159,230   $30,000   $76,080   $14,100   $279,410 

 

  (1) Mr. Hall became a full-time employee of the Company on March 1, 2017. Effective October 1, 2017, Mr. Hall agreed to revert to his prior Consulting Agreement with the Company in order to conserve cash. For the balance of 2017, his corporation received a fee of $10,000 per month. He became a full-time employee again on January 2, 2018. All of Mr. Hall’s “All Other Compensation” consisted of consulting fees which are not included in under Salary.
     
  (2)

Tolanda Shorter was appointed as Vice President, Product Development and Marketing on February 1, 2017 and President on July 31, 2017. From February 1, 2017 to February 28, 2017, Ms. Shorter was compensated as a consultant until she became a full-time employee on March 1, 2017. In 2017 Ms. Shorter’s “All Other Compensation” consisted of $10,100 in consulting fees and $4,000 for reimbursement of medical insurance. Ms. Shorter resigned from her position on September 1, 2018.

 

Compensation Agreements/Arrangements

 

March 1, 2017, the Company entered into a two-year Employment Agreement with Mr. Barry Hall. Under that Agreement, he received annual compensation of $200,400 per year through September 30, 2017. Effective October 1, 2017, Mr. Hall agreed to revert to his prior Consulting Agreement with the Company to conserve cash. For the balance of 2017, during which time his corporation received a fee of $10,000 per month. Effective January 1, 2018, Mr. Hall agreed to reduce his compensation to $180,000 per year for the remainder of the term. This agreement remains in effect.

 

Director Compensation

 

On July 27, 2017, the Board adopted a Board Compensation Package (“BCP”). The BCP provided that independent Board members received 8,333 stock options, vesting quarterly over two years, to be granted on the day of election or appointment to the Board. Additionally, under the BCP these Board members received (i) $1,000 for each quarterly board meeting attended, (ii) $250 for each special Board meeting attended, (iii) 833 stock options, vesting 25% quarterly over the course of the year, to be granted on the first day of each year and (iv) reimbursements to attend annual Board and shareholder meetings.

 

24
 

 

Non-employee members of our Board of Directors were compensated for as follows:

 

Fiscal 2018 Director Compensation

 

Name  Fees
Earned or
Paid in
Cash ($)
   Stock
Awards ($)
   Options
Awards ($) (1)
   Total ($) 
Leonard Dreyer (2)  $4,750         -    1,374    6,124 
Karen Macdonald (3)   4,000    -    1,374    5,374 
Aric Perminter (3)   4,750    -    1,374    6,124 
Faisal Razzaqi (3)   4,000    -    1,374    5,374 

 

  (1) Amounts reported represent the aggregate grant date fair value of awards granted without regards to forfeitures granted to the independent members of our Board during 2018, computed in accordance with ASC 718. This amount does not reflect the actual economic value realized by the director.
  (2) Mr. Dreyer served on the Board from December 18, 2017 to October 31, 2018.
  (3) Dr. Macdonald, Mr. Perminter and Dr. Razzaqi served on the Board from July 28, 2017 to October 31, 2018.

 

As of December 31, 2018, there were no securities granted under equity compensation plans

 

ITEM 12. SERCURITY OWNERSHIP OF CERTAN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth the number of shares of Her Import’s common stock beneficially owned as of April 15, 2019 by (i) those persons known by her to be owners of more than 5% of its common stock, (ii) each director and director nominee, (iii) the Named Executive Officers (as disclosed in the Summary Compensation Table), and (iv) Her Import’s executive officers and directors as a group. Unless otherwise specified in the notes to this table, the address for each person is: c/o Her Imports, 8861 W. Sahara Ave, Suite 210, Las Vegas, NV 89117.

 

Title of Class  Beneficial Owner 

Amount of

Beneficial

Ownership (1)

  

Percent

Beneficially

Owned (1)

 
            
Named Executive Officers:             
Common Stock  Barry Hall   62,500    * 
Common Stock  Tolanda Shorter   -0-    -0- 
Common Stock  All directors and executive officers as a group (1 person)   62,500    * 
              
5% Shareholders:             
Common Stock  Cabello Real Ltd. (2)   1,272,696    14.8%
Common Stock  Cabello Real FZE (2)   4,750,000    55.3%
Common Stock  Malaika Terry (3)   1,000,000    11.6%

 

* indicates less than 1%

 

(1) Based on 8,584,135 shares of common stock issued and outstanding as of April 15, 2019. Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power with respect to securities. A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days whether upon the exercise of options, warrants or conversion of notes. Unless otherwise indicated in the footnotes to this table, Her Imports believes that each of the shareholders named in the table has sole voting and investment power with respect to the shares of common stock indicated as beneficially owned by them.
   
(2) Cabello Real Ltd is located at Level 23 Boulevard Plaza Tower 2 Emaar Boulevard, Dubai, United Arab Emirates. Cabello Real FZE is located at Business Center, Al Shmookh Building, UAQ Free Trade Zone, Umm Al Quwain, United Arab Emirates. Mr. Jonathan Terry indirectly controls Cabello Real Ltd. and Cabello Real FZE. Additionally, Cabello Real Ltd. owns 5 million shares of non-voting callable preferred stock.
   
(3) Daughter of Mr. Jonathan Terry.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION, AND DIRECTOR INDEPENDENCE

 

Related Party Transactions

 

Barry Hall

 

During the year ended 2017 we paid Carlaris LV, Inc. $62,700, for consulting services. This company is controlled by Mr. Barry Hall, who is our Chairman, Chief Executive Officer and Chief Financial Officer.

 

25
 

 

Denis Betsi

 

During the year ended December 31, 2017 $126,000, for consulting services to a company controlled by Mr. Denis Betsi, who at the time of the payments was our Chief Technology Officer and a director.

 

Cabello

 

On November 28, 2016, the Company entered into an Asset Share Purchase & Business Agreement with Cabello to acquire the exclusive U.S. rights to the Her Imports trademark. In addition to these rights, the Company also purchased certain other assets owned by Cabello including customer lists and various digital content. In exchange for these rights, and other digital assets, the Company issued to Cabello 10,000,000 shares of non-voting, non-cumulative, callable preferred stock (subsequently revised to 5,000,000) with a dividend rate of $0.144 per share per annum and a liquidation preference of $2.00 per share. In addition, the Cabello received 1,250,000 shares of common stock. Both the preferred stock and common stock issued were unregistered. Additionally, the Company applied with the State of Nevada for the approval of the Certificate of Designations, Preferences, and Rights of Callable Non-cumulative Preferred Stock. The Certificate designated 5,000,000 as Callable Non-cumulative Preferred Stock at a par value of $.001 per share. Cabello is controlled by Mr. Jonathan Terry, who is the Company’s principal shareholder who is also actively involved in its daily operations.

 

On June 29, 2014, the Company entered into the MIP with Leader, a shareholder. On July 31, 2017, the MIP was assigned by Leader to Cabello. Prior to signing the MIP Leader advanced the Company $50,000 which the MIP allowed to be converted to 83,333 shares of common stock at $.60 per share. That left up to 9,500,000 shares of common stock that Cabello could purchase at $0.05 per share from its portion of the funds generated by the offers it creates. Contrary to customary practice, the MIP did not provide for any adjustment in the event of a future reverse split, so the Company’s recent reverse split did not affect the number of shares purchasable or the exercise price. This highlighted an unfair agreement which adversely affected the Company. This problem was exacerbated since Cabello is a related party. From April 19 to April 20, 2018, Cabello ran a program to sell a variety of the Company’s hair products. This program generated approximately $150,000 in revenue, however, a final accounting of the results of the program were never completed. Instead, on June 20, 2018 the Company issued to Cabello 4,500,000 shares of restricted common stock in exchange for cancelation of the MIP and forgiveness of any monies owed to Cabello for program in April. This cancellation resulted in a non-cash expense of $3,397,500 based on the estimated value of the stock issued in exchange for the cancellation of the MIP.

 

At December 31, 2018 and December 31, 2017, the Company had a receivable from Cabello, its principal stockholder, of $204,893 and $108,026 that resulted from payments made by the Company on behalf of Cabello. The Company has the right to offset this receivable against any future dividend payments owed Cabello related to the preferred stock. Subsequent to December 31, 2018, two dividends of $60,000 each were declared and offset against amounts owed by Cabello. Finally, in 2018 and 2017, the Company incurred $13,329 and $14,675, respectively, in royalty expense which were also offset against the Cabello receivable.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

On July 28, 2015, our Board of Directors approved the appointment of and engaged RBSM LLP, as our independent registered public accounting firm.

 

26
 

 

The aggregate fees billed to us or incurred by us to RBSM, LLP for the year ended December 31, 2018 and 2017 are as follows:

 

    For Year Ended December 31, 2018     For Year Ended December 31, 2017  
Audit Fees (1)   $ 104,025     $ 69,961  
Audit-Related Fees   $ -0-     $ -0-  
Tax Fees   $ -0-     $ -0-  
Total   $ 104,025     $ 69,961  

 

(1) Audit Fees include fees billed and expected to be billed for services performed as of December 31, 2018 to comply with GAAP, including the recurring audit of our financial statements for such period included in this Annual Report on Form 10-K and for the reviews of the quarterly financial statements included in the Quarterly Reports on Form 10-Q filed with the SEC.

 

Audit Committee Policies and Procedures

 

At the time of engaging RBSM we did not have an audit committee; therefore, our Board pre-approved all services to be provided to us by our independent auditor. This process involves obtaining (I) a written description of the proposed services, (ii) the confirmation of our Principal Accounting Officer that the services are compatible with maintaining specific principles relating to independence, and (iii) confirmation from our securities counsel that the services are not among those that our independent auditors have been prohibited from performing under SEC rules. In the year ended December 31, 2018, all fees paid to RBSM, LLP were pre-approved in accordance with this policy.

 

Less than 50 percent of hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal year were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees.

 

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

 

(1) Financial Statements. See Index to Consolidated Financial Statements, which appears on page F-1 hereof. The financial statements listed in the accompanying Index to Consolidated Financial Statements are filed herewith in response to this Item.
   
(2) Financial Statements Schedules. All schedules are omitted because they are not applicable or because the required information is contained in the Consolidated Financial Statements or notes included herein.
   
(3) Exhibits.

 

Exhibit       Incorporated by Reference   Filed or
Furnished
No.   Exhibit Description   Form   Date   Number   Herewith
                     
3.1   Articles of Incorporation   SB-2   6/14/07   3.1    
3.1(a)   Certificate of Amendment to Articles of Incorporation - name change   8-K   1/12/17   10.18    
3.1(b)   Certificate of Amendment to Articles of Incorporation - preferred stock   8-K   2/14/18   3.1    
3.1(c)   Certificate of Amendment to Articles of Incorporation - reverse stock split   10-Q   5/15/18  

3.1(c)

   
3.1(d)   Certificate of Correction to the Certificate of Amendment to Articles of Incorporation - reverse stock split   8-K   4/4/2018   3.1    
3.1(e)   Certificate of Amendment to Articles of Incorporation - dividend   8-K   8/27/18   3.1    
3.2   Amended and Restated Bylaws   10-Q   8/14/18   3.2    
10.1   2017 Equity Incentive Plan   8-K   9/19/17   4.1    
10.2   Marketing and Selling Agreement between Her Imports and Cabello Real FDE dated April 20, 2017   8-K   4/27/17   10.20    

 

27
 

 

10.3   Replacement Asset Share Purchase & Business Agreement between Cabello Real and Her Imports dated as of November 28, 2016   10-K   4/17/17   10.19    
16.1   Letter from Marcum LLP dated June 22, 2017 to the Securities and Exchange Commission regarding statements included in the Form 8-K   8-K/A   6/23/17   16.3    
16.2   Lette rfrom RBSM LLP dated May 3, 2017 to the Securities and Exchange Commission regarding statements included in the Form 8-K   8-K   5/4/17   16.2    
23.1  

Consent of Independent Registered Public Accounting Firm

               
31.1   Certification of Principal Executive Officer and Principal Financial Officer (302)               Filed
32.1   Certification of Principal Executive and Principal Financial Officer (906)               Furnished**
101.INS   XBRL Instance Document               Filed
101.SCH   XBRL Taxonomy Extension Schema Document               Filed
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document               Filed
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document               Filed
101.LAB   XBRL Taxonomy Extension Label Linkbase Document               Filed
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document               Filed

 

* Represents compensatory plan of management.

 

** This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.

 

Copies of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our shareholders who make a written request to our Corporate Secretary at 8861 W. Sahara Ave., Suite 210, Las Vegas, NV 89117.

 

ITEM 16. FORM 10-K SUMMARY

 

Not applicable

 

28
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Her Imports
     
Date: April 15, 2019 By: /s/ Barry Hall
  Name: Barry Hall
  Title: Chief Executive Officer and Chief Financial Officer
    (Principal Financial Officer and Principal Accounting Officer) and Director

 

29
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Her Imports and Subsidiary

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Her Imports and Subsidiary (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the consolidated results of its operations and its cash flows for the years ended December 31, 2018 and 2017, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. 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 the 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.

 

/s/ RBSM LLP  
   
We have served as the Company’s auditor since 2015.  
   
Larkspur, CA  
April 15, 2019  

 

F-1
 

 

Her Imports

Consolidated Balance Sheets

 

   December 31, 2018   December 31, 2017 
ASSETS          
           
Current assets          
Cash  $107,969   $190,233 
Receivables   62,398    165,770 
Related party receivables   204,893    108,026 
Inventories   1,680,612    2,335,753 
Prepaid maintenance fees - current   -    75,000 
Other prepaid expenses   31,676    64,923 
Deposits   145,872    196,392 
Total current assets   2,233,420    3,136,097 
           
Property, Equipment and software, net   124,359    267,464 
Prepaid maintenance fees - non-current   -    209,375 
Other asset   -    25,000 
Trademark   4,640,000    8,200,000 
Total assets  $6,997,779   $11,837,936 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current liabilities          
Accounts payable and accrued liabilities  $646,034   $822,216 
Income tax liability   -    134,432 
Notes payable   401,978    177,390 
Total current liabilities   1,048,012    1,134,038 
           
Total liabilities   1,048,012    1,134,038 
           
Stockholders’ equity          
Callable $0.144 per share per year non-cumulative dividend liquidation preference of $2.00 per share, preferred stock, $0.001 par value, 10,000,000 shares authorized and 5,000,000 issued and outstanding as of December 31, 2018 and December 31, 2017, respectively   5,000    5,000 
Common stock, $0.001 par value, 70,000,000 shares authorized, 8,584,135 and 4,150,059 shares issued and outstanding as of December 31, 2018 and December 31, 2017, respectively   8,584    4,150 
Additional paid-in capital   30,118,775    26,679,777 
Accumulated deficit   (24,182,592)   (15,985,029)
Total stockholders’ equity   5,949,767    10,703,898 
Total liabilities and stockholders’ equity  $6,997,779   $11,837,936 

 

See accompanying notes to these consolidated financial statements.

 

F-2
 

 

Her Imports

Consolidated Statements of Operations

 

   For the Years Ended December 31, 
   2018   2017 
Product sales  $12,143,242   $16,069,119 
Cost of products sold   6,960,243    8,616,081 
Gross profit   5,182,999    7,453,038 
           
Operating expenses          
Royalties   13,329    14,675 
Selling expense   4,072,735    5,184,806 
General and administrative expense   1,328,035    1,301,849 
Total operating expenses   5,414,099    6,501,330 
           
Income (loss) from operations   (231,100)   951,708 
           
Other (expense) income          
Interest income   -    70 
Interest expense   (36,713)   (8,703)
Loss on abandonment of fixed assets   (384,453)   (7,260)
Impairment of trademark   (3,560,000)   - 
Contract termination expense - related party   (3,397,500)   - 
Total other expense   (7,378,666)   (8,499)
           
Income (loss) before benefit (provision) for income taxes   (7,609,766)   935,815 
           
Benefit (provision) for income taxes   132,203    (11,036)
Net income (loss) attributable to Company   (7,477,563)   924,779 
Preferred stock dividends   (720,000)   (720,000)
Net income (loss) to common stockholders  $(8,197,563)  $204,779 
           
Net basic income (loss) per share attributable to common Stockholders: basic and diluted  $(1.25)  $0.05 
           
Weighted average number of common shares outstanding: basic and diluted   6,533,440    4,150,059 

 

See accompanying notes to these consolidated financial statements.

 

F-3
 

 

Her Imports

Consolidated Statement of Stockholders’ Equity

Years Ended December 31, 2018 and 2017

 

   Callable Non-cumulative       Additional         
   Preferred Stock   Common Stock   Paid-in   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Capital   Deficit   Equity 
BALANCE, December 31, 2016   5,000,000   $5,000    4,150,059   $4,150   $26,651,247   $(16,189,808)  $10,470,589 
Non-cash stock compensation   -    -    -    -    28,530    -    28,530 
Net income attributible to common stockholders   -    -    -    -    -    204,779    204,779 
BALANCE, December 31, 2017   5,000,000    5,000    4,150,059    4,150    26,679,777    (16,189,808)   10,703,898 
Common stock issued to directors and employees   -    -    6,400    6    -    -    6 
Non-cash stock compensation   -    -    -    -    70,926    -    70,926 
Common stock issued for cancellation of agreement   -    -    4,500,000    4,500    3,393,000    -    3,397,500 
Common stock canceled from lawsuit settlement   -    -    (72,324)   (72)   (24,928)   -    (25,000)
Net loss attributable to common stockholders        -    -    -    -    (8,197,563)   (8,197,563)
BALANCE, December 31, 2018   5,000,000   $5,000    8,584,135   $8,584   $30,118,775   $(24,387,371)  $5,949,767 

 

See accompanying notes to these consolidated financial statements.

 

F-4
 

 

Her Imports

Consolidated Statements of Cash Flows

 

   For the Years Ended December 31, 
   2018   2017 
OPERATING ACTIVITIES          
Net income (loss) attributable to Company  $(7,477,563)  $924,779 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:          
Depreciation and amortization   77,464    129,945 
Stock-based compensation   70,932    28,530 
Loss on abandonment of fixed assets   384,455    7,260 
Impairment of trademark   3,560,000    - 
Contract termination expense   3,397,500    - 
Changes in operating assets and liabilities:          
Receivables   103,372    (120,194)
Related party receivables   (96,867)   (81,414)
Inventories   655,141    (288,300)
Prepaid maintenance fees   -    75,000 
Other prepaid expenses   33,247    (18,512)
Deposits   50,520    (163,442)
Accounts payable and accrued liabilities   (176,182)   93,791 
Income tax liability   (134,432)   6,781 
Other asset   -    (25,000)
Net cash provided by operating activities   447,587    569,224 
           
INVESTING ACTIVITIES          
Purchase of fixed assets   (34,440)   (148,144)
Net cash used in investing activities   (34,440)   (148,144)
           
FINANCING ACTIVITIES          
Issuance of notes payable   2,284,070    177,390 
Repayment on notes payable   (2,059,481)   (43,805)
Payment of preferred dividend   (720,000)   (720,000)
Net cash used in financing activities   (495,411)   (586,415)
           
NET DECREASE IN CASH   (82,264)   (165,335)
           
CASH - BEGINNING OF PERIOD   190,233    355,568 
CASH - END OF PERIOD  $107,969   $190,233 
           
SUPPLEMENTAL DISCLOSURES:          
Interest paid  $36,713   $5,539 
Income taxes paid  $3,502   $4,254 
           
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Shares returned in exchange for cancellation of investment  $25,000   $- 

 

See accompanying notes to these consolidated financial statements.

 

F-5
 

 

Notes to the Consolidated Financial Statements

 

1. Description of the Company

 

Her Imports, (previously known as EZJR, Inc.), (“the Company” or “Her”), was incorporated on August 14, 2006 under the laws of the State of Nevada.

 

Corporate Structure and Business

 

Her is a retailer of Human Hair Extensions and related haircare and beauty products headquartered in Las Vegas, Nevada. The Company sells its products at consultation studios, on its Website, www.herimports.com and on Amazon.com. As of December 31, 2018, the Company operated 16 retail locations, all of which are in the U.S and one of which was closed on that date. These locations are primarily in “executive offices suites” such as Regus PLC, where furniture, administrative staff and security are provided. The Company then stocks the location with products and point-of-sale equipment. These locations are leased on a short-term basis (primarily one year or less). Five leases, including our corporate office, have leases longer than one year at the time they were entered into. This allows the Company to open and close its consultation studios within a short period of time at minimal expense to the Company. At the Company’s consultation studios, the customer is provided with a personal, one-on-one consultation with a Her beauty expert. Additionally, the Company has locations in Greenbelt, Maryland and Brooklyn, New York with salons where customers can have their hair purchases “installed.”

 

The Company has one wholly owned subsidiary, Her Marketing Concepts, Inc. (“Her Marketing”), a Nevada corporation. All employees of the Company are employed by Her Marketing.

 

Agreement with Cabello Real Ltd.

 

On November 28, 2016, the Company entered into an Asset Share Purchase & Business Agreement with Cabello Real Ltd. (“Cabello”), a private United Arab Emirates company to acquire the exclusive U.S. rights to the Her Imports trademark. In addition to these rights, the Company also purchased certain other assets owned by Cabello including customer lists and various digital content. In exchange for these rights, and other digital assets, the Company issued to Cabello 10,000,000 shares of non-voting, non-cumulative, callable preferred stock (subsequently revised to 5,000,000) with a dividend rate of $0.144 per share per annum and a liquidation preference of $2.00 per share. In addition, the Cabello received 1,250,000 shares of common stock. Both the preferred stock and common stock issued were unregistered. Additionally, the Company filed with the Secretary of State of Nevada for the approval of the Certificate of Designations, Preferences, and Rights of Callable Non-cumulative Preferred Stock. The Certificate designated 5,000,000 as Callable Non-cumulative Preferred Stock at a par value of $.001 per share. Cabello is controlled by Mr. Johnathan Terry, who is the Company’s principal shareholder who is also actively involved in its operations.

 

On January 12, 2017, the Company changed its name from EZJR, Inc. to Her Imports.

 

eCommerce Platform

 

In January 2018, the Company converted to a new cloud-based eCommerce platform from its server-based eCommerce platform. The primary reason for the change was to allow the Company to optimize its mobile marketing efforts. In the past, marketing efforts have focused on traditional media, email, and search. However, due to the proliferation of smart phones and social media it is much more effective, while less expensive, to reach our customers using mobile marketing using SMS messaging and social platforms such as Facebook and Snapchat. Furthermore, advances in eCommerce shopping carts to cloud-based platforms allow for significant customization that was not previously available. The Company can interface with the shopping cart using various self-developed “mini-CRMs” depending on the marketing promotion and platform.

 

As a result of the change, the Company incurred a one-time charge of $383,542 from the write-off of the previous CRM and the prepaid maintenance agreement associated with it.

 

F-6
 

 

Media Investor Purchaser Agreement

 

On June 29, 2014, the Company entered into a Media Investor Purchaser Agreement (“MIP”) with Leader Act HK Ltd (“Leader”), a shareholder. On July 31, 2017, this agreement was assigned by Leader to Cabello. Prior to signing the agreement Leader advanced the Company $50,000 which the agreement allowed to be converted to 83,333 shares of common at $.60 per share. That left up to 9,500,000 shares of common stock that Cabello could purchase at $0.05 per share from its portion of the funds generated by the offers it creates. Contrary to customary practice, the MIP did not provide for any adjustment in the event of a future reverse split, so the Company’s recent reverse split did not affect the number of shares purchasable or the exercise price. This highlighted an unfair agreement which adversely affected the Company. This problem was exacerbated since Cabello is a related party. From April 19 to April 20, 2018, Cabello ran a program to sell a variety of the Company’s hair products. This program generated approximately $150,000 in revenue, however, a final accounting of the results of the program were never completed. Instead, on June 20, 2018 the Company issued to Cabello 4,500,000 of restricted common stock in exchange for cancelation of the MIP Agreement and forgiveness of any monies owed to Cabello for program in April. This cancellation resulted in a non-cash expense of $3,397,500 based on the estimated value of the stock issued in exchange for the cancellation of the agreement.

 

Agreement with Cabello Real FZE

 

On April 20, 2017, the Company entered into a Marketing and Selling Agreement with Cabello Real FZE, owner of a hair care product line called OSIworks, whereby the Company exclusively purchases, markets and sells OSIworks’ products in the United States. Under the agreement the Company pays Cabello a royalty of 2% of net sales. Cabello Real FZE is also controlled by Jonathan Terry, the Company’s principal shareholder. During the years ending December 31, 2018 and December 31, 2017 the Company recognized royalty expense of $13,329 and $14,675, respectively, related to the agreement.

 

2. Summary of Significant Accounting Policies

 

There have been no changes in Significant Accounting Policies from those described in our Form 10-K for our fiscal year ending December 31, 2017 filed with the Securities and Exchange Commission on March 27, 2018.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company (a Nevada corporation) and its wholly owned subsidiary, Her Marketing. All significant intercompany transactions have been eliminated in consolidation.

 

Basis of Presentation of the Consolidated Financial Statements

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Her Marketing. The Company maintains its books of account and prepares consolidated financial statements in accordance with Generally Accepted Accounting Principles in the United States of America (“U.S. GAAP”). The Company’s fiscal year ends on December 31. All significant intercompany balances and transactions have been eliminated in consolidation.

 

On January 31, 2017, the Company effected a 1-for-2 reverse stock split effective January 31, 2017. The par value was not adjusted as a result of the reverse stock split. On April 9, 2018, the Company effected a 1-for-6 reverse stock split effective April 9, 2018. All references to numbers of shares of our common stock and per-share information in the accompanying consolidated financial statements and in these notes to the consolidated financial statements have been adjusted retroactively to reflect these splits.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company evaluates its estimates on an ongoing basis, including those related to the fair values of stock-based awards, income taxes and contingent liabilities, among others. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates and such differences could be material to the consolidated financial position and results of operations.

 

F-7
 

 

Fair Value of Financial Instruments

 

The Company measures fair value based on the prices that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3).

 

The Company did not have any assets measured at fair value on a recurring basis at December 31, 2018 and December 31, 2017.

 

The Company believes the carrying amounts of cash and cash equivalents, accounts receivable, other current assets, accounts payable, and other accrued liabilities are a reasonable approximation of the fair value of those financial instruments because of the nature of the underlying transactions and the short-term maturities involved.

 

Deposits

 

   December 31, 2018   December 31, 2017 
Deposits on Products  $122,599   $175,819 
Security Deposits   23,273    20,573 
Total  $145,872   $196,392 

 

Intangibles

 

Intangible assets are comprised primarily of trademarks that represent the Company’s exclusive ownership of the HER trademarks in the US and are inclusive all related social media sites and domain names in the US., all used in connection with (consisting of the name, Her Imports and the Her Imports Logo) the manufacture, sale and distribution of human hair extensions and related beauty products. In accordance with Financial Accounting Standards Board Accounting Standard Codification 350 (FASB ASC 350), intangible assets with indefinite lives are not amortized but instead are measured for impairment at least annually, or when events indicate that an impairment exists through the use of discounted cash flow models. The Company calculates impairment as the excess of the carrying value of its indefinite-lived assets over their estimated fair value. If the carrying value exceeds the estimate of fair value a write-down is recorded. For the year ended December 31, 2018, based on expert analysis and advice we determined that there was an impairment to the carrying value of our trademark in the amount of $3,560,000. For the year ended December 31, 2017 there were no impairments recorded.

 

The following table presents the changes in trademark:

 

Balance as of December 31, 2017  $8,200,000 
Impairment expenses   (3,560,000)
Balance as of December 31, 2018  $4,640,000 

 

Revenue Recognition

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued accounting standards update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. ASU No. 2014-09, as amended, is effective for the Company as of January 1, 2018.

 

The adoption did not result in any material change in the timing of recognizing revenue The adoption will also result in a change in the timing of recognizing revenue for sales where we ship the merchandise to the customer from a distribution center or store, as revenue for sales where we ship the merchandise to customers will be recognized when control of the merchandise transfers to the customer, which is generally at the time of shipment rather than upon delivery of the products to the customer. Additionally, the Company has had a deminimis amount of sales returns.

 

F-8
 

 

The Company, through the Her Imports retail locations, its eCommerce Website, www.herimports.com and Amazon.com sells a variety of hair extensions and related products.

 

Revenue is recognized at the “point of sale” in the stores. Customers pay for the products using either cash, a debit card or a credit card. All sales are final. In the case of cash sales at the store, the store manager makes a nightly deposit of the cash. For credit card and debit sales, the Company recognizes the sale when the card is charged and approved. Sales tax collected from customers is excluded from revenue and is included in accrued liabilities on our consolidated balance sheets.

 

Product purchases on the Company’s Website are paid for using either debit cards, credit cards, or PayPal Revenue for online product sales are recognized upon shipment of the product.

 

From time to time, the Company partners with third-party financing companies which provide our customers the ability to pay over time. These arrangements are between the third-party financing company and the customer and, hence, there is no recourse against the Company. In these instances, revenue is recorded at the time of sale when the customer makes the purchase at a retail location and at the time of shipment when the purchase is made online.

 

Also included in revenue is shipping revenue from our e-commerce customers. Sales taxes collected from retail customers are excluded from reported revenues when control of the merchandise transfers to the customers, which is generally at the time of shipment rather than upon delivery of the products to the customer.

 

Revenue from sales on Amazon.com are recorded net of certain expenses paid to Amazon.com including selling fees, transaction fees, service fees, administrative fees and inventory and inbound service fees. All advertising fees paid to Amazon.com is recognized as a period expense and is booked to selling expense.

 

Earnings (Loss) per Share

 

The Company utilizes FASB ASC 260. Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Common equivalent shares are excluded from the computation if their effect is anti-dilutive.

 

Reverse Stock Split

 

All references to numbers of shares of our common stock and per-share information in the accompanying financial statements have been adjusted retroactively to reflect the Company’s 1-for-2 reverse stock split effected on January 31, 2017, and a 1-for-6 reverse stock split effective April 9, 2018. The par value was not adjusted because of the reverse stock splits.

 

Stock-based compensation

 

The Company records stock-based compensation issued to external entities for goods and services at either the fair market value of the shares issued, or the value of the services received, whichever is more readily determinable, using the measurement date guidelines enumerated in FASB ASC 505-50-30. For the year ended December 31, 2018, and December 31, 2017 the Company recognized stock-based compensation expense of $70,932 and $28,530, respectively.

 

Liquidity

 

At December 31, 2018, the Company had cash and cash equivalents of $107,969, a positive working capital deficit of approximately $1,185,408 and an accumulated deficit of $24,182,592. Additionally, the Company has incurred loss a loss from operations of $231,100 and a net loss of $8,197,563. Majority of the loss was non-cash due to impairment of our trademark and contract termination expense.

 

As of April 13, 2018, the Company had approximately $172,000 in cash on hand as a result of our return to profitability.

 

Our primary use of cash is the purchase of inventory and the payment of dividends on outstanding callable non-cumulative preferred stock. We anticipate that inventory may increase as a result of sales growth and the addition of more SKU’s to our product line and when we open new retail operations. We currently plan to fund our growth through earnings, however, have obtained a credit facility related to the purchase of inventory. We believe we have sufficient working capital to pay our expenses for the next twelve months and anticipate paying monthly dividends of $60,000 on the preferred stock until such time that we call the preferred stock.

 

Management has taken several actions to ensure that the Company will continue as a going concern over the next twelve months, including the closing of certain stores, headcount reductions, and reductions in discretionary expenditures.

 

Recent Accounting Pronouncements

 

Except as noted below, the Company has considered all recent accounting pronouncements and has concluded that there are no recent accounting pronouncements that may have a material impact on its consolidated financial statements, based on current information.

 

F-9
 

 

In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842) Codification Improvements, which provides clarification on implementation issues associated with adopting ASU 2016-02. The implementation issues noted in ASU 2019-01 include determining the fair value of the underlying asset by lessors that are not manufacturers or dealers, presentation on the statement of cash flows for sales-type and direct financing leases, and transition disclosures related to Topic 250, Accounting Changes and Error Corrections. We will apply the guidance, if applicable, as of January 1, 2019, the date we adopted ASU 2016-02. The adoption of this ASU did not have a material impact on our financial position, results of operations, cash flows, or presentation thereof.

 

In October 2018, the FASB issued ASU 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entitles, that changes the guidance for determining whether a decision-making fee paid to a decision makers and service providers are variable interests. The guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted. We will adopt this standard on its effective date of January 1, 2020. We do not expect the adoption of this ASU to have a material impact on our consolidated financial position, results of operations, cash flows, or presentation thereof.

 

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. We will adopt this standard on its effective date of January 1, 2020. We are currently evaluating the impact of this ASU on our financial position, results of operations, cash flows, or presentation thereof.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes or modifies certain disclosures and in certain instances requires additional disclosures. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. We will adopt this standard on its effective date of January 1, 2020. We do not expect the adoption of this ASU to have a material impact on our financial position, results of operations, cash flows, or presentation thereof.

 

In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements which provides a new transition method and a practical expedient for separating components of a lease contract. ASU 2018-11 is intended to reduce the costs and ease the implementation of the new leasing standard for financial statement preparers. The effective date and transition requirements for the amendments related to separating components of a contract are the same as the effective date and transition requirements in ASU 2016-02. We adopted this ASU on its effective date of January 1, 2019. Refer to the discussion of ASU 2016-02 below for the impact on our financial position, results of operations, cash flows, or presentation thereof.

 

In July 2018, the FASB issued ASU 2018-09, Codification Improvements. The amendments in ASU 2018-09 affect a wide variety of Topics in the FASB Codification and apply to all reporting entities within the scope of the affected accounting guidance. The Company has evaluated ASU 2018-09 in its entirety and determined that the amendments related to Topic 718-740, Compensation-Stock Compensation-Income Taxes, are the only provisions that currently apply to the Company. The amendments in ASU 2018-09 related to Topic 718-740, Compensation-Stock Compensation-Income Taxes, clarify that an entity should recognize excess tax benefits related to stock compensation transactions in the period in which the amount of the deduction is determined. The amendments in ASU 2018-09 related to Topic 718-740 are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company does not expect the adoption of the new standard to have a material impact on the Company’s Consolidated Financial Statements.

 

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment. ASU 2018-07 aligns the accounting for share based payments granted to non-employees with that of share-based payments granted to employees. We adopted this ASU on its effective date of January 1, 2019. The adoption of this ASU did not have a material impact on our financial position, results of operations, cash flows, or presentation thereof.

 

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This standard amends Accounting Standards Codification 740, Income Taxes (ASC 740) to provide guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (the Tax Reform Act) pursuant to Staff Accounting Bulletin No. 118, which allows companies to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. As described in the footnotes to the Annual Report on Form 10-K, the Company’s accounting for the tax effects of enactment of the Tax Reform Act is being assessed; however, in certain cases, as described below, we made a reasonable estimate of the effects on our existing deferred tax balances and valuation allowance. The Company determined that the $62.9 million recorded in connection with the re-measurement of certain deferred tax assets and liabilities, and corresponding valuation allowance was a provisional amount and a reasonable estimate at December 31, 2017. The Company has not completed the accounting with regard to the tax effects associated with an intra-entity transfer of certain intellectual property rights with the enactment of Tax Reform Act. Our accounting for the intra-entity transfer reflects the utilization of net operating losses on the basis of the laws in effect before the Tax Reform Act. The Company is evaluating the impact under Tax Reform Act on the Company’s global business structure. In all aspects, the Company will continue to make and refine calculations as additional analysis is completed. The Company expects to complete the accounting assessment during the one-year measurement period provided by SAB 118.

 

3. Property, Equipment and Software

 

Property and equipment consisted of the following:

 

   December 31, 2018   December 31, 2017 
Software  $110,000   $463,310 
Computers and equipment   113,098    99,592 
Furniture   42,064    30,391 
Leasehold improvements   26,384    19,493 
subtotal   291,546    612,786 
Accumulated depreciation and amortization   (167,187)   (345,322)
Property, equipment and software, net  $124,359   $267,464 

 

F-10
 

 

Depreciation and amortization expense on property, plant, equipment, and software for the years ended December 31, 2018 and December 31, 2017 was $77,464 and $129,945 respectively.

 

4. Sales tax payable

 

The Company is delinquent in filing the remittance of taxes, for which the Company has transacted business. The Company has recorded tax obligations plus potential interest and penalties estimated to be approximately $18,792, computed through December 31, 2018, which are included in accounts payable and accrued liabilities on the balance sheet. The Company is in the process of becoming fully compliant.

 

5. Related Party Transactions

 

Related Party Accounts Receivable and Payable

 

At December 31, 2018 and December 31, 2017, the Company had a receivable from Cabello, its principal stockholder, of $204,893 and $108,026, respectively, that resulted from payments made by the Company on behalf of Cabello. The Company has the right to offset this receivable against any future dividend payments owed Cabello related to the preferred stock described in Note 1. As described in Note 11, subsequent to December 31, 2018, three dividends of $60,000 each were declared and offset against amounts owed by Cabello. For further information on related party transactions, see Note 1. As described below, in 2018 and 2017, the Company incurred $13,329 and $14,675, respectively, in royalty expense which were also offset against the Cabello receivable.

 

Royalty Expense

 

Royalty expense is a result of royalties incurred on products sold under the brand name OSIworks, a company under common control with the Company’s principal shareholder. During the years ended December 31, 2018 and December 31, 2017 royalty expense was $13,329 and $14,675, respectively.

 

Contract Termination Expense – Related Party

 

On June 20, 2018, the Company issued to Cabello 4,500,000 shares of restricted common stock in exchange for cancelation of the MIP Agreement (described in Note 1) and forgiveness of any monies owed to Cabello for program run in April. This cancellation resulted in a non-cash expense of $3,397,500 based on the estimated value of the stock issued in exchange for the cancellation of the agreement.

 

6. Commitments and Contingencies

 

Leases

 

At December 31, 2018, the Company leased or rented 19 different facilities including its corporate headquarters, a warehouse and 15 active retail locations. Future lease obligation for these facilities are as follows:

 

Year  Amount 
2019  $282,240 
2020   159,292 
2021   148,804 
2022   120,045 
2023   24,808 
Total  $735,189 

 

Rent expense for the years ended December 31, 2018 and December 31, 2017 was $493,343 and $620,469, respectively.

 

F-11
 

 

Concentrations

 

As of December 31, 2018, the Company has only twelve qualified vendors that supply its wigs and hair extension products. The Company sources its hair care products from one vendor. There are numerous suppliers of styling tools as this is a commodity product.

 

During the year ended December 31, 2018, the Company purchased hair products from eight different vendors, however, two vendors accounted for approximately 85.8% of all hair products purchased. During the year ended December 31, 2017, the Company purchased hair products from seven different vendors, however, three vendors accounted for approximately 91.3% of all hair products purchased.

 

Legal Proceedings

 

From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Company’s business.

 

On or about September 5, 2015, the Company received a summons naming it in a civil action against Her Imports, LLC, Her Imports New York, LLC, Her Holding, Inc. and EZJR, Inc. (now Her Imports) from a former independent contractor of Her Imports, LLC. The complaint claims unpaid wages and overtime wages in violation of New York Labor Law, among other things. No specific damages are mentioned in the complaint. The Company subsequently answered the complaint and denied any wrongdoing as EZJR had no relationship with the contractor, whatsoever. At this point in the litigation it is impracticable to foresee the outcome, however, the Company believes it has meritorious defense and is vigorously defending this litigation. On February 16, 2018, a magistrate judge ruled that EZJR, Her Holding and Her Imports, LLC acted as a joint employer. The judge also found that genuine issues of material fact exist as to “whether plaintiff qualifies as an ‘employee’ under the law or was an ‘independent contractor’.” While the Company disagrees with the ruling that it was a joint employer, it has decided to proceed to trial on the basis that the plaintiff was an independent contractor, while reserving the right to appeal the decision.

 

On or about On March 13, 2018, the Company received a summons in a civil action alleging that it had violated the Telephone Consumer Protection Act of 1991 (TCPA). In the complaint, an individual who provided his phone number to the Company to obtain certain discounts on the Company’s products, claims that the Company sent several text messages to his cell phone without prior written consent. The suit was filed by on behalf of the plaintiff and others similarly situated. On or about June 5, 2018 the Company received a second summons in a civil action also alleging that it had violated the TCPA. In the complaint, an individual who provided her phone number to the Company to obtain certain discounts on the Company’s products, claims that the Company sent several text messages to her cell phone without prior written consent. The suit was filed by on behalf of the plaintiff and others similarly situated. In both instances our review of the circumstance surrounding the claim are that the actions are not justified and as such we made the decision to intend to vigorously defend the Company against these actions. In the case of the first action we have filed a response denying the allegations. In the case of the second action we have file a motion to dismiss or consolidate this action with the first based on what is known “the-first-to-file rule.” To date there has been no ruling on this motion.

 

On January 12, 2017, the Company entered into a Business Purchase Agreement with EnzymeBioSystems, Inc. (“EnzymeBio”), a Nevada corporation, whereby the Company entered into an agreement to purchase 100% ownership of EnzymeBio’s wholly owned subsidiary, Share Acquisition Corp. (“SAC”), a Nevada corporation in exchange for approximately 9,167 shares of the Company’s common stock and $25,000 cash. On February 28, 2017, EnzymeBio agreed to spin-off SAC as a dividend. Pursuant to the Business Purchase Agreement and Nevada Revised Stature 92A.180 (Merger of a subsidiary into parent or parent into subsidiary), SAC was to be acquired and merged into the Company. Restricted common shares of the Company were to be exchanged on a pro-rata one-for-one ownership basis. After the exchange took place, SAC would be collapsed into the Company and subsequently dissolved with the Nevada Secretary of State. The Company agreed to acquire SAC for the sole purpose to increase its shareholder base. The Company paid the $25,000, however, the share exchange did not take place and the agreement was not consummated. The Company was subsequently informed by its legal counsel that this transaction cannot be concluded under applicable securities laws. The Company informed EnzymeBio of this and requested that the $25,000 payment be returned. As a result, the $25,000 payment was recorded under Other Asset on the balance sheet. EnzymeBio refused to return the $25,000 and, as a result, on March 13, 2018 the Company filed a legal complaint against those parties which included a demand for the $25,000 as well as legal fees and specific damages the Company incurred as a result of their actions. In June 2018, the defendants responded to the complaint denying the allegation and also filed a counterclaim against the Company and its Chief Executive Officer. Subsequently, the defendants stipulated and all charges against the Company and its Chief Executive Officer were dismissed. On and effective October 30, 2018 all parties involved in the lawsuit agreed to a settlement and mutual release. Under the settlement agreement, the Company agreed to dismiss that lawsuit. In return, certain shareholders of the Company agreed to return to the Company 72,324 shares of the Company’s common stock upon the filing by the Company of a Form 15 with the U.S. Securities and Exchange Commission. The returned common stock was retired. Additionally, the shareholders agreed to place 120,000 shares of common in an attorney trust account and that such shares will be surrendered for retirement to the Company on January 1, 2020 should the Company refrain from trading its stock other than on the “pink sheet system or OTC market.”

 

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7. Promissory Notes

 

UPS Capital

 

On November 8, 2017 the Company entered into an agreement with UPS Capital Corporation (UPS) for a $500,000 credit facility. Under the terms of the agreement UPS will loan 100% of the invoice amount on incoming offshore shipments carried by UPS. Upon funding the loan, the Company pays a transaction fee of 1.85% or 2.75% for air shipment or ocean shipment, respectively. Repayment of amounts funded are due in 60 days for air shipments and 90 days for ocean shipment. Amounts funded are secured by inventory on hand and are personally guaranteed by the Company’s Chief Executive Officer and the Company’s principal controlling shareholder. As of December 31, 2018, and December 31, 2017 the Company owed $401,979 and $177,390, respectively under the facility.

 

8. Stockholders’ Equity

 

On January 31, 2017, the Company effected a 1-for-2 reverse stock split effective January 31, 2017. The par value was not adjusted as a result of the reverse stock split. On April 9, 2018, the Company effected a 1-for-6 reverse stock split effective April 9, 2018. All references to numbers of shares of our common stock and per-share information in the accompanying consolidated financial statements and in these notes to the consolidated financial statements have been adjusted retroactively to reflect these splits.

 

As described in Note 1, on November 28, 2016, the Company entered into an Asset Share Purchase & Business Agreement with Cabello to acquire the exclusive U.S. rights to the Her Imports trademark. In exchange for these rights, and other digital assets, the Company issued to Cabello 10,000,000 shares of unregistered non-voting, non-cumulative, callable preferred stock (subsequently revised to 5,000,000 shares) and 1,250,000 unregistered common stock with a combined value of $8,200,000. All shares of callable preferred stock rank superior to all the Company’s preferred stock and common stock currently outstanding and hereafter issued, as to distributions of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary (with the exception of a merger), including the payment of dividends. The callable preferred stock is subject to a monthly dividend payment equal to a rate of $0.144 per share of preferred stock per annum. The declaration and payment of the dividend on a monthly basis is subject to the approval of the Company’s Board of Directors. Such dividend is non-cumulative should the Company not pay the dividend. The Company has a right of first refusal to purchase the callable preferred stock, should the shareholder decide to sell all or part of their callable preferred stock. The callable preferred stock has no voting rights. Through December 31, 2018, the Board of Directors has declared and approved, preferred stock dividends of $1,320,000 ($60,000 each month) to Cabello related to the 5,000,000 shares of callable, non-voting, non-cumulative preferred stock. Because the dividends on the preferred stock are non-cumulative and at the discretion of the Company, these preferred shares are considered to be equity.

 

At December 31, 2018 and December 31, 2017, the Company had 10,000,000 shares of preferred stock authorized and 5,000,000 issued and outstanding and 70,000,000 shares of common stock authorized. At December 31, 2018 and December 31, 2017 there were 8,584,135 and 4,150,039 shares of common stock outstanding, respectively.

 

As described in Note 1, on October 13, 2016, the Company entered into a five-year maintenance agreement on its eCommerce platform with Leader in exchange for 250,000 shares of the Company’s common stock valued at $375,000 based on the fair market value of a service maintenance contract provided to other third parties which approximates the fair value of the common stock at the time it was issued. In January 2018 the Company converted to a new cloud-based eCommerce platform from its server-based eCommerce platform. As a result, the Company wrote off $265,625 of unamortized prepaid software maintenance related to the agreement.

 

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As described in Note 1, on June 20, 2018 the Company issued 4,500,000 shares of restricted common stock to Cabello in exchange for cancelation of the MIP Agreement and forgiveness of monies owed to Cabello for program that was run in April 2018.

 

As described in Note 6, as part of a settlement agreement certain shareholders of the Company agreed to return to the Company 72,324 shares of the Company’s common stock upon the filing by the Company of a Form 15 with the U.S. Securities and Exchange Commission. The returned common stock was retired.

 

9. Stock-based Compensation

 

On September 5, 2017 the Company adopted the 2017 Her Imports Stock Incentive Plan. For the years ended December 31, 2018 and December 31, 2017, the Company recognized $70,932 and $28,530, respectively in stock-based compensation related to stock options and common stock issued under the plan. Stock-based compensation expense is included in the following captions on the consolidated statements of operations.

 

   Year Ended   Year Ended 
   December 31, 2018   December 31, 2017 
Selling expense  $38,041   $- 
General and administrative expense   32,891    28,530 
Total  $70,932   $28,530 

 

Changes in the Company’s outstanding stock options under the plan during the year ended December 31, 2018 and 2017 were as follows:

 

       Weighted 
   Number of   Average 
   Options   Price 
Outstanding at December 31, 2016   -   $- 
Granted   58,332    9.42 
Exercised   -    - 
Outstanding at December 31, 2017   58,332    9.42 
Granted   3,332    1.65 
Exercised   -    - 
Forfeited or expired   (61,664)   9.00 
Outstanding at December 31, 2018   -   $ N/A 
           
Exercisable at December 31, 2017   7,292   $10.68 
Exercisable at December 31, 2018   -   $ N/A 

 

The Company’s stock options are measured at fair value using the Black-Scholes Option Pricing Model methodology. A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s stock options that are categorized within Level 3 of the fair value hierarchy for year ended December 31, 2018 is as follows:

 

Strike Price   $ 1.65 to 10.68 
Volatility   46.21%
Risk-free interest rate   2.15%
Contractual life (in years)   5 
Dividend yield (per share)   0%

 

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10. Income Taxes

 

The tax reform bill that Congress voted to approve December 20, 2017, also known as the “Tax Cuts and Jobs Act”, made sweeping modifications to the Internal Revenue Code, including a much lower corporate tax rate, changes to credits and deductions, and a move to a territorial system for corporations that have overseas earnings. The act replaced the prior-law graduated corporate tax rate, which taxed income over $10 million at 35%, with a flat rate of 21%.

 

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. For financial reporting purposes, the provision for income taxes is based on pre-tax loss of $$4,598,845 for the year ended December 31, 2018 and a pre-tax income of $945,103 for the year ended December 31, 2017. An estimated blended tax rate of 2.9% has been used to calculate the benefit for income before taxes of $132,203 for the year ended December 31, 2018. Beginning in 2017, and for fourteen years thereafter, there will be a permanent book versus tax difference of $546,667 each year related to the amortization of the trademark, which is deductible for tax purposes but is not amortized and expensed for financial reporting purposes. The benefit resulting from the loss before income taxes for taxes based on income for the year ended December 31, 2018 is based on a 1.2% rate for the provision for taxes. This resulted in provision of $11,306. The provision (benefit) for income taxes for the years ended December 31, 2018 and December 31, 2017 consisted of the following:

 

   Year Ended 
   December 31, 2018   December 31, 2017 
U.S. Federal  $132,203   $- 
U.S. State   -    (11,306)
Total   132,203    (11,306)
Deferred   -    - 
Total benefit (provision) for income taxes  $132,203   $(11,306)

 

As of December 31, 2018, we had a tax loss carryforward of approximately $5,832,269 which can be used to offset future Federal income taxes.

 

Deferred income tax assets at December 31 2018 and 2017 are as follows:

 

Deferred income tax assets          
Net operating loss carryforward  $1,808,621   $1,233,424 
Stock-based compensation   70,932    28,530 
Depreciation, amortization and other   546,667    546,667 
Total deferred tax assets   2,426,220    1,808,621 
Valuation allowance   (2,426,220)   (1,808,621)
Deferred income tax, net  $-   $- 

 

The Company generated a deferred tax asset through net operating loss carry-forwards. The Company has not completed its IRC Section 382 Valuation, as required and the NOL’s because of potential Change of Ownerships might limit the usage or render the NOL’s completely worthless. Therefore, management of the Company based upon management’s evaluation has recorded a full valuation reserve (100%), since it is more likely than not that no benefit will be realized for the deferred tax assets.

 

11. Subsequent Events

 

On January 3, 2019, a monthly $60,000 dividend related to 5,000,000 shares of Callable Preferred Stock owned by Cabello Real Ltd was approved. This dividend was offset against amounts owed to the Company by Cabello.

 

On February 4, 2019, a monthly $60,000 dividend related to 5,000,000 shares of Callable Preferred Stock owned by Cabello Real Ltd was approved. This dividend was offset against amounts owed to the Company by Cabello.

 

On March 4, 2019, a monthly $60,000 dividend related to 5,000,000 shares of Callable Preferred Stock owned by Cabello Real Ltd was approved. This dividend was offset against amounts owed to the Company by Cabello.

 

On April 3, 2019, a monthly $60,000 dividend related to 5,000,000 shares of Callable Preferred Stock owned by Cabello Real Ltd was approved. This dividend was offset against amounts owed to the Company by Cabello.

 

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