INNERSCOPE HEARING TECHNOLOGIES,
INC.
|
CONDENSED CONSOLIDATED BALANCE
SHEETS
|
(unaudited)
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
64,884
|
|
|
$
|
84,720
|
|
Accounts receivable, net
|
|
|
23,613
|
|
|
|
12,950
|
|
Accounts receivable from
related party
|
|
|
109,121
|
|
|
|
73,996
|
|
Note receivable, other
|
|
|
27,975
|
|
|
|
—
|
|
Prepaid assets
|
|
|
99,571
|
|
|
|
101,110
|
|
Inventory
|
|
|
35,806
|
|
|
|
5,959
|
|
Total
current assets
|
|
|
360,970
|
|
|
|
278,735
|
|
|
|
|
|
|
|
|
|
|
Security deposit
|
|
|
4,616
|
|
|
|
—
|
|
Domain name
|
|
$
|
3,000
|
|
|
$
|
3,000
|
|
Intangible assets, net
|
|
|
12,466
|
|
|
|
—
|
|
Property and equipment,
net of accumulated depreciation of $1,510 (2018) and $1,068 (2017)
|
|
|
38,672
|
|
|
|
1,583
|
|
Investment
in undivided interest in real estate
|
|
|
1,223,513
|
|
|
|
1,224,903
|
|
Total
assets
|
|
$
|
1,643,235
|
|
|
$
|
1,508,221
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
$
|
339,177
|
|
|
$
|
161,919
|
|
Accounts payable to related
party
|
|
|
22,548
|
|
|
|
22,548
|
|
Notes payable - stockholder
|
|
|
95,800
|
|
|
|
65,000
|
|
Advances payable, stockholders
|
|
|
69,044
|
|
|
|
176,838
|
|
Current portion of convertible
notes payable, net of discounts
|
|
|
317,205
|
|
|
|
74,140
|
|
Current portion of note
payable
|
|
|
19,369
|
|
|
|
18,518
|
|
Customer deposits
|
|
|
48,914
|
|
|
|
—
|
|
Officer salaries payable
|
|
|
122,758
|
|
|
|
47,248
|
|
Income taxes payable
|
|
|
—
|
|
|
|
33,682
|
|
Derivative liabilities
|
|
|
1,350,231
|
|
|
|
540,965
|
|
Deferred
revenue
|
|
|
—
|
|
|
|
847,223
|
|
Total
current liabilities
|
|
|
2,385,046
|
|
|
|
1,988,081
|
|
|
|
|
|
|
|
|
|
|
Long term portion of note
payable
|
|
|
969,105
|
|
|
|
982,176
|
|
Long
term portion of convertible note payable, net of discounts
|
|
|
—
|
|
|
|
12,587
|
|
Total
liabilities
|
|
|
3,354,150
|
|
|
|
2,982,844
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Deficit:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001
par value; 25,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
Series A preferred stock,
par value $0.0001, -0- shares authorized and issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Series B preferred stock,
par value $0.0001, 900,000 shares authorized and issued and outstanding (2018)
|
|
|
90
|
|
|
|
—
|
|
Common stock, $0.0001 par
value; 490,000,000 shares authorized; 103,951,750 and 61,539,334 shares issued and outstanding September 30, 2018, and December
31, 2017, respectively
|
|
|
10,395
|
|
|
|
6,153
|
|
Common stock to be issued,
$0.0001 par value, 1,371,511 and 102,564 shares September 30, 2018, and December 31, 2017, respectively
|
|
|
137
|
|
|
|
10
|
|
Additional paid-in capital
|
|
|
2,552,604
|
|
|
|
331,227
|
|
Deferred stock compensation
|
|
|
(145,833
|
)
|
|
|
(25,000
|
)
|
Accumulated
deficit
|
|
|
(4,128,308
|
)
|
|
|
(1,787,012
|
)
|
|
|
|
|
|
|
|
|
|
Total
stockholders' deficit
|
|
|
(1,710,915
|
)
|
|
|
(1,474,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,643,235
|
|
|
$
|
1,508,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated
financial statements.
|
INNERSCOPE
HEARING TECHNOLOGIES, INC.
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, other
|
|
$
|
44,724
|
|
|
$
|
78,833
|
|
|
$
|
98,696
|
|
|
$
|
327,501
|
|
Revenues,
related party
|
|
|
15,000
|
|
|
|
25,948
|
|
|
|
67,019
|
|
|
|
62,890
|
|
Total
revenues
|
|
|
59,724
|
|
|
|
104,781
|
|
|
|
165,715
|
|
|
|
390,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, other
|
|
|
25,714
|
|
|
|
70,307
|
|
|
|
74,972
|
|
|
|
204,810
|
|
Cost
of sales, related
|
|
|
3,371
|
|
|
|
10,597
|
|
|
|
24,779
|
|
|
|
26,413
|
|
Total
cost of sales
|
|
|
29,085
|
|
|
|
80,904
|
|
|
|
99,751
|
|
|
|
231,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
30,639
|
|
|
|
23,877
|
|
|
|
65,965
|
|
|
|
159,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
(including stock- based fees of $772,600 for the nine months ended September 30, 2018)
|
|
|
177,778
|
|
|
|
159,114
|
|
|
|
1,263,084
|
|
|
|
482,382
|
|
Advertising and promotion
|
|
|
46,408
|
|
|
|
—
|
|
|
|
137,736
|
|
|
|
—
|
|
Professional fees (including
stock- based fees of $62,597 and $126,837 for three and nine months ended September 30, 2018, respectively, and $25,000 and
$140,000 for the three and nine months ended September 30, 2017, respectively)
|
|
|
174,952
|
|
|
|
81,226
|
|
|
|
405,858
|
|
|
|
302,122
|
|
Consulting fees, stockholder
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
60,000
|
|
Rent (including related
party of $36,000 and $108,000 for the three and nine months ended September 30, 2018, respectively, and $36,000 and $73,500
for the three and nine months ended September 30, 2017)
|
|
|
45,062
|
|
|
|
36,000
|
|
|
|
119,937
|
|
|
|
75,377
|
|
Investor relations
|
|
|
11,482
|
|
|
|
10,022
|
|
|
|
87,901
|
|
|
|
22,927
|
|
Other
general and administrative
|
|
|
27,024
|
|
|
|
17,056
|
|
|
|
71,464
|
|
|
|
52,408
|
|
Total
operating expenses
|
|
|
482,705
|
|
|
|
303,418
|
|
|
|
2,085,980
|
|
|
|
995,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(452,066
|
)
|
|
|
(279,541
|
)
|
|
|
(2,020,015
|
)
|
|
|
(836,048
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative expense
|
|
|
(270,849
|
)
|
|
|
—
|
|
|
|
(940,819
|
)
|
|
|
—
|
|
Gain on investment in undivided
interest in real estate
|
|
|
(2,132
|
)
|
|
|
2,962
|
|
|
|
(1,390
|
)
|
|
|
(983
|
)
|
Gain on collections of
bad debt
|
|
|
3,000
|
|
|
|
—
|
|
|
|
3,000
|
|
|
|
—
|
|
Write off of deferred commissions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(508,334
|
)
|
Gain on contract cancellations
|
|
|
1,297,223
|
|
|
|
—
|
|
|
|
1,297,223
|
|
|
|
160,000
|
|
Gain on debt extinguishment
|
|
|
33,775
|
|
|
|
—
|
|
|
|
33,775
|
|
|
|
—
|
|
Interest income, including
$57 and $179 (2017) from officer
|
|
|
—
|
|
|
|
59
|
|
|
|
—
|
|
|
|
251
|
|
Interest
expense and finance charges
|
|
|
(399,278
|
)
|
|
|
(2,883
|
)
|
|
|
(713,070
|
)
|
|
|
(4,521
|
)
|
Total
other income (expense), net
|
|
|
661,739
|
|
|
|
138
|
|
|
|
(321,281
|
)
|
|
|
(353,587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
209,673
|
|
|
$
|
(279,403
|
)
|
|
$
|
(2,341,296
|
)
|
|
$
|
(1,189,635
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted income (loss) per share
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding Basic and diluted
|
|
|
80,652,837
|
|
|
|
61,539,334
|
|
|
|
66,651,688
|
|
|
|
61,320,706
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated
financial statements.
|
INNERSCOPE HEARING TECHNOLOGIES,
INC.
|
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
|
(Unaudited)
|
|
|
|
|
|
|
|
For
the nine months ended
September
30,
|
|
|
2018
|
|
2017
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,341,296
|
)
|
|
$
|
(1,189,635
|
)
|
Adjustments to reconcile
net loss to net cash used in operations:
|
|
|
|
|
|
|
|
|
Loss on fair value of derivatives
|
|
|
940,819
|
|
|
|
—
|
|
Amortization of debt discounts
|
|
|
619,336
|
|
|
|
—
|
|
Depreciation
|
|
|
1,853
|
|
|
|
663
|
|
Stock compensation expense
|
|
|
899,437
|
|
|
|
140,000
|
|
Loss on investment in undivided
interest in real estate
|
|
|
1,390
|
|
|
|
983
|
|
Gain on debt extinguishment
|
|
|
(33,775
|
)
|
|
|
—
|
|
Gain on collection of bad
debts
|
|
|
(3,000
|
)
|
|
|
—
|
|
Recognition of deferred
revenues per settlement
|
|
|
(847,223
|
)
|
|
|
—
|
|
Changes in operating assets
and liabilities:
|
|
|
|
|
|
|
|
|
Decrease (increase) in:
|
|
|
|
|
|
|
|
|
Interest receivable, related
party
|
|
|
—
|
|
|
|
33
|
|
Accounts receivable
|
|
|
(7,663
|
)
|
|
|
(74,164
|
)
|
Inventory
|
|
|
(29,847
|
)
|
|
|
(4,764
|
)
|
Deferred commissions, stockholder
|
|
|
—
|
|
|
|
133,334
|
|
Prepaid assets
|
|
|
12,297
|
|
|
|
(68,621
|
)
|
Other receivables
|
|
|
(5,725
|
)
|
|
|
—
|
|
Accounts receivable, related
party
|
|
|
(35,125
|
)
|
|
|
—
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
|
138,530
|
|
|
|
65,802
|
|
Commissions payable, stockholder
|
|
|
—
|
|
|
|
(96,000
|
)
|
Officer salaries payable
|
|
|
75,510
|
|
|
|
44,185
|
|
Deferred revenue
|
|
|
—
|
|
|
|
625,000
|
|
Customer deposits
|
|
|
48,914
|
|
|
|
—
|
|
Due
to related party
|
|
|
(62,794
|
)
|
|
|
141,532
|
|
Net
cash used in operating activities
|
|
|
(628,362
|
)
|
|
|
(281,652
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of domain name
|
|
|
—
|
|
|
|
(3,000
|
)
|
Repayments from shareholder
loans receivable
|
|
|
—
|
|
|
|
5,125
|
|
Investment
in undivided interest in real estate
|
|
|
—
|
|
|
|
(217,321
|
)
|
Net
cash used in investing activities
|
|
|
—
|
|
|
|
(215,196
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance
of note payable
|
|
|
32,600
|
|
|
|
—
|
|
Advances to shareholder
|
|
|
(22,250
|
)
|
|
|
—
|
|
Proceeds from advances,
shareholder
|
|
|
36,800
|
|
|
|
14,500
|
|
Proceeds from issuances
of convertible notes payable
|
|
|
772,500
|
|
|
|
—
|
|
Repayments of note payable
|
|
|
(55,578
|
)
|
|
|
—
|
|
Repayments of advances,
shareholder
|
|
|
(6,000
|
)
|
|
|
—
|
|
Repayments
of principal of convertible note payable
|
|
|
(149,546
|
)
|
|
|
—
|
|
Net
cash provided by financing activities
|
|
|
608,526
|
|
|
|
14,500
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(19,836
|
)
|
|
|
(482,348
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, Beginning of period
|
|
|
84,720
|
|
|
|
493,514
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, End of period
|
|
$
|
64,884
|
|
|
$
|
11,166
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
126,549
|
|
|
$
|
4,521
|
|
Cash
paid for income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Schedule
of non-cash Investing or Financing Activity:
|
|
|
|
|
|
|
|
|
Reclassification
of derivative liabilities upon principal repayments of convertible notes
|
|
$
|
787,162
|
|
|
$
|
—
|
|
Issuance
of note payable for investment in undivided interest in real estate
|
|
$
|
—
|
|
|
$
|
1,007,930
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Assets
|
|
|
|
|
|
|
|
|
Issuance of common stock
as consideration for assets purchased
|
|
$
|
22,974
|
|
|
$
|
—
|
|
Assumed liabilities
|
|
|
33,047
|
|
|
|
—
|
|
Property and equipment
|
|
|
(38,400
|
)
|
|
|
—
|
|
Other Assets
|
|
|
(4,614
|
)
|
|
|
—
|
|
Customer base
|
|
|
(300
|
)
|
|
|
—
|
|
Non-
compete
|
|
|
(12,707
|
)
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated
financial statements.
|
NOTE
1 - ORGANIZATION
Business
InnerScope
Hearing Technologies, Inc. (“Company”, “InnerScope”) is a Nevada Corporation incorporated on June 15,
2012, with its principal place of business in Roseville, California. The Company was originally named InnerScope Advertising Agency,
Inc. and was formed to provide advertising and marketing services to retail establishments in the hearing device industry. On
August 25, 2017, the Company changed its name to InnerScope Hearing Technologies, Inc. to better reflect the Company’s current
direction as a technology driven company with a scalable business to business (B2B) solution and business to consumer (and B2C)
solution. Recently, the Company began offering its own line of Food and Drug Administration (the “FDA”)
registered
Hearing Aids and its
“Hearable”, and “Wearable” Personal Sound Amplifier Products (PSAPs).
On
August 5, 2016, the Company along with Mark Moore (“Mark”, the Company’s Chairman of the Board), Matthew
Moore (“Matthew”, the Company’s Chief Executive Officer) and Kim Moore (“Kim”, the Company’s
Chief Financial Officer) entered into a Store Expansion Consulting Agreement (the “Expansion Agreement”) with a third
party (the “Client”). Mark, Matthew and Kim are herein referred to collectively as the “Moores”. Pursuant
to the Expansion Agreement, the Company and the Moores were responsible for all physical plant and marketing details for the Client’s
new store openings during the initial term of six-months. The Expansion Agreement was cancelled on January 6, 2017. The Client
has decided to do their own marketing in-house and eliminate this out-sourced contract and decided to open only one location
and delay the opening of any other new stores. For the nine months ended September 30, 2017, the Company has recognized
$100,000 of income for the one new store, opened in January 2017, an additional $30,000 for the cancellation of the Store Expansion
Agreement and a marketing agreement, and $160,000 in other income, net, for payments received for the Expansion Agreement pursuant
to the cancellation.
Also,
on August 5, 2016, the Company and the Moores entered into a Consulting Agreement (the “Consulting Agreement”) with
the same Client as the store Expansion Agreement. Under the Consulting Agreement, including the Non-Compete provision covering
a ten-mile radius of any retail store, the Company and the Moores were to provide unlimited licensing of the Intela-Hear brand
name, exclusive access to the Aware Aural Rehab Program within 10 miles of retail stores, exclusive territory of all services
within 10 miles of retail stores and up to 40 hours per month of various consulting services. The Consulting Agreement continued
until January 31, 2019, unless terminated for cause, as defined in the Consulting Agreement. On May 26, 2017, the Company and
the Moores were named in an action filed by the Client, that included a demand that all monies paid pursuant to the Consulting
Agreement be returned. On August 13, 2018, the Client, InnerScope and the Moores executed a Settlement Agreement (See Note 12).
NOTE
2 – Asset Purchase Acquisition of Kathy L Amos Audiology
Effective
September 10, 2018, the Company acquired all of the assets and assumed certain liabilities of Kathy L Amos Audiology (“Amos
Audiology”) in exchange for 340,352 shares of common stock (the “Acquisition”). Amos Audiology provides retail
hearing aid sales and audiological services in the East Bay area of San Francisco, California.
Based
on the fair value of the common stock issued of $22,974, based on the market price of the common stock on that date, and the assumed
liabilities of $33,049, the total purchase consideration was $56,023.
The
following table summarizes the purchase price allocation of the fair value of assets acquired and liabilities assumed in the acquisition:
|
|
Purchase
Price Allocation
|
Fair
value of consideration for Acquisition
|
|
$
|
22,974
|
|
Liabilities
assumed
|
|
|
33,049
|
|
Total
purchase consideration
|
|
$
|
56,023
|
|
Tangible
assets acquired
|
|
$
|
43,016
|
|
Intangible
assets
|
|
|
13,007
|
|
|
|
$
|
56,023
|
|
The
total purchase price of $56,023 has been allocated to the tangible and intangible assets acquired and liabilities assumed based
on preliminary estimated fair values as of the completion of the Acquisition. The fair value of Amos Audiology’s identifiable
intangible assets was estimated primarily using the income approach which requires an estimate or forecast of all the expected
future cash flows, either through the use of the relief-from-royalty method or the multi-period excess earnings method. The Company
has preliminary determined that the identifiable intangible assets, consisting of a customer base and non-compete had fair values
of $300 and $12,707, respectively.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Basis
of Presentation and Principles of Consolidation
The
accompanying condensed consolidated financial statements in this report have been prepared by the Company without audit. In the
opinion of management, all adjustments necessary to present the financial position, results of operations and cash flows for the
stated periods have been made. Except as described below, these adjustments consist only of normal and recurring adjustments.
Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance
with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed
consolidated unaudited financial statements should be read in conjunction with a reading of the Company’s financial statements
and notes thereto included in the Annual Report for the year ended December 31, 2017, filed with the United States Securities
and Exchange Commission (the “SEC”) on April 17, 2018. Interim results of operations for the three and nine months
ended September 30, 2018, and 2017, are not necessarily indicative of future results for the full year. Certain amounts from the
2017 period have been reclassified to conform to the presentation used in the current period.
Emerging
Growth Companies
The
Company qualifies as an “emerging growth company” under the 2012 JOBS Act. Section 107 of the JOBS Act provides that
an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities
Act for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption
of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to take
advantage of the benefits of this extended transition period.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses
during the reported period. Actual results could differ from those estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original term of three months or less to be cash equivalents. These investments
are carried at cost, which approximates fair value. Cash and cash equivalent balances may, at certain times, exceed federally
insured limits. If the amount of a deposit at any time exceeds the federally insured amount at a bank, the uninsured portion of
the deposit could be lost, in whole or in part, if the bank were to fail.
Accounts
receivable
The
Company records accounts receivable at the time products and services are delivered. An allowance for losses is established through
a provision for losses charged to expense. Receivables are charged against the allowance for losses when management believes collectability
is unlikely. The allowance (if any) is an amount that management believes will be adequate to absorb estimated losses on existing
receivables, based on evaluation of the collectability of the accounts and prior loss experience. As of September 30, 2018, and
December 31, 2017, management’s evaluation did not require the establishment of an allowance for uncollectible receivables.
Sales
Concentration and Credit Risk
Following
is a summary of customers who accounted for more than ten percent (10%) of the Company’s revenues for the three and nine
months ended September 30, 2018 and 2017, and accounts receivable balance as of September 30, 2018:
|
|
|
|
|
|
|
|
|
|
Accounts
|
|
|
September
30, 2018
|
|
September
30, 2017
|
|
Receivable
|
|
|
3
months
|
|
9
months
|
|
3
months
|
|
9
months
|
|
as
of
|
|
|
%
|
|
%
|
|
%
|
|
%
|
|
September
30, 2018
|
Customer
A
|
|
|
—
|
|
|
|
—
|
|
|
|
29.3
|
%
|
|
|
10.0
|
%
|
|
$
|
—
|
|
Customer
B
|
|
|
—
|
|
|
|
—
|
|
|
|
22.9
|
%
|
|
|
17.8
|
%
|
|
$
|
—
|
|
Customer
C, related
|
|
|
25.1
|
%
|
|
|
40.4
|
%
|
|
|
24.8
|
%
|
|
|
16.1
|
%
|
|
$
|
109,121
|
|
Customer
D
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
33.3
|
%
|
|
$
|
—
|
|
Customer
E
|
|
|
—
|
|
|
|
16.3
|
%
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Inventory
Inventory
is valued at the lower of cost or market value. Cost is determined using the first in first out (FIFO) method. Provision for potentially
obsolete or slow-moving inventory is made based on management analysis or inventory levels and future sales forecasts. The Company
has not recorded any loss provisions during the periods presented.
Property
and Equipment
Property
and equipment are stated at cost, and depreciation is provided by use of a straight-line method over the estimated useful lives
of the assets. The Company reviews property and equipment for potential impairment whenever events or changes in circumstances
indicate that the carrying amounts of assets may not be recoverable. The estimated useful lives of property and equipment are
as follows:
Computer
equipment
|
3
years
|
Machinery and equipment
|
5
years
|
Furniture and fixtures
|
5
years
|
The
Company's property and equipment consisted of the following at September 30, 2018, and December 31, 2017:
|
|
September
30,
2018
|
|
December
31,
2017
|
Computer
equipment
|
|
$
|
2,651
|
|
|
$
|
2,651
|
|
Machinery
and equipment
|
|
|
27,490
|
|
|
|
—
|
|
Furniture
and fixtures
|
|
|
2,160
|
|
|
|
—
|
|
Leasehold
improvements
|
|
|
8,750
|
|
|
|
—
|
|
Accumulated
depreciation
|
|
|
(2,379
|
)
|
|
|
(1,068
|
)
|
Balance
|
|
$
|
38,672
|
|
|
$
|
1,583
|
|
Depreciation
expense of $869 and $1,311 was recorded for the three and nine months ended September 30, 2018, respectively and $221 and $663
for the three and nine months ended September 30, 2017, respectively.
Investment
in Undivided Interest in Real Estate
The
Company accounts for its’ investment in undivided interest in real estate using the equity method, as the Company is severally
liable only for the indebtedness incurred with its interest in the property. The Company includes its allocated portion of net
income or loss in Other income (expense) in its Statement of Operations, with the offset to the equity investment account on the
balance sheet. For the nine months ended September 30, 2018, the Company recognized a loss of $1,390. As of September 30, 2018,
and December 31, 2017, the carrying value of the Company’s investment in undivided interest in real estate was $1,223,513
and $1,224,903, respectively (see Note 9).
Fair
Value of Financial Instruments
The
Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance
on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability,
as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that
market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes
a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation
techniques, are assigned a hierarchical level.
The
following are the hierarchical levels of inputs to measure fair value:
|
•
|
Level
1 - Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.
|
|
•
|
Level
2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar
assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities;
or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
•
|
Level
3 - Unobservable inputs reflecting the Company's assumptions incorporated in valuation techniques used to determine fair value.
These assumptions are required to be consistent with market participant assumptions that are reasonably available.
|
The
carrying amounts of the Company's financial assets and liabilities, such as cash, prepaid expenses, accounts receivable, accounts
payable and accrued expenses, certain notes payable and notes payable - related party, approximate their fair values because of
the short maturity of these instruments.
The
following table represents the Company’s financial instruments that are measured at fair value on a recurring basis as of
September 30, 2018, and December 31, 2017, for each fair value hierarchy level:
September
30, 2018
|
|
|
Derivative
Liabilities
|
|
|
|
Total
|
|
Level
I
|
|
$
|
—
|
|
|
$
|
—
|
|
Level
II
|
|
$
|
—
|
|
|
$
|
—
|
|
Level
III
|
|
$
|
1,350,231
|
|
|
$
|
1,350,231
|
|
|
|
|
|
|
|
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Level
I
|
|
$
|
—
|
|
|
$
|
—
|
|
Level
II
|
|
$
|
—
|
|
|
$
|
—
|
|
Level
III
|
|
$
|
540,965
|
|
|
$
|
540,965
|
|
Embedded
Conversion Features
The
Company evaluates embedded conversion features within convertible debt under ASC 815 "Derivatives and Hedging" to determine
whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at
fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under
ASC 815, the instrument is evaluated under ASC 470-20 "Debt with Conversion and Other Options" for consideration of
any beneficial conversion feature.
Derivative
Financial Instruments
The
Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates
all of it financial instruments, including stock purchase warrants, to determine if such instruments are derivatives or contain
features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the
derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the
fair value reported as charges or credits to income.
For
option-based simple derivative financial instruments, the Company uses the Monte Carlo simulations to value the derivative instruments
at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.
Debt
Issue Costs and Debt Discount
The
Company may record debt issue costs and/or debt discounts in connection with raising funds through the issuance of debt. These
costs may be paid in the form of cash, or equity (such as warrants). These costs are amortized to interest expense through the
maturity of the debt. If a conversion of the underlying debt occurs prior to maturity a proportionate share of the unamortized
amounts is immediately expensed.
Original
Issue Discount
For
certain convertible debt issued, the Company may provide the debt holder with an original issue discount. The original issue discount
would be recorded to debt discount, reducing the face amount of the note and is amortized to interest expense through the maturity
of the debt. If a conversion of the underlying debt occurs prior to maturity a proportionate share of the unamortized amounts
is immediately expensed.
Revenue
Recognition
The
Company has adopted ASU 2014-09, as amended effective January 1, 2018, and determined that there was no significant impact on
its revenue recognition. The Company’s contracts with customers are generally on a purchase order basis
and represent obligations that are satisfied at a point in time as defined in the new guidance. Accordingly, revenue
for each sale is recognized when each sale is complete, and any costs incurred before this point in time, are recorded as
assets to be expensed during the period the related revenue is recognized. The Company accepts prepayments on hearing aids
and records the mount received as customer deposits on its’ balance sheet. When the Company delivers the hearing aid to
the customer, revenue is recognized as well as the corresponding cost of sales. As of September 30, 2018, the Company had
received $48,814 of customer deposits, that will be recognized in October 2018, the month the hearing aids were delivered to
the customer. For the nine months ended September 30, 2017, the Company received and recognized $100,000 of revenue related
to the Store Expansion agreement, and $30,000 of income from the cancellation of the Marketing and Store
Expansion Agreements.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740-10, Income Taxes. Deferred tax assets and liabilities are recognized
to reflect the estimated future tax effects, calculated at the tax rate expected to be in effect at the time of realization. A
valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred
tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and
rates of the date of enactment.
ASC
740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements
and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure
and transition issues. Interest and penalties are classified as a component of interest and other expenses. To date, the Company
has not been assessed, nor paid, any interest or penalties.
Uncertain
tax positions are measured and recorded by establishing a threshold for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition
threshold at the effective date may be recognized or continue to be recognized.
Earnings
(Loss) Per Share
The
Company reports earnings (loss) per share in accordance with ASC 260, "Earnings per Share." Basic earnings (loss) per
share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during each
period. Diluted earnings per share is computed by dividing net loss by the weighted-average number of shares of common stock,
common stock equivalents and other potentially dilutive securities outstanding during the period. As of September 30, 2018, the
Company’s outstanding convertible debt is convertible into approximately 16,998,883 shares of common stock, subject to adjustment
based on the Company’s stock price at the actual time of conversion. This amount is not included in the computation of dilutive
loss per share because their impact is antidilutive. As of September 30, 2017, the Company did not have any outstanding common
stock equivalents or any other potentially dilutive securities.
Recent
Accounting Pronouncements
In
May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606).
ASU 2014-09 is amended
by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12, ASU 2016-20, ASU 2017-10, ASU 2017-13 and ASU 2017-14, which
FASB issued in August 2015, March 2016, April 2016, May 2016, May 2016, December 2016, May 2017, September 2017 and November 2017,
respectively (collectively, the amended ASU 2014-09). The amended ASU 2014-09 provides a single comprehensive model for the recognition
of revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific
guidance. It requires an entity to recognize revenue when the entity transfers promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amended
ASU 2014-09 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s). The
amended ASU 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows
arising from customer contracts, including qualitative and quantitative information about contracts with customers, significant
judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The effective date
for the amended ASU 2014-09 is for years beginning after December 15, 2017 with early adoption permitted. The Company adopted
the new guidance effective January 1, 2018 under the modified retrospective transition approach and it did not have a material
impact on the condensed consolidated financial statements of the Company.
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-02, “Leases (Topic 842)”. Under this guidance, an entity is required to recognize right-of-use assets and
lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific
accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative
and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing
and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December
15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption
permitted. The Company is currently evaluating the impact of the adoption of this standard will have on our consolidated financial
statements.
With
the exception of the new standard discussed above, there have been no other recent accounting pronouncements or changes in accounting
pronouncements during the six months ended June 30, 2018, as compared to the recent accounting pronouncements described
in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as filed on April 17,
2018, that are of significance or potential significance to the Company.
NOTE
4 – GOING CONCERN AND MANAGEMENT’S PLANS
The
accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. which
assumes the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The Company
experienced a net loss of $2,341,296 for the nine months ended September 30, 2018. At September 30, 2018, the Company had a working
capital deficit of $2,024,076, and an accumulated deficit of $4,128,308. These factors raise substantial doubt about the Company’s
ability to continue as a going concern and to operate in the normal course of business. These consolidated financial statements
do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification
of liabilities that might result from this uncertainty.
Management’s
Plans
The
Company continues to implement an industry encompassing revenue strategy, including the current revenue model to other
major sectors of the global hearing industry. The Company plans include generating revenues from 7 separate revenue streams.
On July 5, 2018, the Company signed a supplier agreement as a direct shipped vendor for Walmart.com. The Company has
been accepted as a Walmart.com USA, LLC (a wholly-owned subsidiary of Wal-Mart Stores, Inc.) supplier and is selling
its FDA-Registered Hearing Aids and its Personal Sound Amplification Products (“PSAP’s”) to Walmart.com as
the retailer for their Direct-To-Consumer online retail sale. On September 10, 2018, the Company acquired all of the assets
and assumed certain liabilities of Amos Audiology (see Note 2). This transaction is part of management’s plans to
expand the Comp
any’s retail clinic business by opening up to 22 clinics in the next 12 months.
NOTE
5 – ADVANCES PAYABLE, SHAREHOLDERS
Chief
Executive Officer
A
summary of the activity for the nine months ended September 30, 2018, and the year ended December 31, 2017, representing amounts
paid by the Company’s CEO (stockholder) on behalf of the Company and amounts reimbursed is as follows.
|
|
September
30,
2018
|
|
December
31,
2017
|
Beginning
Balance
|
|
$
|
138,637
|
|
|
$
|
-0-
|
|
Amounts
paid on Company’s behalf
|
|
|
304,056
|
|
|
|
149,370
|
|
Reimbursements
|
|
|
(328,685
|
)
|
|
|
(10,733
|
)
|
Cancelled
in exchange for Series B preferred stock
|
|
|
(45,000
|
)
|
|
|
—
|
|
Ending
Balance
|
|
$
|
69,008
|
|
|
$
|
138,637
|
|
The
ending balances as of September 30, 2018, and December 31, 2017, are included in Advances payable, stockholders on the condensed
consolidated balance sheets included herein.
Director
A
summary of the activity for the nine months ended September 30, 2018, and the year ended December 31, 2017, representing amounts
paid by the Company’s Chairman (stockholder) on behalf of the Company and amounts reimbursed is as follows.
|
|
September
30,
2018
|
|
December
31,
2017
|
Beginning
Balance
|
|
$
|
38,201
|
|
|
$
|
-0-
|
|
Amounts
paid on Company’s behalf
|
|
|
24,335
|
|
|
|
39,201
|
|
Reimbursements
|
|
|
(62,500
|
)
|
|
|
(1,000
|
)
|
Ending
Balance
|
|
$
|
36
|
|
|
$
|
38,201
|
|
The
ending balances as of September 30, 2018, and December 31, 2017, are included in Advances payable, stockholders on the condensed
consolidated balance sheets included herein.
NOTE
6 – NOTE PAYABLE, STOCKHOLDER
A
summary of the activity for the nine months ended September 30, 2018, and the year ended December 31, 2017, of amounts the Company’s
CEO (stockholder) loaned the Company and amounts repaid is as follows:
|
|
September
30, 2018
|
|
December
31,
2017
|
Beginning
Balance
|
|
$
|
65,000
|
|
|
$
|
-0-
|
|
Amounts
loaned to the Company
|
|
|
36,800
|
|
|
|
65,000
|
|
Repaid
|
|
|
(6,000
|
)
|
|
|
-0-
|
|
Ending
Balance
|
|
$
|
95,800
|
|
|
$
|
65,000
|
|
The
ending balance amount is due on demand, carries interest at 8% per annum and is included Notes payable, stockholder on the condensed
consolidated balance sheet included herein.
NOTE
7 – NOTE PAYABLE
On
February 27, 2018, the Company entered into a Business Loan Agreement (the “February BLA”) for $43,358 with a third-
party, whereby the Company received $32,600 on March 1, 2018. The February BLA requires the Company to make the first six monthly
payments of principal and interest of $4,102 per month, and then $3,124 for months seven through twelve. The Company paid the
note in full on August 28, 2018. The note carried a 33% interest rate and matures on March 1, 2019.
On
July 30, 2018, the Company entered into a Business Loan Agreement (the “July BLA”) for $11,020 with a third- party,
whereby the Company received $9,500 on July 30, 2018. The July BLA requires the Company to make the first two monthly payments
of principal and interest of $2,106 per month, and then $1,702 for months three through six. The Company paid the note in full
on August 28, 2018. The note carried a 16% interest rate and matures on February 16, 2019.
NOTE
8 – RELATED PARTY TRANSACTIONS
The
Company loaned the CEO $20,500 during the year ended December 31, 2013. The note and interest were paid in full during the year
ended December 31, 2017. The Company recorded interest income of $64 for the nine months ended September 30, 2017.
During
the nine months ended September 30, 2018 and the year ended December 31, 2017, our CEO (stockholder) paid expenses of the Company
and accounts payable on behalf of the Company (see Note 5). As of September 30, 2018, and December 31, 2017, the Company owed
the CEO $69,008 and $138,637, respectively, which is included in Advances payable, stockholders on the condensed consolidated
balance sheets included herein.
During
the nine months ended September 30, 2018, and the year ended December 31, 2017, our Chairman (stockholder) paid expenses of the
Company and accounts payable on behalf of the Company (see Note 5). As of September 30, 2018, and December 31, 2017, the Company
owed the Chairman $36 and $38,201, respectively, which is included in Advances payable, stockholders on the condensed consolidated
balance sheets included herein.
Pursuant
to a Marketing Agreement (cancelled August 5, 2016), the Company provided marketing programs to promote and sell hearing aid instruments
and related devices to Moore Family Hearing Company (“MFHC”). MFHC owned and operated retail hearing aid stores. Based
on common control of MFHC and the Company, all transactions with MFHC are classified as related party transactions. On August
8, 2016, in consideration of $128,000 (the “Cancellation Fee”), MFHC and the Company agreed to cancel the Marketing
Agreement as a result of the sale by MFHC of substantially all of their assets. On August 11, 2016, MFHC paid $229,622 to the
Company (inclusive of the balance owed as of June 30, 2016, the Cancellation Fee and other related party activity).
Pursuant
to the Marketing Agreement, beginning in January 2014, the monthly fee was increased from $2,500 to $3,200 per retail location.
For the year ended December 31, 2016 (through August 5, 2016), there were 20 stores resulting in revenue of $458,667. The Company
has offset the accounts receivable owed from MFHC for expenses of the Company that have been paid by MFHC. As a result of these
payments, in addition to MFHC’s payments to the Company through December 31, 2016, the balance due to MFHC as of September
30, 2018, and December 31, 2017, was $22,548, which is included in Accounts payable, related party, on the condensed consolidated
balance sheet included herein.
On
April 1, 2013, the Company entered into a five-year sublease agreement with MFHC to sublease approximately 729 square feet of
office space for $1,500 per month. The monthly rent reduced the amounts owed to the Company from MFHC for the marketing services
provided to MFHC. For the nine months ended September 30, 2017, the Company expensed $1,500 related to this lease.
Effective
August 1, 2016, the Company agreed to compensation of $225,000 and $125,000 per year for the Company’s CEO and CFO, respectively.
On November 15, 2016, the Company entered into employment agreements with its CEO and CFO, which includes their annual base salaries
of $225,000 and $125,000, respectively. For the three and nine months ended September 30, 2018, and 2017, the Company recorded
expenses to its officers in the following amounts:
|
|
Three
months ended
September
30,
|
|
Nine
months ended
September
30,
|
|
Description
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
CEO
|
|
|
$
|
59,134
|
|
|
$
|
56,250
|
|
|
$
|
171,634
|
|
|
$
|
168,750
|
|
|
CFO
|
|
|
|
30,449
|
|
|
|
31,250
|
|
|
|
91,989
|
|
|
|
93,750
|
|
|
Total
|
|
|
$
|
89,583
|
|
|
$
|
87,500
|
|
|
$
|
263,623
|
|
|
$
|
262,500
|
|
As
of September 30, 2018, the Company owes the CEO and CFO $6,593 and $116,163, respectively, and as of December 31, 2017, the Company
owed the CEO and CFO $4,327 and $40,385, respectively for accrued and unpaid wages. These amounts are included in Officer salaries
payable on the balance sheets included herein.
In
September 2016, the officers and directors of the Company formed a California Limited Liability Company (“LLC1”),
for the purpose of acquiring commercial real estate and other business activities. On December 24, 2016, LLC1 acquired two retail
stores from the buyer of the MFHC stores. On March 1, 2017, the Company entered into a twelve-month Marketing Agreement with each
of the stores to provide telemarketing and design and marketing services for $2,500 per month per store, resulting in $15,000
and $45,000, respectively for the three and nine months ended September 30, 2018, and $15,000 for the nine months ended September
30, 2017. Additionally, for the three and six months ended June 30, 2018, the Company invoiced LLC1 $20,226 for the Company’s
production, printing and mailing services and $1,793 for sale of products. As of September 30, 2018, and December 31, 2017, LLC1
owes the Company $109,121 and $73,996, respectively. On May 9, 2017, the Company and LLC1 purchased certain real property from
an unaffiliated party (see Note 9). On June 14, 2017, the Company entered into a five-year lease with LLC1 for approximately 6,944
square feet and a monthly rent of $12,000. For the three and nine months ended September 30, 2018, the Company expensed $36,000
and $108,000, respectively, related to this lease and is included in Rent, related party, on the condensed consolidated statement
of operations, included herein.
In
November 2016, the Company’s Chairman formed a California Limited Liability Company (“LLC2”), for the purpose
of providing consulting services to the Company. The Company entered into an agreement with LLC2, and paid LLC2 $375,000 during
the year ended December 31, 2016, for services performed and to be performed. Of the $375,000 amount paid, $241,667 was recognized
as consulting fees- stockholder for the year ended December 31, 2016, and the remaining $133,334 was recorded as deferred commissions-
stockholder as of December 31, 2016. For the nine months ended September 30, 2017, the Company paid LLC2 an additional $771,000
($96,000 of which reduced previous amounts owed) and expensed $808,334 ($60,000 as commissions for services performed and $748,334
as other expense). As of September 30, 2017, the deferred commissions-stockholder is $-0-.
On
May 9, 2017, the Company and LLC1 purchased certain real property from an unaffiliated party. The Company and LLC1 have agreed
that the Company purchased and owns 49% of the building and LLC1 purchased and owns 51% of the building. The contracted purchase
price for the building was $2,420,000 and the total amount paid at closing was $2,501,783 including, fees, insurance, interest
and real estate taxes. The Company paid for their building interest by delivering cash at closing of $209,971 and being a co-borrower
on a note in the amount of $2,057,000, of which the Company has agreed with LLC1 to pay $1,007,930 (see Note 9).
NOTE
9– INVESTMENT IN UNDIVIDED INTEREST IN REAL ESTATE
On
May 9, 2017, the Company and LLC1 purchased certain real property from an unaffiliated party. The Company and LLC1 have agreed
that the Company purchased and owns 49% of the building and LLC1 purchased and owns 51% of the building. The contracted purchase
price for the building was $2,420,000 and the total amount paid at closing was $2,501,783 including, fees, insurance, interest
and real estate taxes. The Company paid for their building interest by delivering cash at closing of $209,971 and being a co-borrower
on a note in the amount of $2,057,000, of which the Company has agreed with LLC1 to pay $1,007,930.
The
allocated portion of the results in an equity method investment in a privately-held, related party, company are included in the
Company’s consolidated statements of operations. For the three and nine months ended September 30, 2018, a net loss of $2,132
and $1,390, respectively, is included in “Other income (expense), net”. As of September 30, 2018, the carrying value
of the Company’s investment in undivided interest in real estate was $1,223,513.
The
unaudited condensed balance sheet as of September 30, 2018 and the unaudited condensed statement of operations for the nine months
ended September 30, 2018, for the real property is as follows:
Current assets:
|
|
|
Cash
and cash equivalents
|
|
$
|
13,938
|
|
Accounts
receivable, net
|
|
|
11,361
|
|
Prepaid
expenses and other current assets
|
|
|
70,462
|
|
Total
current assets
|
|
|
95,761
|
|
Land
and Building, net
|
|
|
2,365,173
|
|
Other
assets, net
|
|
|
53,323
|
|
Total
assets
|
|
$
|
2,514,257
|
|
|
|
|
|
|
Current
portion of mortgage payable
|
|
$
|
39,528
|
|
Other
current liabilities
|
|
|
61,254
|
|
Total
current liabilities
|
|
|
100,782
|
|
Mortgage
payable, long-term
|
|
|
1,977,766
|
|
Total
liabilities
|
|
|
2,078,548
|
|
Total
equity
|
|
|
435,709
|
|
Total
liabilities and equity
|
|
$
|
2,514,257
|
|
Rental
income
|
|
$
|
210,696
|
|
Expenses:
|
|
|
|
|
Property
taxes
|
|
|
19,938
|
|
Depreciation
and amortization
|
|
|
32,675
|
|
Insurance
|
|
|
2,033
|
|
Repairs
and maintenance
|
|
|
20,860
|
|
Other
|
|
|
24,707
|
|
Interest
expense
|
|
|
103,319
|
|
Total
expenses
|
|
|
213,532
|
|
Net
loss
|
|
$
|
(2,836
|
)
|
NOTE
10– NOTE PAYABLE - UNDIVIDED INTEREST IN REAL ESTATE
On
May 9, 2017, the Company and LLC1 purchased certain real property from an unaffiliated party. The Company and LLC1 have agreed
that the Company purchased and owns 49% of the building and LLC1 purchased and owns 51% of the building. The contracted purchase
price for the building was $2,420,000 and the total amount paid at closing was $2,501,783 including, fees, insurance, interest
and real estate taxes. The Company is a co-borrower on a $2,057,000 Small Business Administration Note (the “SBA Note”).
The SBA Note carries a 25-year term, with an initial interest rate of 6% per annum, adjustable to the Prime interest rate plus
2%, and is secured by a first position Deed of Trust and business assets located at the property. The Company initially recorded
a liability of $1,007,930 for its portion of the SBA Note, with the offset being to Investment in undivided interest in real estate
on the balance sheet presented herein. As of September 30, 2018, the current and long-term portion of the SBA Note is $19,369
and $969,105, respectively. Future principal payments for the Company’s portion are:
Twelve
months ending September 30,
|
|
Amount
|
|
2019
|
|
|
$
|
19,369
|
|
|
2020
|
|
|
|
20,401
|
|
|
2021
|
|
|
|
21,782
|
|
|
2022
|
|
|
|
23,168
|
|
|
2023
|
|
|
|
24,596
|
|
|
Thereafter
|
|
|
|
879,158
|
|
|
Total
|
|
|
$
|
988,474
|
|
NOTE
11– CONVERTIBLE NOTES PAYABLE
On
October 11, 2017, the Company completed the closing of a private placement financing transaction (the “Transaction”)
with a third-party investor, pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) dated October
5, 2017. Pursuant to the Purchase Agreement, the investor purchased a 12% Convertible Promissory Note (the “Note”),
dated October 5, 2017, in the principal amount of $48,000. On October 11, 2017, the Company received proceeds of $45,000 which
excluded transaction costs, fees, and expenses of $3,000. Principal and interest was due and payable July 15, 2018, and the Note
was convertible into shares of the Company’s common stock at any time after one hundred eighty (180) days, at the average
of the two lowest closing bid prices during the ten (10) prior trading days from which a notice of conversion is received by the
Company multiplied by sixty-five percent (65%), representing a thirty-five percent (35%) discount. The embedded conversion feature
included in the note resulted in an initial debt discount of $40,300, and an initial derivative liability of $40,300. For the
nine months ended September 30, 2018, amortization of the debt discount of $27,739 was charged to interest expense. The Company
also recorded a discount for debt issuance costs of $3,000 and has amortized $2,065 to interest expense for the nine months ended
September 30, 2018. During the nine months ended September 30, 2018, the investor converted $48,000 of principal and $2,880 of
accrued interest into 4,330,984 shares of common stock. As of September 30, 2018, and December 31, 2017, the note balance is $-0-
and $48,000, respectively.
On
November 10, 2017, the Company issued a convertible promissory note (the “Note”), with a face value of $299,000, maturing
on January 12, 2019, and stated interest of 10% to a third-party investor. The note was convertible at any time after ninety (90)
days of the funding of the note into a variable number of the Company's common stock, based on a conversion ratio of 65% of the
lowest trading price for the 20 days prior to conversion. The note was funded on November 10, 2017, when the Company received
proceeds of $250,000, after disbursements for the lender’s transaction costs, fees and expenses. The Note also required
daily payments of $700 per day via ACH through January 12, 2019, when all unpaid principal and interest is due. The embedded conversion
feature included in the note resulted in an initial debt discount of $250,000, an initial derivative expense of $213,549 and an
initial derivative liability of $463,549. For the nine months ended September 30, 2018, amortization of the debt discount of $208,583
was charged to interest expense. The Company also recorded an original issue discount and debt issue discount of $49,000 and amortized
$40,883 to interest expense for the nine months ended September 30, 2018. During the nine months ended September 30, 2018, the
Company made principal payments of $81,900, and the investor converted $123,250 of principal and $21,843 of interest into 21,887,432
shares of common stock. On August 10, 2018, the investor sold $40,000 of the Note to a third party, and the investor also forgave
$35,650 of principal. As of September 30, 2018, and December 31, 2017, the note balance is $-0- and $280,800, respectively.
On
December 12, 2017, the Company completed the closing of a private placement financing transaction (the “Transaction”)
when a third-party investor purchased a convertible note (the “Convertible Note”). The Convertible Note carries a
10% annual interest rate and is in the principal amount of $50,000. Principal and interest is due and payable December 12, 2018,
and the Note is convertible into shares of the Company’s common stock at any time after one hundred eighty (180) days, at
a conversion price (the “Conversion Price”) equal to seventy-five percent (75%) of the average closing price of the
Company’s common stock for the ten (10) days immediately preceding the conversion, representing a twenty-five percent (25%)
discount. The embedded conversion feature included in the note resulted in an initial debt discount of $13,207, and an initial
derivative liability of $13,207. For the nine months ended September 30, 2018, amortization of the debt discount of $9,905 was
charged to interest expense. As of September 30, 2018, and December 31, 2017, the note balance is $50,000, with a carrying value
as of September 30, 2018, of $47,102, net of unamortized discounts of $2,898.
On
February 1, 2018, the Company completed the closing of a private placement financing transaction (the “Transaction”)
when a third-party investor purchased a convertible note (the “Convertible Note”). The Convertible Note carries a
10% annual interest rate and is in the principal amount of $35,000. Principal and interest is due and payable February 1, 2019,
and the Note is convertible into shares of the Company’s common stock at any time after one hundred eighty (180) days, at
a conversion price (the “Conversion Price”) equal to seventy-five percent (75%) of the average closing price of the
Company’s common stock for the ten (10) days immediately preceding the conversion, representing a twenty-five percent (25%)
discount. The embedded conversion feature included in the note resulted in an initial debt discount of $9,554, and an initial
derivative liability of $9,554. For the nine months ended September 30, 2018, amortization of the debt discount of $9,554 was
charged to interest expense. During the nine months ended September 30, 2018, the investor converted $35,000 of principal and
$1,750 of interest into 2,085,106 shares of common stock. As of September 30, 2018, the note balance is $-0-
On
February 8, 2018, the Company completed the closing of a private placement financing transaction (the “Transaction”)
with a third-party investor, pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) dated February
8, 2018. Pursuant to the Purchase Agreement, the investor purchased a 12% Convertible Promissory Note (the “Note”),
dated February 8, 2018, in the principal amount of $58,300. On February 8, 2018, the Company received proceeds of $50,000 which
excluded transaction costs, fees, and expenses of $8,300. Principal and interest was due and payable November 8, 2018, and the
Note was convertible into shares of the Company’s common stock at any time after one hundred eighty (180) days, at the average
of the two lowest closing bid prices during the ten (10) prior trading days from which a notice of conversion is received by the
Company multiplied by seventy-five percent (75%), representing a twenty-five percent (25%) discount. The embedded conversion feature
included in the note resulted in an initial debt discount of $50,000, an initial derivative liability of $65,525 and an initial
derivative expense of $15,525. For the nine months ended September 30, 2018, amortization of the debt discount of $50,000 was
charged to interest expense. The Company also recorded a debt issue discount of $8,300 and has amortized $8,300 to interest expense
for the nine months ended September 30, 2018. During the nine months ended September 30, 2018, the Company made principal payments
of $46,121, and the investor converted $12,179 of principal into 2,925,932 shares of common stock. As of September 30, 2018, the
note balance is $-0-.
On
March 2, 2018, the Company completed the closing of a private placement financing transaction (the “Transaction”)
when a third-party investor purchased a convertible note (the “Convertible Note”). The Convertible Note carries a
10% annual interest rate and is in the principal amount of $50,000. Principal and interest is due and payable March 2, 2019, and
the Note is convertible into shares of the Company’s common stock at any time after one hundred eighty (180) days, at a
conversion price (the “Conversion Price”) equal to seventy-five percent (75%) of the average closing price of the
Company’s common stock for the ten (10) days immediately preceding the conversion, representing a twenty-five percent (25%)
discount. The embedded conversion feature included in the note resulted in an initial debt discount of $13,399, and an initial
derivative liability of $3,399. For the nine months ended September 30, 2018, amortization of the debt discount of $7,816 was
charged to interest expense. As of September 30, 2018, the note balance is $50,000, with a carrying value of $44,417, net of unamortized
discounts of $5,583.
On
March 26, 2018, the Company completed the closing of a private placement financing transaction (the “Transaction”)
when a third-party investor purchased a convertible note (the “Convertible Note”). The Convertible Note carried a
10% annual interest rate and is in the principal amount of $50,000. Principal and interest was due and payable March 26, 2019,
and the Note was convertible into shares of the Company’s common stock at any time after one hundred eighty (180) days,
at a conversion price (the “Conversion Price”) equal to seventy-five percent (75%) of the average closing price of
the Company’s common stock for the ten (10) days immediately preceding the conversion, representing a twenty-five percent
(25%) discount. The embedded conversion feature included in the note resulted in an initial debt discount of $13,420, and an initial
derivative liability of $13,420. For the nine months ended September 30, 2018, amortization of the debt discount of $13,420 was
charged to interest expense. During the nine months ended September 30, 2018, the investor converted $50,000 of principal and
$1,205 of interest into 844,870 shares of common stock. As of September 30, 2018, the note balance is $-0-.
On
March 27, 2018, the Company completed the closing of a private placement financing transaction (the “Transaction”)
when a third-party investor purchased a convertible note (the “Convertible Note”). The Convertible Note carries a
10% annual interest rate and is in the principal amount of $25,000. Principal and interest is due and payable March 27, 2019,
and the Note is convertible into shares of the Company’s common stock at any time after one hundred eighty (180) days, at
a conversion price (the “Conversion Price”) equal to seventy-five percent (75%) of the average closing price of the
Company’s common stock for the ten (10) days immediately preceding the conversion, representing a twenty-five percent (25%)
discount. The embedded conversion feature included in the note resulted in an initial debt discount of $6,736, and an initial
derivative liability of $6,736. For the nine months ended September 30, 2018, amortization of the debt discount of $3,424 was
charged to interest expense. As of September 30, 2018, the note balance is $25,000, with a carrying value of $21,688, net of unamortized
discounts of $3,312.
On
April 8, 2018, the Company issued a convertible promissory note (the “Note”), with a face value of $95,450, maturing
on July 8, 2019, and stated interest of 10% to a third-party investor. The note is convertible at any time after ninety (90) days
of the funding of the note into a variable number of the Company's common stock, based on a conversion ratio of 65% of the lowest
trading price for the 20 days prior to conversion. The note was funded on April 11, 2018, when the Company received proceeds of
$75,000, after disbursements for the lender’s transaction costs, fees and expenses. The Note also requires daily payments
of $375 per day via ACH through July 8, 2019, when all unpaid principal and interest is due. The embedded conversion feature included
in the note resulted in an initial debt discount of $75,000, an initial derivative expense of $77,108 and an initial derivative
liability of $152,108. For the nine months ended September 30, 2018, amortization of the debt discount of $45,049 was charged
to interest expense. The Company also recorded an original issue discount and debt issue discount of $20,450 and amortized $12,262
to interest expense for the nine months ended September 30, 2018. During the nine months ended September 30, 2018, the Company
made principal payments of $20,625. As of September 30, 2018, the note balance is $76,700, with a carrying value of $38,561, net
of unamortized discounts of $38,139.
On
May 11, 2018, the Company issued a convertible promissory note (the “Note”), with a face value of $100,000, maturing
on May 11, 2019, and stated interest of 10% to a third-party investor. The note is convertible at any time after the funding of
the note into a variable number of the Company's common stock, based on a conversion ratio of 62% of the lowest trading price
for the 20 days prior to conversion. The note was funded on May 16, 2018, when the Company received proceeds of $75,825, after
disbursements to vendors and for the lender’s transaction costs, fees and expenses. The embedded conversion feature included
in the note resulted in an initial debt discount of $95,000, an initial derivative expense of $60,635 and an initial derivative
liability of $155,635. For the nine months ended September 30, 2018, amortization of the debt discount of $50,271 was charged
to interest expense. The Company also recorded a debt issue discount of $5,000 and amortized $1,946 to interest expense for the
nine months ended September 30, 2018. During the nine months ended September 30, 2018, the investor converted $14,000 of principal
and $322 of interest into 4,125,055 shares of common stock. As of September 30, 2018, the note balance is $86,000, with a carrying
value of $38,217, net of unamortized discounts of $47,783.
On
May 23, 2018, the Company issued a convertible promissory note (the “Note”), with a face value of $60,000, maturing
on February 22, 2019, and stated interest of 12% to a third-party investor. The note is convertible at any time after the funding
of the note into a variable number of the Company's common stock, based on a conversion ratio of 65% of the lowest trading price
for the 20 days prior to conversion. The note was funded on May 30, 2018, when the Company received proceeds of $57,000, after
the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial
debt discount of $57,000, an initial derivative expense of $48,033 and an initial derivative liability of $105,033. For the nine
months ended September 30, 2018, amortization of the debt discount of $26,794 was charged to interest expense. The Company also
recorded a debt issue discount of $3,000 and amortized $1,410 to interest expense for the nine months ended September 30, 2018.
As of September 30, 2018, the note balance is $60,000, with a carrying value of $28,204, net of unamortized discounts of $31,796.
On
June 12, 2018, the Company issued a convertible promissory note (the “Note”), with a face value of $88,000, maturing
on March 12, 2019, and stated interest of 10% to a third-party investor. The note is convertible at any time after the funding
of the note into a variable number of the Company's common stock, based on a conversion ratio of 65% of the lowest trading price
for the 25 days prior to conversion. The note was funded on June 14, 2018, when the Company received proceeds of $80,250, after
the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial
debt discount of $80,250, an initial derivative expense of $93,150 and an initial derivative liability of $173,400. For the nine
months ended Sept 30, 2018, amortization of the debt discount of $32,188 was charged to interest expense. The Company also recorded
a debt issue discount of $7,750 and amortized $3,109 to interest expense for the nine months ended September 30, 2018. As of September
30, 2018, the note balance is $88,000, with a carrying value of $35,297, net of unamortized discounts of $52,703.
On
June 26, 2018, the Company issued a convertible promissory note (the “Note”), with a face value of $92,000, maturing
on September 26, 2019, and stated interest of 10% to a third-party investor. The note is convertible at any time after ninety
(90) days of the funding of the note into a variable number of the Company's common stock, based on a conversion ratio of 65%
of the lowest trading price for the 20 days prior to conversion. The Company recorded an initial note balance of $42,000 on June
27, 2018, when the Company received proceeds of $25,000, after disbursements for the lender’s transaction costs, fees and
expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $25,000, an initial derivative
expense of $31,685 and an initial derivative liability of $56,685. For the nine months ended September 30, 2018, amortization
of the debt discount of $5,158 was charged to interest expense. The Company also recorded an original issue discount and debt
issue discount of $17,000 and amortized $3,508 to interest expense for the nine months ended September 30, 2018. During the nine
months ended September 30, 2018, the Company made principal payments of $900. As of September 30, 2018, the note balance is $41,100,
with a carrying value of $7,766, net of unamortized discounts of $33,334.
On
June 26, 2018, the Company completed the closing of a private placement financing transaction (the “Transaction”)
with a third-party investor, pursuant to a Securities Purchase Agreement (the “Purchase Agreement”). Pursuant to the
Purchase Agreement, the investor purchased a 12% Convertible Promissory Note (the “Note”), in the principal amount
of $58,300, maturing on April 15, 2019. On June 29, 2018, the Company received proceeds of $50,000 which excluded transaction
costs, fees, and expenses of $8,300. The Note is convertible into shares of the Company’s common stock at any time after
one hundred eighty (180) days, at the average of the two lowest closing bid prices during the twenty (20) prior trading days from
which a notice of conversion is received by the Company multiplied by seventy-five percent (75%), representing a twenty-five percent
(25%) discount. The embedded conversion feature included in the note resulted in an initial debt discount of $50,000, an initial
derivative liability of $116,550 and an initial derivative expense of $66,550. For the nine months ended September 30, 2018, amortization
of the debt discount of $16,091 was charged to interest expense. The Company also recorded an original issue discount and debt
issue discount of $8,300 and amortized $2,671 to interest expense for the nine months ended September 30, 2018. As of September
30, 2018, the note balance is $58,300, with a carrying value of $18,762, net of unamortized discounts of $39,538.
On
August 7, 2018, the Company issued a convertible promissory note (the “Note”), with a face value of $88,250, maturing
on November 7, 2019, and stated interest of 10% to a third-party investor. The note is convertible at any time after ninety (90)
days of the funding of the note into a variable number of the Company's common stock, based on a conversion ratio of 65% of the
lowest trading price for the 20 days prior to conversion. The note was funded on August 7, 2018, when the Company received proceeds
of $80,250, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included
in the note resulted in an initial debt discount of $80,250, an initial derivative expense of $86,207 and an initial derivative
liability of $166,457. For the nine months ended September 30, 2018, amortization of the debt discount of $16,558 was charged
to interest expense. The Company also recorded a debt issue discount of $8,000 and amortized $1,651 to interest expense for the
nine months ended September 30, 2018. As of September 30, 2018, the note balance is $88,250, with a carrying value of $18,209,
net of unamortized discounts of $70,441.
On
August 10, 2018, the Company issued a convertible promissory note (the “Note”), with a face value of $110,000, maturing
on November 10, 2019, and stated interest of 10% to a third-party investor. The note is convertible at any time after ninety (90)
days of the funding of the note into a variable number of the Company's common stock, based on a conversion ratio of 65% of the
lowest trading price for the 20 days prior to conversion. The note was funded on August 10, 2018, when the Company received proceeds
of $100,000, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature
included in the note resulted in an initial debt discount of $100,000, an initial derivative expense of $113,173 and an initial
derivative liability of $213,173. For the nine months ended September 30, 2018, amortization of the debt discount of $20,633 was
charged to interest expense. The Company also recorded a debt issue discount of $10,000 and amortized $2,063 to interest expense
for the nine months ended September 30, 2018. As of September 30, 2018, the note balance is $110,000, with a carrying value of
$22,696, net of unamortized discounts of $87,304.
The
following is a summary of the Company’s convertible notes and related discounts as of September 30, 2018:
Convertible
notes
|
|
$
|
733,350
|
|
Unamortized
note discounts
|
|
|
(416,145
|
)
|
Balance
at September 30, 2018
|
|
$
|
317,205
|
|
The
following is a roll-forward of the Company’s convertible notes and related discounts for the nine months ended September
30, 2018:
|
|
Principal
Balance
|
|
Debt
Discounts
|
|
Total
|
Balance
at January 1, 2018
|
|
$
|
378,800
|
|
|
$
|
(292,073
|
)
|
|
$
|
86,727
|
|
New
issuances
|
|
|
860,300
|
|
|
|
(743,409
|
)
|
|
|
116,891
|
|
Cash
payments
|
|
|
(149,546
|
)
|
|
|
—
|
|
|
|
(149,546
|
)
|
Conversions
|
|
|
(322,429
|
)
|
|
|
—
|
|
|
|
(322,429
|
)
|
Debt
forgiveness
|
|
|
(33,775
|
)
|
|
|
—
|
|
|
|
(33,775
|
)
|
Amortization
|
|
|
—
|
|
|
|
619,337
|
|
|
|
619,337
|
|
Balance
at September 30, 2018
|
|
$
|
733,350
|
|
|
$
|
(416,145
|
)
|
|
$
|
317,205
|
|
NOTE
12 – DERIVATIVE LIABILITIES
The
Company determined that the conversion features of the convertible notes represented embedded derivatives since the Notes are
convertible into a variable number of shares upon conversion. Accordingly, the notes are not considered to be conventional debt
under EITF 00-19 and the embedded conversion feature is bifurcated from the debt host and accounted for as a derivative liability.
Accordingly, the fair value of these derivative instruments is recorded as liabilities on the consolidated balance sheet with
the corresponding amount recorded as a discount to each Note, with any excess of the fair value of the derivative component over
the face amount of the note recorded as an expense on the issue date. Such discounts are amortized from the date of issuance to
the maturity dates of the Notes. The change in the fair value of the derivative liabilities are recorded in other income or expenses
in the condensed consolidated statements of operations at the end of each period, with the offset to the derivative liabilities
on the balance sheet. See Note 11.
The
Company valued the derivative liabilities at issuance, September 30, 2018, and December 31, 2017, at $1,350,231 and $540,965,
respectively. The Company used the Monte Carlo simulation valuation model with the following assumptions for new notes issued
during the nine months ended September 30, 2018, risk-free interest rates from 1.82% to 2.51% and volatility of 303% to 432%,
and as of September 30, 2018, risk-free interest rates from 2.36% to 2.61% and volatility of 412% to 444%.
A
summary of the activity related to derivative liabilities for the nine months ended on September 30, 2018, is as follows:
|
|
September
30, 2018
|
Beginning
Balance
|
|
$
|
540,965
|
|
Initial
Derivative Liability
|
|
|
1,247,675
|
|
Fair
Value Change
|
|
|
348,753
|
|
Reclassification
for principal payments and conversions
|
|
|
(787,162
|
)
|
Ending
Balance
|
|
$
|
1,350,231
|
|
Derivative
liability expense of $940,819 for the nine months ended September 30, 2018, consisted of the initial derivative expense of $592,066
and the above fair value change of $348,753.
NOTE
13– COMMITMENTS AND CONTINGENCIES
Lease
Agreements
On
June 14, 2017, the company entered into a five-year lease with LLC1 for approximately 6,944 square feet and a monthly rent of
$12,000.
Future
principal payments for the Company’s portion are:
|
For
the twelve months ending September 30,
|
|
Amount
|
|
2019
|
|
|
$
|
144,000
|
|
|
2020
|
|
|
|
144,000
|
|
|
2021
|
|
|
|
144,000
|
|
|
2022
|
|
|
|
108,000
|
|
|
Total
|
|
|
$
|
540,000
|
|
Rent
expense, related party, for the three and nine months ended September 30, 2018, was $47,937 ($36,000 related) and $119,937 ($108,000
related), respectively and $36,000 (all related) and $75,377 ($73,500 related) for the three and nine months ended September 30,
2017, respectively.
Consulting
Agreements
On
August 5, 2016, the Company along with Mark Moore (“Mark”, the Company’s chairman), Matthew Moore (“Matthew”,
the Company’s Chief Executive Officer) and Kim Moore (“Kim”, the Company’s Chief Financial Officer) entered
into a Store Expansion Consulting Agreement (the “Expansion Agreement”) Mark, Matthew and Kim are herein referred
to collectively as the Moores. Pursuant to the Expansion Agreement, the Company and the Moores were responsible for all physical
plant and marketing details for new store openings during the initial term of six-months. The Expansion Agreement was cancelled
on January 6, 2017. The Company’s client has decided to do their own marketing in-house and eliminate this out-sourced contract
and has decided to delay the opening of any new stores. For the nine months ending September 30, 2017, the Company has received
and recognized $400,000 in other income for payments received for the cancellation of the Expansion Agreement.
Also
on August 5, 2016, the Company and the Moores entered into a Consulting Agreement (the “Consulting Agreement”) with
the same party as the store Expansion Agreement. Under the Consulting Agreement, including the Non-Compete provision covering
a ten- mile radius of any retail store, the Company and the Moores were to provide unlimited licensing of the Intela-Hear brand
name, exclusive access to the Aware Aural Rehab Program within 10 miles of retail stores, exclusive territory of all services
within 10 miles of retail stores and 40 hours per month of various consulting services. The Consulting Agreement was to continue
until January 31, 2019, unless terminated for cause, as defined in the Consulting Agreement. On May 2, 2017, the Company received
a demand letter threatening litigation unless all monies paid pursuant to the Consulting Agreement are returned. On May 26, 2017,
a complaint (the “Complaint”) was filed against the Company and the Moores, which includes a request for rescission
of the Consulting Agreement. The Company filed a countersuit against this third party for breach of contract so that it may
recover the amounts owed under the Consulting Agreement, however, effective January 1, 2017, the Company had not recognized revenue
from the Consulting Agreement, and accordingly, $847,223 was classified as deferred revenue on the December 31, 2017, consolidated
balance sheets presented herein. On August 13, 2018, Helix, the Company and the Moores signed a Settlement Agreement, whereby,
the Company received $450,000 and both parties dismissing all claims against the other party with prejudice. Accordingly, the
Company recognized Other income of $1,297,223 comprised of the deferred revenues for amounts previously received and the $450,000
settlement amount.
Effective
December 1, 2017, the Company entered into a one-year Marketing Services Agreement (the “MSA”). Pursuant to the terms
of the MSA, the Company will receive consulting and advisory services regarding the implementation of marketing programs, including
the design and creation of commercial websites and commercialization of products through social media or other marketing methods.
The Company will pay consideration for the services of $5,000 cash and $5,000 of common stock each month. The Company will issue
the number of shares of common stock equal to a twenty-five percent (25%) discount to the lowest closing price of the common stock
for the five (5) last trading days of the common stock for that month. The parties agreed to terminate the services and contract
effective June 30, 2018. For the nine months ended September 30, 2018, the Company recorded $30,000 of consulting expense and
recorded $38,512 of stock-based compensation expense (pursuant to the terms of the MSA) from the issuance of 925,130 shares of
common stock. On February 27, 2018, the Company issued 102,564 shares of common stock that were previously recorded as common
stock to be issued as of December 31, 2017.
On
August 9, 2018, the Company entered into a monthly Consulting Services Master Agreement (the “CSMA”). The CSMA requires
a two- month minimum and a 30- day termination notice. Pursuant to the CSMA, the Company is to compensate the consultant $12,500
per month by the issuance of restricted shares of common stock, based on the average closing trading prices for the three days
prior to each monthly payment.
On
August 10, 2018, the Company entered into a one- year Consulting, Public Relations and Marketing Agreement (the “CPRM Agreement”),
which can be cancelled by either party with a 30- day notice to the other party. Pursuant to the terms of the CPRM Agreement the
Company is to issue 100,000 shares of restricted common stock each month. The parties agreed to terminate the CPRM Agreement on
October 23, 2018.
On
August 15, 2018, the Company entered into a six-month Consulting Agreement (the “CA”). Pursuant to the CA, the Company
agreed to issue 2,500,000 shares of restricted common stock to the consultant.
Legal
Matters
On
May 26, 2017, Helix Hearing Care (California), Inc. a California corporation (“Helix”), filed a complaint (the “Complaint”)
against the InnerScope and the Moores, in the Circuit Court of the 11
th
Judicial Circuit in and for Miami-Dade
County, Florida, that includes a rescission of the Consulting Agreement and a demand that all monies paid pursuant to the Consulting
Agreement be returned, on the basis that an injunction against certain Officers and Directors renders the Consulting Agreement
impossible to perform. The Company had previously received $1,250,000 under the Consulting Agreement. InnerScope was not named
as an enjoined party in such previous litigation, and the services contemplated under the Consulting Agreement are not within
the scope of the injunction, thus InnerScope believes the accusation by the third party is frivolous and without merit, as well
as not providing sufficient cause for the Agreement to be terminated. InnerScope and the Moores filed their Answer and Affirmative
Defenses to the Complaint on June 27, 2017. On the same date, InnerScope, the Moores, and MFHC filed a counterclaim. On
February 27, 2018, the Counterclaim was amended to include four claims for breach of contract, one claim for anticipatory breach
of contract, one claim for negligent misrepresentation, and one claim for account stated. On August 13, 2018, Helix, the Company
and the Moores signed a Settlement Agreement, whereby, the Company received $450,000, both parties dismissing all claims against
the other party with prejudice and Matthew, Mark and Kimberly have been released from their covenant not to compete agreement
signed in August 2016 with Helix.
NOTE
13 – STOCKHOLDERS’ EQUITY
Preferred
Stock
The
Company has 25,000,000 authorized shares of $0.0001 preferred stock.
Series
A Preferred Stock
On
June 4, 2018, the Company filed in the State of Nevada a Certificate of Designation of a series of preferred stock, the Series
A Preferred Stock. 9,510,000 shares were designated as Series A Preferred Stock. The Series A Preferred Stock has mandatory conversion
rights, whereby each share of Series A Preferred Stock will convert two (2) shares of common stock upon the Company filing Amended
and Restated Articles of Incorporation with the Secretary of State of Nevada, increasing the authorized shares of common stock.
The Series A Preferred Stock has voting rights on an is if converted basis. The Series A Preferred Stock does not have any right
to dividends. On June 4, 2018 the Company issued 3,170,000 shares of Series A Preferred Stock each to Matthew, Mark and Kimberly,
in exchange for each of them cancelling and returning to treasury 6,340,000 shares of common stock. The issuances were made in
reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act, and Rule 506(b) promulgated thereunder,
as the shareholders are accredited investors, there was no general solicitation, and the transaction did not involve a public
offering. On August 8, 2018, Matthew, Mark and Kim each converted 3,170,000 shares of Series A Preferred Stock for 6,340,000 shares
of common stock. The common stock issued replaced the 19,010,000 shares in the aggregate that the Moore’s cancelled in June
2018. As of September 30, 2018, there were no shares of Series A Preferred Stock issued and outstanding.
Series
B Preferred Stock
On
June 4, 2018, the Company also filed in the State of Nevada a Certificate of Designation of a series of preferred stock, the Series
B Preferred Stock. 900,000 shares were designated as Series B Preferred Stock. The Series B Preferred Stock is not convertible
into common stock, nor does the Series B Preferred Stock have any right to dividends and any liquidation preference. The Series
B Preferred Stock entitles its holder to a number of votes per share equal to 1,000 votes. On June 4, 2018, the Company issued
300,000 shares of its Series B Preferred Stock each to Matthew, Mark and Kimberly, in consideration of $45,000 of accrued expenses,
the Company’s failure to timely pay current and past salaries, and the willingness to accrue unpaid payroll and non-reimbursement
of business expenses without penalty or action for all amounts. The issuances were made in reliance on the exemption from registration
provided by Section 4(a)(2) of the Securities Act, and Rule 506(b) promulgated thereunder, as the shareholders are accredited
investors, there was no general solicitation, and the transaction did not involve a public offering. The Company determined that
fair value of the Series B Preferred Stock issued to the Company’s CEO was $817,600. The fair value was determined as set
forth in the Statement of Financial Accounting Standard ASC 820-10-35-37, Fair Value in Financial Instruments. As of September
30, 2018, there were 900,000 shares of Series B Preferred Stock issued and outstanding.
Common
Stock
The
Company has 490,000,000 authorized shares of $0.0001 common stock. As of September 30, 2018, and December 31, 2017, there are
103,951,750 and 61,539,334, respectively, shares of common stock outstanding.
On
February 23, 2018, the Company issued 111,111 shares of common stock to a consultant. The shares were valued at $7,778, based
on the market price of the common stock on January 31, 2018, the date the Company agreed to issue the shares.
On
February 23, 2018, the Company issued 10,397 shares of common stock to an employee. The shares were valued at $728, based on the
market price of the common stock on January 31, 2018, the date the Company agreed to issue the shares.
On
February 27, 2018, the Company issued 102,564 shares of common stock that were classified as common stock to be issued as of December
31, 2017.
On
February 28, 2018, the Company recorded 133,067 shares of common stock to be issued to a marketing consultant (see Note 13) and
recorded $8,117 of stock-based compensation expense (based on the market price of the common stock on that date). The shares were
certificated on September 5,2018.
On
March 31, 2018, the Company recorded 133,333 shares of common stock to be issued to the same marketing consultant (See Note 13)
and recorded $9,067 of stock-based compensation expense (based on the market price of the common stock on that date). The shares
were certificated on September 5, 2018.
On
April 30, 2018, the Company recorded 166,667 shares of common stock to be issued to a marketing consultant (see Note 13) and recorded
$6,883 of stock-based compensation expense (based on the market price of the common stock on that date). The shares were certificated
on September 5, 2018.
On
May 31, 2018, the Company recorded 380,952 shares of common stock to be issued to the same marketing consultant (See Note 13)
and recorded $6,667 of stock-based compensation expense (based on the market price of the common stock on that date). The shares
were certificated on September 5, 2018.
On
June 4, 2018, Matthew, Mark and Kimberly, each cancelled and returned to treasury 6,340,000 shares of common stock, in exchange
for the issuance of 3,170,000 shares of Series A Preferred Stock to each. On August 8, 2018, Matthew, Mark and Kim each converted
3,170,000 shares of Series A Preferred Stock for 6,340,000 shares of common stock. The common stock issued replaced the 19,010,000
shares in the aggregate that the Moore’s cancelled in June 2018.
On
August 27, 2018, the Company issued 100,000 shares of restricted common stock to a consultant pursuant to the CPRM Agreement (See
Note 13). The shares were valued at $8,430 of stock-based compensation expense (based on the market price of the common stock
on that date).
On
August 27, 2018, the Company issued 129,534 shares of restricted common stock pursuant to the CSMA (See Note 13). The shares were
valued at $12,500 based on the average closing price for the three days prior to the effective date of the CSMA.
On
August 27, 2018, the Company issued 2,500,000 shares of restricted common stock pursuant to the CA (See Note 13). The shares were
valued at $175,000 based on the market price of the common stock, and were recorded as deferred stock compensation on the condensed
consolidated balance sheet presented herein, and will be amortized to stock compensation expense over the term of the CA. For
the three and nine months ended September 30, 2018, the Company amortized $29,167 to stock compensation expense.
During
the nine months ended September 30, 2018, the Company issued 38,644,791 shares of common stock for conversion of $272,429 of principal
and $27,596 of accrued interest, for a total of $350,430.
Common
Stock to be issued
On
September 5, 2018, the Company recorded 340,352 shares of common stock to be issued pursuant to the APA related to Amos Audiology
(See Note 2).
On
September 7, 2018, the Company recorded 186,289 shares of restricted common stock to be issued to a consultant pursuant to the
CSMA. The shares were valued at $12,500 based on the average closing price for the three days prior to the monthly effective date
of the CSMA.
On
September 28, 2018, the Company recorded 844,870 shares of common stock to be issued for the conversion of $50,000 of principal
and $1,205 of accrued interest, for a total of $51,205.
As
of September 30, 2018, there were 1,371,511 shares of common stock to be issued.
NOTE 14 – SUBSEQUENT EVENTS
On October 3, 2018, the Company
entered into a Manufacturing Design and Marketing Agreement (the “Agreement”) with Zounds Hearing, Inc. a Delaware
corporation (“Zounds”), whereby, Zounds as the Subcontractor will provide design, technology, manufacturing and supply
chain services to the Company, to enable the Company to manufacture comparable hearing aids and related components and accessories
to be sold under the Company’s exclusive brand names (the “Manufacturer’s Products”) through the Company’s
various marketing and distribution channels. The Company will pay Zounds One Million USD ($1,000,000) (the “Technology Access
Fee”). The Technology Access Fee, as amended will be paid in eight (8) installments of $75,000 each, in four week intervals
until $600,000 is paid and $400,000 to be paid as Product Surcharges based on $200 per unit manufactured for up to the first 2,000
units. Once $400,000 of Product Surcharges are paid said per unit surcharge will be discontinued.
On October 31, 2018, the Company entered
into a Joint Development Agreement (the “JD Agreement”) and an Exclusive Distribution Agreement (the “ED Agreement”)
with Erchonia Corporation (“Erchonia”). As part of the JD Agreement, the Company and Erchonia will conduct FDA clinical
research and trials for the purposes of obtaining 510k FDA Clearances for devices, technologies, methods and techniques used in
the treatment of hearing relating conditions and disorders such as Tinnitus, Sensorineural hearing Loss, dizziness and other disorders.
The agreements give the Company the exclusive worldwide rights for all designs and any newly developed Erchonia 3LT lasers and
related technologies and gives the Company the rights to license and distribute such products worldwide.
On November 2, 2018, the Company entered
into a Securities Purchase Agreement (the “SPA”) with a third- party investor pursuant to which the Company issued
two $280,500 face amounts of 8% Convertible Redeemable Notes (the “Notes”) for an aggregate face amount of $561,000
(the “Note Financing”). The Notes were issued with an original issue discount of $51,000, for an aggregate purchase
price of $510,000. The proceeds to the Company from the sale of the Notes was $510,000 which was paid for by (i) payment of $255,000
in cash and (ii) the issuance by the investor to the Company of a $255,000 principal amount of Collateralized Secured Promissory
Note (the “Investor Note”). The Investor Note is secured and collateralized by one of the above two reference Notes
issued by the Company.
The Notes issued by the Company accrue
interest at a rate of 8% per annum with an increase to 24% in the event of a default and, mature on November 2, 2019 subject to
acceleration in the event of default. Principal and interest on the Notes are convertible into Common Stock of the Company at
a price of 70% of the lowest closing bid price of the common stock as reported on the OTCQB exchange or any exchange upon which
the Common Stock may be traded in the future, as calculated during the 15- trading day period just prior to the date of notice
of conversion.
From October 1, 2018, through
November 15, 2018, the Company received conversion notices for the issuance of 13,180,436 shares of common stock for
conversion of $394,233 of principal and $14,659 of accrued interest on convertible notes. As a result of the new note issued
above and the conversions since October 1, 2018, the convertible note balance as of November 15, 2018 is approximately $620,000.
The Company has evaluated subsequent events through the date the financial statements were issued and filed with
the Securities and Exchange Commission. The Company has determined that there are no other such events that warrant disclosure
or recognition in the financial statements, except as stated herein.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following is management’s discussion and analysis of certain significant factors that have affected our financial position
and operating results during the periods included in the accompanying consolidated financial statements, as well as information
relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes,”
“anticipates,” “may,” “will,” “should,” “expect,” “intend,”
“estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are
intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the
matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to
time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed
on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update these forward-looking
statements.
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with the
financial statements and notes thereto for the years ended December 31, 2017 and 2016 and filed by the Company on Form 10-K with
the Securities and Exchange Commission on April 17, 2018.
This
discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that
any conclusion reached herein will necessarily be indicative of actual operating results in the future.
While
our financial statements are presented on the basis that we are a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business over a reasonable length of time, our independent auditor’s
report on our financial statements for the years ended December 31, 2017 and 2016 includes a “going concern” explanatory
paragraph that describes substantial doubt about our ability to continue as a going concern. Management’s plans in regard
to the factors prompting the explanatory paragraph are discussed below and also in Note 3 to the unaudited condensed consolidated
financial statements.
Corporate
History and Current Business
InnerScope
Hearing Technologies, Inc. (“Company”, “InnerScope”) is a Nevada Corporation incorporated on June 15,
2012, with its principal place of business in Roseville, California. The Company was originally named InnerScope Advertising Agency,
Inc. and was formed to provide advertising and marketing services to retail establishments in the hearing device industry. On
August 25, 2017, the Company changed its name to InnerScope Hearing Technologies, Inc. to better reflect the Company’s current
direction as a technology driven company with a scalable business to business (B2B) solution and business to consumer (and B2C)
solution. Recently, the Company began offering its own line of FDA (Food and Drug Administration)
registered
Hearing Aids and its
“Hearable”, and “Wearable” Personal Sound Amplifier Products (PSAPs). On July
5, 2018, the Company signed a supplier agreement as a direct shipped vendor ("DSV") for Walmart.com. The Company has
been accepted as a Walmart.com USA, LLC (a wholly-owned subsidiary of Wal-Mart Stores, Inc.) supplier and will sell its FDA-Registered
Hearing Aids and its PSAP to Walmart.com as the retailer for their Direct-To-Consumer online retail sale.
On
August 5, 2016, the Company along with Mark Moore (“Mark”, the Company’s chairman), Matthew Moore (“Matthew”,
the Company’s Chief Executive Officer) and Kim Moore (“Kim”, the Company’s Chief Financial Officer) entered
into a Store Expansion Consulting Agreement (the “Expansion Agreement”). Mark, Matthew and Kim are herein referred
to collectively as the Moores. Pursuant to the Expansion Agreement, the Company and the Moores will be responsible for all physical
plant and marketing details for new store openings during the initial term of six-months. The Expansion Agreement was cancelled
on January 6, 2017. The Company’s client has decided to do their own marketing in-house and eliminate this out-sourced contract,
and has decided to delay the opening of any new stores. For the nine months ending September 30, 2017, the Company has received
and recognized $400,000 in other income for payments received for the cancellation of the Expansion Agreement.
Also,
on August 5, 2016, the Company and the Moores entered into a Consulting Agreement (the “Consulting Agreement”) with
the same Client as the store Expansion Agreement. Under the Consulting Agreement, including the Non-Compete provision covering
a ten-mile radius of any retail store, the Company and the Moores were to provide unlimited licensing of the Intela-Hear brand
name, exclusive access to the Aware Aural Rehab Program within 10 miles of retail stores, exclusive territory of all services
within 10 miles of retail stores and up to 40 hours per month of various consulting services. The Consulting Agreement continues
until January 31, 2019, unless terminated for cause, as defined in the Consulting Agreement. On May 26, 2017, the Company and
the Moores were named in an action filed by the Client, that included a demand that all monies paid pursuant to the Consulting
Agreement be returned. On August 13, 2018, the Client, InnerScope and the Moores executed a Settlement Agreement (See Note 13).
Results
of Operations
For
the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017
Revenues
Revenues
for the three and nine months ended September 30, 2018 were $59,724 and $165,715, respectively, compared to $104,781 and $390,391
for the three and nine months ended September 30, 2017, respectively. The revenue decrease was primarily the result of the cancellations
of the third-party Consulting and Marketing Agreements in January 2017, as well as reduced revenues from direct print and mail
services. For the three and nine months ended September 30, 2018, a related customer accounted for 25.1% and 40.4%, respectively,
of our revenues and another customer accounted for approximately 16.3% for the nine months ended September 30, 2018. Beginning
in the second quarter of 2018, the Company began to market and sell Personal Sound Amplifier Products (“PSAP’s”)
online on a direct to consumer basis and beginning in the third quarter of 2018 began selling hearing aids on Walmart.com website.
A breakdown of the net decrease in sales is as follows:
|
|
Three
months ended
September
30,
|
|
Nine
months ended
September
30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Online
sales
|
|
$
|
44,724
|
|
|
$
|
—
|
|
|
$
|
63,247
|
|
|
$
|
—
|
|
Consulting
fees
|
|
|
—
|
|
|
|
15,500
|
|
|
|
—
|
|
|
|
147,500
|
|
Direct
print, mail services and product
|
|
|
—
|
|
|
|
63,333
|
|
|
|
35,449
|
|
|
|
180,001
|
|
Sub
total
|
|
|
44,724
|
|
|
|
78,833
|
|
|
|
98,696
|
|
|
|
327,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related
party - direct print and mail services
|
|
|
—
|
|
|
|
10,948
|
|
|
|
22,019
|
|
|
|
27,890
|
|
Related
party - Marketing and consulting fee
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
45,000
|
|
|
|
35,000
|
|
Sub
total
|
|
|
15,000
|
|
|
|
25,948
|
|
|
|
67,019
|
|
|
|
62,890
|
|
Total
revenues
|
|
$
|
59,724
|
|
|
$
|
104,781
|
|
|
$
|
165,715
|
|
|
$
|
390,391
|
|
Online
sales
Beginning
in the second quarter of 2018, the Company began to market a line of PSAP hearables and wearables and during the third quarter
of 2018, expanded their line of products to include FDA registered hearing aid devices. The Company has introduced the products
through new marketing campaigns, to bring awareness to the products and anticipates sales of these products to increase during
the remainder of 2018 and after.
Consulting
For
the nine months ended September 30, 2017, the Company recorded $100,000 of income related to the Store Expansion Agreement, $30,000
of income from the cancellation of the Marketing and Store Expansion Agreements and for the three and nine months ended September
30, 2017, $15,500 and $7,500 of consulting income from new clients.
Direct
print and mail service
During
the nine months ended September 30, 2018, the Company developed marketing materials, including printing and mailing services,
for direct marketing campaigns and recorded revenues of $35,449, compared to $63,333 and $180,001 for the three and nine months
ended September 30, 2017, respectively.
Related
Party
On
December 24, 2016, Moore Holdings, LLC. (“Moore Holdings”) acquired two retail stores from the buyer of the MFHC
stores. On March 1, 2017, the Company entered into a twelve- month Marketing Agreement with six (6) month renewals,
thereafter, with each of the stores to provide telemarketing and design and marketing services for $2,500 per month per
store, resulting in $15,000 and $45,000, respectively, of revenues for the three and nine months ended September 30, 2018,
and $15,000 and $35,000 for the three and nine months ended September 30, 2017, respectively. For the nine months ended
September 30, 2018, the Company also provided direct print and mailing services for the two retail stores and recognized
revenue of $22,019, for the services, compared to $10,048 and $27,890 for the three and nine months ended September 30,
2017.
Cost
of sales
The
Company records the costs of designing, producing, printing and mailing advertisements for our client’s direct mail marketing
campaigns in cost of sales in the month of the mailing as well as the licensing of telemarketing software and records cost of
sales on products sold online, when shipped. Cost of sales for the three and nine months ended September 30, 2018 was $29,085
and $99,751, respectively, compared to $80,904 and $231,223 for the three and nine months ended September 30, 2017, respectively.
Operating
Expenses
Operating
expenses were $482,705 and $2,085,980, respectively, for the three and nine months ended September 30, 2018, compared to $303,418
and $995,216, respectively, for the three and nine months ended September 30, 2017. The increase in expenses in the current periods
was as follows:
|
|
Three
months ended
September
30,
|
|
Nine
months ended
September
30,
|
Description
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Compensation
and benefits
|
|
$
|
177,778
|
|
|
$
|
159,114
|
|
|
$
|
490,484
|
|
|
$
|
482,382
|
|
Stock
compensation
|
|
|
62,597
|
|
|
|
25,000
|
|
|
|
899,437
|
|
|
|
140,000
|
|
Professional
fees
|
|
|
112,355
|
|
|
|
56,226
|
|
|
|
279,021
|
|
|
|
162,122
|
|
Commissions,
stockholder
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
60,000
|
|
Advertising
and promotion
|
|
|
46,408
|
|
|
|
—
|
|
|
|
137,736
|
|
|
|
—
|
|
Investor
relations
|
|
|
11,482
|
|
|
|
10,022
|
|
|
|
87,901
|
|
|
|
22,927
|
|
Rent,
related party
|
|
|
36,000
|
|
|
|
36,000
|
|
|
|
108,000
|
|
|
|
73,500
|
|
Rent,
other
|
|
|
9,062
|
|
|
|
—
|
|
|
|
11,937
|
|
|
|
1,877
|
|
General
and other administrative
|
|
|
27,023
|
|
|
|
17,056
|
|
|
|
71,464
|
|
|
|
55,785
|
|
Total
|
|
$
|
482,705
|
|
|
$
|
303,418
|
|
|
$
|
2,085,980
|
|
|
$
|
995,216
|
|
Compensation
and benefits decreased slightly in the current three and six-month periods.
Stock
based compensation for the three and nine months ended September 30, 2018, is comprised of:
|
•
|
On
February 23, 2018, the Company issued 111,111 shares of common stock to a marketing consultant.
The shares were valued at $7,778, based on the market price of the common stock on January
31, 2018, the date the Company agreed to issue the shares and are included in the nine
months ended September 30, 2018.
|
|
•
|
On
February 23, 2018, the Company issued 10,397 shares of common stock to an employee. The
shares were valued at $728, based on the market price of the common stock on January
31, 2018, the date the Company agreed to issue the shares and are included in the nine
months ended September 30, 2018.
|
|
•
|
On
February 28, 2018, the Company recorded 133,067 shares of common stock to be issued to
a marketing consultant (see Note 12) and recorded $8,117 of stock-based compensation
expense (based on the market price of the common stock on that date) and are included
in the nine months ended September 30, 2018.
|
|
•
|
On
March 31, 2018, the Company recorded 133,333 shares of common stock to be issued to the
same marketing consultant and recorded $9,067 of stock-based compensation expense (based
on the market price of the common stock on that date) and are included in the nine months
ended September 30, 2018.
|
|
•
|
The
amortization of deferred stock compensation of $25,000 is included in the six months
ended June 30, 2018.
|
|
•
|
On
April 30, 2018, the Company recorded 166,667 shares of common stock to be issued to the
same marketing consultant and recorded $6,883 of stock-based compensation expense (based
on the market price of the common stock on that date) and is included in the nine months
ended September 30, 2018.
|
|
•
|
On
May 31, 2018, the Company recorded 380,952 shares of common stock to be issued to the
same marketing consultant and recorded $6,667 of stock-based compensation expense (based
on the market price of the common stock on that date) and is included in the nine months
ended September 30, 2018.
|
|
•
|
On
June 4, 2018, the Company issued 300,000 shares of its Series B Preferred Stock each
to Matthew, Mark and Kimberly, in consideration of $45,000 of accrued expenses, the Company’s
failure to timely pay current and past salaries, and the willingness to accrue unpaid
payroll and non-reimbursement of business expenses without penalty or action for all
amounts. The Company determined that fair value of the Series B Preferred Stock issued
to the Company’s CEO was $817,600, and accordingly $772,600 is included in stock
compensation expense for the nine months ended September 30, 2018. The fair value was
determined as set forth in the Statement of Financial Accounting Standard ASC 820-10-35-37,
Fair Value in Financial Instruments.
|
|
•
|
On
August 27, 2018, the Company issued 100,000 shares of restricted common stock to a consultant
pursuant to the CPRM Agreement (See Note 13). The shares were valued at $8,430 of stock-based
compensation expense (based on the market price of the common stock on that date) and
is included in the three and nine months ended September 30, 2018.
|
|
•
|
On
August 27, 2018, the Company issued 129,534 shares of restricted common stock pursuant
to the CSMA (See Note 13). The shares were valued at $12,500 based on the average closing
price for the three days prior to the effective date of the CSMA and is included in the
three and nine months ended September 30, 2018.
|
|
•
|
On
August 27, 2018, the Company issued 2,500,000 shares of restricted common stock pursuant
to the CA (See Note 13). The shares were valued at $175,000 based on the market price
of the common stock, and were recorded as deferred stock compensation on the condensed
consolidated balance sheet presented herein, and will be amortized to stock compensation
expense over the term of the CA. For the three and nine months ended September 30, 2018,
the Company amortized $29,167 to stock compensation expense.
|
|
•
|
On
September 7, 2018, the Company recorded 129,534 shares of restricted common stock to
be issued pursuant to the CSMA (See Note 13). The shares were valued at $12,500 based
on the average closing price for the three days prior to the effective date of the CSMA
and is included in the three and nine months ended September 30, 2018. The shares were
certificated om October 9, 2018.
|
Stock
based compensation expense for 2017 was as a result of on April 3, 2017, the Company issued 333,334 shares of restricted common
stock to a third party, pursuant to a one-year consulting agreement. The Company valued the shares at $0.30 per share (the market
price of the common stock on the date of the agreement). The Company amortized the $100,000 cost over the term of the agreement,
and accordingly has included $25,000 and $50,000, respectively, in stock-based compensation for the three and nine months ended
September 30, 2017. Additionally, on April 7, 2017, the Company issued 300,000 shares of restricted common stock to a third party,
pursuant to a consulting agreement. The Company valued the shares at $0.30 per share (the market price of the common stock on
the date of the agreement), and recorded an expense of $90,000 for the nine months ended September 30, 2017.
Professional
fees, excluding stock-based compensation for the three and nine months ended September 30, 2018 were $112,355 and $279,021 for
the three and nine months ended September 30, 2018, respectively, and $56,226 and $162,122, for the three and nine months ended
September 30, 2017, respectively. Professional fees, excluding stock-based compensation, consisted of:
|
|
Three
months ended
September
30,
|
|
Nine
months ended
September
30,
|
Description
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Legal
fees
|
|
$
|
38,893
|
|
|
$
|
17,840
|
|
|
$
|
106,061
|
|
|
$
|
42,520
|
|
Business
consulting
|
|
|
51,250
|
|
|
|
7,500
|
|
|
|
95,374
|
|
|
|
22,500
|
|
Accounting
and auditing fees
|
|
|
18,500
|
|
|
|
21,900
|
|
|
|
65,500
|
|
|
|
68,803
|
|
Information
technology
|
|
|
3,712
|
|
|
|
8,986
|
|
|
|
12,086
|
|
|
|
28,299
|
|
Total
|
|
$
|
112,355
|
|
|
$
|
56,226
|
|
|
$
|
279,021
|
|
|
$
|
162,122
|
|
Commissions,
stockholder, are the result of the Company recording commission due on all amounts recognized as revenue in the period related
to the Consulting Agreement and Store Expansion Agreement.
Rent,
related party, increased for the three and nine months ended September 30, 2018, compared to the three and nine months ended September
30, 2017 as a result of the Company on June 14, 2017, entered into a five-year lease with LLC1 for approximately 6,944 square
feet and a monthly rent of $12,000.
General
and administrative costs were $27,024 and $71,464, respectively, for the three and nine months ended September 30, 2018, compared
to $17,056 and $52,408, respectively, for the three and nine months ended September 30, 2017, respectively.
Other
income (expense), net
Other
income, was $661,739 for the three months ended September 30, 2018, and was an expense of $321,281 for the nine months
ended September 30, 2018, compared to other income of $138 and other expense of $353,587 for the three and nine months
ended September 30, 2017, respectively. Included in other income (expense) for the three and nine months ended September 30,
2018 was $1,297,223 as a result of the Helix settlement, whereby the Company recognized $847,223 previously classified as
deferred revenues and $450,000 of cash received from the settlement. There was also a gain on debt extinguishment of $33,775
for the three and nine months ended September 30, 2018. For the three and nine months ended September 30, 2018, derivative
expense was $270,849 and $940,81, respectively related to convertible notes. For the three and nine months ended September
30, 2018, interest expense, including amortization of debt discounts increased significantly as a result of the convertible
notes. The 2017 periods included a loss recorded on the Consulting Agreement, due to the uncertainty of future services
being provided, based on the Complaint (see Note 13). The increase for the nine-month period was partially offset by the
Company recognizing a gain $160,000 on the cancellation of Store Expansion Agreement. The Company received $400,000 during
the nine months ended September 30, 2017 and also paid $240,000 to a stockholder for services provided related to the
income received pursuant to the Cancellation Agreement.
Net
income (loss)
Net
income for the three months ended September 30,2018 was $209,673 and the net loss for the nine months ended September 30, 2018,
was $2,341,296, compared to net losses of $279,403 and $1,189,635 for the three and nine months ended September 30, 2017.
Capital
Resources and Liquidity
Liquidity
is the ability of an enterprise to generate adequate amounts of cash to meet its needs to pay ongoing obligations. As of September
30, 2018, we had cash and cash equivalents of $64,884, a decrease of $19,836, from $84,720 as of December 31, 2017. As of September
30, 2018, we had current liabilities of $2,385,046 (including derivative liabilities of $1,350,231) compared to current assets
of $360,970 which resulted in working capital deficit of $2,024,076. The current liabilities are comprised of accounts payable,
accrued expenses, notes payable, convertible notes payable and derivative liabilities.
Our
ability to operate over the next twelve months, is contingent upon continuing to realize sales revenue sufficient to fund our
ongoing expenses. If we are unable to sustain our ongoing operations through sales revenue, we intend to fund operations through
debt and/or equity financing arrangements, which may be insufficient to fund our working capital, or other cash requirements.
There can be no assurance that such additional financing will be available to us on acceptable terms, or at all. Our ability
to operate beyond September, 2019, is contingent upon continuing to realize sales revenue sufficient to fund our ongoing expenses.
If we are unable to sustain our ongoing operations through sales revenue, we intend to fund operations through debt and/or equity
financing arrangements, which may be insufficient to fund our working capital, or other cash requirements. Since September 30,
2018, we have received $310,500, from the issuance of $330,500 of convertible notes and $47,215 note. We do not have any formal
commitments or arrangements for the sales of stock or the advancement or loan of funds at this time. There can be no assurance
that such additional financing will be available to us on acceptable terms, or at all.
Operating
Activities
Cash
used in operating activities was $628,362 for the nine months ended September 30, 2018 compared to $281,652 for the nine months
ended September 30, 2017. For the nine months ended September 30, 2018, the cash used in operations was a result of the net loss
of $2,341,296, the recognition of $847,223 of deferred revenue and increases in assets of $66,063, offset by increases in liabilities
of $200,161 and the non- cash expense items of depreciation and amortization of $621,189, derivative expense of $940,819 and stock-
based compensation of $899,437.
Cash
used in operating activities was $281,652 for the nine months ended September 30, 2017. For the nine months ended September 30,
2017, the cash used in operations was a result of the net loss of $1,189,635 and increases in accounts receivable $74,164 and
prepaid assets of $68,621 and a decrease of $96,000 of commissions payable, stockholder. These were partially offset by the non-
cash expenses of $140,000 of stock-based compensation and $983 for the loss on equity investment (related party), decrease of
deferred commissions, stockholder of $133,334 and an increase of deferred revenue of $625,000.
Investing
Activities
Cash
used in investing activities was $215,196 for the nine months ended September 30, 2017, was materially comprised of the investment
for the purchase of a 49% interest in a building. The Company also received $5,125 as a payment on a note receivable from an officer
and paid $3,000 to acquire the web address innd.com.
Financing
Activities
For
the nine months ended September 30, 2018, the Company has received $772,500 from the issuance of $860,300 of convertible notes,
cash of $32,600 from the issuance of a note of $43,358, and related party notes payable issued of in the aggregate of $36,800.
For the nine months ended September 30, 2018, the Company made principal payments of $149,546 on convertible notes, $55,578 on
notes payable and $6,000 paid on related party notes payable. The Company also advanced $22,250 to a shareholder.
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 or results of operations.
Critical
Accounting Policies
Basis
of presentation
The
accompanying condensed consolidated financial statements are prepared in accordance with Generally Accepted Accounting Principles
in the United States of America ("US GAAP"). The condensed consolidated financial statements of the Company include
the consolidated accounts of InnerScope and its’ wholly owned subsidiaries ILLC and Intela-Hear, a California limited liability
company. All intercompany accounts and transactions have been eliminated in consolidation.
Use
of estimates
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue
Recognition
The
Company has adopted ASU 2014-09, as amended effective January 1, 2018, and determined that there was no significant impact on
its revenue recognition. The Company’s contracts with customers are generally on a purchase order basis and represent
obligations that are satisfied at a point in time as defined in the new guidance. Accordingly, revenue for each project
is recognized when each project is complete, and any costs incurred before this point in time, are recorded as assets to be expensed
during the period the related revenue is recognized.
Income
taxes
The
Company uses the liability method of accounting for Income Taxes. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. A valuation allowance can be provided for a net deferred tax asset, due to uncertainty
of realization.
Net
loss per common share
The
Company reports earnings (loss) per share in accordance with ASC 260, "Earnings per Share." Basic earnings (loss) per
share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during each
period. Diluted earnings per share is computed by dividing net loss by the weighted-average number of shares of common stock,
common stock equivalents and other potentially dilutive securities outstanding during the period. As of September 30, 2018, the
Company’s outstanding convertible debt is convertible into approximately 16,998,883 shares of common stock, subject to adjustment
based on changes in the Company’s stock price. This amount is not included in the computation of dilutive loss per share
because their impact is antidilutive. As of September 30, 2017, the Company did not have any outstanding common stock equivalents
or any other potentially dilutive securities.