SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2017March 31, 2018
OR
☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________________ to __________________
Commission File Number 333-209341
INNERSCOPE HEARING TECHNOLOGIES,ADVERTISING AGENCY, INC.
(Exact name of registrant as specified in its charter)
Nevada | 46-3096516 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
2151 Professional Drive, 2ndSecond Floor, Roseville, CA 95661
(Address of principal executive offices)
(916) 218-4100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No☐
Indicate by check mark whether the registrant is a largelarger accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer a smaller reporting company or an emerging growth company. See the definitions of “largeand large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company”filer" in Rule 12b-2 of the Exchange Act.: (Check one)
Large accelerated filer ☐ | Accelerated filer ☐ | |
Non-accelerated filer ☐ (Do not check if a smaller reporting company) | Smaller reporting company ☑ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑No☑
The number of shares outstanding of the Registrant's $0.0001 par value Common Stock as of November 17, 2017,May 25, 2018, was 61,539,33462,312,857 shares.
INNERSCOPE HEARING TECHNOLOGIES, INC.
FORM 10-Q
Quarterly Period Ended September 30, 2017March 31, 2018
INDEX
FORWARD-LOOKING STATEMENTS | Page | |
PART I. FINANCIAL INFORMATION | ||
Item 1. | Financial Statements | |
Condensed Consolidated Balance Sheets at | 2 | |
Condensed Consolidated Statements of Operations for the three | 3 | |
Condensed Consolidated Statements of Cash Flows for the | 4 | |
Notes to Condensed Financial Statements (Unaudited) | 5 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
Item 3. | Quantitative and Qualitative Disclosures about Market Risks | |
Item 4. | Controls and Procedures | |
PART II. OTHER INFORMATION | ||
Item 1. | Legal Proceedings | |
Item 1A. | Risk Factors | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 3. | Defaults Upon Senior Securities | |
Item 4. | Mine Safety Disclosures | |
Item 5. | Other Information | |
Item 6. | Exhibits | |
SIGNATURES | 29 |
INNERSCOPE HEARING TECHNOLOGIES, INC. | INNERSCOPE HEARING TECHNOLOGIES, INC. | INNERSCOPE HEARING TECHNOLOGIES, INC. | CONDENSED CONSOLIDATED BALANCE SHEETS | |||||||||||||
(Unaudited) | ||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
ASSETS | ||||||||||||||||
Current Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 11,166 | $ | 493,514 | $ | 23,385 | $ | 84,720 | ||||||||
Accounts receivable, net | 74,164 | — | 14,596 | 12,950 | ||||||||||||
Deferred commissions, stockholder | — | 133,334 | ||||||||||||||
Accounts receivable from related party | 97,804 | 73,996 | ||||||||||||||
Prepaid assets | 74,844 | 6,223 | 86,918 | 101,110 | ||||||||||||
Inventory | 7,086 | 2,321 | 28,734 | 5,959 | ||||||||||||
Notes and interest receivable, current portion, officer | 12,925 | 10,396 | ||||||||||||||
Total current assets | 180,184 | 645,788 | 251,437 | 278,735 | ||||||||||||
Domain name | 3,000 | — | 3,000 | 3,000 | ||||||||||||
Property, furniture and fixtures and equipment, net of accumulated depreciation of $846 (2017) and $184 (2016) | 1,804 | 2,467 | ||||||||||||||
Notes and interest receivable, long term portion, officer | — | 7,688 | ||||||||||||||
Property, furniture and fixtures and equipment, net of accumulated depreciation of $1,289 (2018) and $1,068 (2017) | 1,362 | 1,583 | ||||||||||||||
Investment in undivided interest in real estate | 1,221,341 | — | 1,222,598 | 1,224,903 | ||||||||||||
Total assets | $ | 1,406,329 | $ | 655,943 | $ | 1,478,397 | $ | 1,508,221 | ||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||||||||||
LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||||||||||
Current Liabilities: | ||||||||||||||||
Accounts payable and accrued expenses | $ | 113,540 | $ | 42,939 | $ | 222,004 | $ | 161,919 | ||||||||
Accounts payable to related party | 154,580 | 13,048 | 22,548 | 22,548 | ||||||||||||
Notes payable - stockholder | 14,500 | — | 91,500 | 65,000 | ||||||||||||
Advances payable, stockholders | 187,760 | 176,838 | ||||||||||||||
Current portion of convertible notes payable, net of discounts | 275,384 | 74,140 | ||||||||||||||
Current portion of note payable | 18,243 | — | 18,793 | 18,518 | ||||||||||||
Commissions payable - stockholder | — | 96,000 | ||||||||||||||
Note payable | 43,358 | — | ||||||||||||||
Officer salaries payable | 50,916 | 6,731 | 95,192 | 47,248 | ||||||||||||
Income taxes payable | 33,682 | 38,482 | 33,682 | 33,682 | ||||||||||||
Derivative liability | 724,289 | 540,965 | ||||||||||||||
Deferred revenue | 847,223 | 222,223 | 847,223 | 847,223 | ||||||||||||
Total current liabilities | 1,232,684 | 419,423 | 2,561,733 | 1,988,081 | ||||||||||||
Long term portion of note payable | 986,760 | — | 977,494 | 982,176 | ||||||||||||
Long term portion of convertible note payable, net of discounts | — | 12,587 | ||||||||||||||
Total liabilities | 2,219,444 | 419,423 | 3,539,227 | 2,982,844 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Stockholders' Equity (Deficit): | ||||||||||||||||
Common stock, $0.0001 par value; 225,000,000 shares authorized; 61,539,334 and 60,906,000 shares issued and outstanding September 30, 2017 and December 31, 2016, respectively | 6,153 | 6,090 | ||||||||||||||
Stockholders' Deficit: | ||||||||||||||||
Common stock, $0.0001 par value; 225,000,000 shares authorized; 61,763,406 and 61,539,334 shares issued and outstanding March 31, 2018, and December 31, 2017, respectively | 6,176 | 6,153 | ||||||||||||||
Common stock to be issued, $0.0001 par value, 266,401 and 102,564 shares March 31, 2018, and December 31, 2017, respectively | 27 | 10 | ||||||||||||||
Preferred stock, $0.0001 par value; 25,000,000 shares authorized; no shares issued | — | — | — | — | ||||||||||||
Additional paid-in capital | 294,047 | 104,110 | 417,922 | 331,227 | ||||||||||||
Deferred stock compensation | (50,000 | ) | — | — | (25,000 | ) | ||||||||||
Retained earnings (accumulated deficit) | (1,063,315 | ) | 126,320 | |||||||||||||
Accumulated deficit | (2,484,955 | ) | (1,787,012 | ) | ||||||||||||
Total stockholders' equity (deficit) | (813,115 | ) | 236,520 | |||||||||||||
Total stockholders' deficit | (2,060,830 | ) | (1,474,623 | ) | ||||||||||||
$ | 1,406,329 | $ | 655,943 | $ | 1,478,397 | $ | 1,508,221 | |||||||||
See notes to condensed consolidated financial statements. |
2 |
INNERSCOPE HEARING TECHNOLOGIES, INC. | ||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||||||||||
(Unaudited) | ||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenues: | ||||||||||||||||
Revenues, other | $ | 78,833 | $ | 294,775 | $ | 327,501 | $ | 395,043 | ||||||||
Revenues, related party | 25,948 | 395,043 | 62,890 | 917,020 | ||||||||||||
Total revenues | 104,781 | 689,818 | 390,391 | 1,312,063 | ||||||||||||
Cost of sales | ||||||||||||||||
Cost of sales, other | 70,307 | — | 204,810 | — | ||||||||||||
Cost of sales, related | 10,597 | 241,752 | 26,412 | 495,654 | ||||||||||||
Total cost of sales | 80,904 | 241,752 | 231,223 | 495,654 | ||||||||||||
Gross profit | 23,877 | 448,066 | 159,168 | 816,409 | ||||||||||||
Operating Expenses: | ||||||||||||||||
Compensation and benefits | 159,114 | 149,056 | 482,382 | 441,397 | ||||||||||||
Professional fees (including stock based fees of $25,000 and $140,000 for the three and nine months ended September 30, 2017, respectively) | 81,226 | 27,785 | 302,122 | 92,734 | ||||||||||||
Consulting fees, stockholder | — | — | 60,000 | — | ||||||||||||
Rent, related party | 36,000 | 4,500 | 75,377 | 28,578 | ||||||||||||
Commissions, stockholder | — | 91,666 | — | 91,666 | ||||||||||||
Other general and administrative | 27,078 | 20,582 | 75,335 | 28,490 | ||||||||||||
Total operating expenses | 303,418 | 293,589 | 995,216 | 682,865 | ||||||||||||
Income (loss) from operations | (279,541 | ) | 154,477 | (836,048 | ) | 133,544 | ||||||||||
Other Income (Expense): | ||||||||||||||||
Gain (loss) on investment in undivided interest in real estate | 2,962 | — | (983 | ) | — | |||||||||||
Write off of deferred commissions (see note 2) | — | — | (508,334 | ) | — | |||||||||||
Gain on contract cancellations | — | — | 160,000 | — | ||||||||||||
Interest income, including related party income of $57 and $179 for the three and nine months ended September 30, 2017, respectively, and $77 and $231 for the three and nine months ended September 30, 2016, respectively | 59 | 77 | 251 | 231 | ||||||||||||
Interest expense and finance charges | (2,883 | ) | (2,264 | ) | (4,521 | ) | (10,785 | ) | ||||||||
Total other income (expense) | 138 | (2,187 | ) | (353,587 | ) | (10,554 | ) | |||||||||
Income (loss) before income taxes | (279,403 | ) | 152,290 | (1,189,635 | ) | 122,990 | ||||||||||
Income tax provision | — | 61,547 | — | 61,547 | ||||||||||||
Net income (loss) | $ | (279,403 | ) | $ | 90,743 | $ | (1,189,635 | ) | $ | 61,443 | ||||||
Basic and diluted income (loss) per share | $ | (0.00 | ) | $ | 0.00 | $ | (0.02 | ) | $ | 0.00 | ||||||
Weighted average number of common shares outstanding Basic and diluted | 61,539,334 | 60,906,000 | 61,320,706 | 60,906,000 | ||||||||||||
See notes to condensed consolidated financial statements. |
INNERSCOPE HEARING TECHNOLOGIES, INC. | ||||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||
(Unaudited) | ||||||||
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
Revenues: | ||||||||
Revenues, other | $ | 27,281 | $ | 139,460 | ||||
Revenues, related party | 28,696 | 5,000 | ||||||
Total revenues | 55,977 | 144,460 | ||||||
Cost of sales | ||||||||
Cost of sales, other | 24,781 | 15,392 | ||||||
Cost of sales, related | 14,083 | — | ||||||
Total cost of sales | 38,864 | 15,392 | ||||||
Gross profit | 17,113 | 129,068 | ||||||
Operating Expenses: | ||||||||
Compensation and benefits | 159,539 | 156,673 | ||||||
Advertising and promotion | 25,321 | — | ||||||
Professional fees (including stock based fees of $50,690 for 2018) | 115,487 | 41,250 | ||||||
Consulting fees, stockholder | — | 60,000 | ||||||
Rent, related party | 36,000 | 18,372 | ||||||
Investor relations | 52,641 | 5,314 | ||||||
Other general and administrative | 41,242 | 10,294 | ||||||
Total operating expenses | 430,230 | 291,903 | ||||||
Loss from operations | (413,116 | ) | (162,835 | ) | ||||
Other Income (Expense): | ||||||||
Derivative expense | (151,259 | ) | — | |||||
Loss on investment in undivided interest in real estate | (2,305 | ) | — | |||||
Gain on contract cancellations | — | 160,000 | ||||||
Interest income, including $64 (2017) from officer | — | 112 | ||||||
Interest expense and finance charges | (131,263 | ) | (368 | ) | ||||
Total other income (expense), net | (284,827 | ) | 159,744 | |||||
Net loss | $ | (697,943 | ) | $ | (3,091 | ) | ||
Basic and diluted loss per share | $ | (0.01 | ) | $ | (0.00 | ) | ||
Weighted average number of common shares outstanding | ||||||||
Basic and diluted | 61,631,452 | 60,906,000 |
3 |
INNERSCOPE HEARING TECHNOLOGIES, INC. | INNERSCOPE HEARING TECHNOLOGIES, INC. | INNERSCOPE HEARING TECHNOLOGIES, INC. | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | (Unaudited) | ||||||||||||
For the nine months ended September 30, | Three Months Ended March 31, | |||||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income (loss) | $ | (1,189,635 | ) | $ | 61,443 | |||||||||||
Adjustments to reconcile net loss to net cash provided by (used in) operations | ||||||||||||||||
Net loss | $ | (697,943 | ) | $ | (3,091 | ) | ||||||||||
Adjustments to reconcile net loss to net cash provided by (used in) operations: | ||||||||||||||||
Loss on fair value of derivatives | 151,259 | — | ||||||||||||||
Amortization of debt discounts | 110,266 | — | ||||||||||||||
Depreciation | 663 | — | 221 | 221 | ||||||||||||
Stock compensation expense | 140,000 | — | 50,690 | — | ||||||||||||
Loss on investment in undivided interest in real estate | 983 | — | 2,305 | — | ||||||||||||
Security deposit used for rent payment | — | 7,026 | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Decrease (increase) in: | ||||||||||||||||
Interest receivable, related party | 33 | (231 | ) | — | 82 | |||||||||||
Accounts receivable | (74,164 | ) | (68,614 | ) | (1,646 | ) | (9,460 | ) | ||||||||
Inventory | (4,764 | ) | (9,486 | ) | (22,775 | ) | (2,910 | ) | ||||||||
Deferred commissions, stockholder | 133,334 | (226,334 | ) | — | (375,000 | ) | ||||||||||
Prepaid assets | (68,621 | ) | (45,707 | ) | 24,951 | (44,755 | ) | |||||||||
Advances to affiliate | (441,000 | ) | ||||||||||||||
Other receivables | — | — | ||||||||||||||
Due from related party | — | 80,800 | ||||||||||||||
Accounts receivable, related party | (23,808 | ) | — | |||||||||||||
Increase (decrease) in: | ||||||||||||||||
Accounts payable and accrued expenses | 65,802 | 82,192 | 60,085 | 38,211 | ||||||||||||
Commissions payable, stockholder | (96,000 | ) | 318,000 | — | (96,000 | ) | ||||||||||
Officer salaries payable | 44,185 | 58,333 | 47,944 | — | ||||||||||||
Deferred revenue | 625,000 | 377,223 | — | 625,000 | ||||||||||||
Due to related party | 141,532 | — | 10,922 | 9,500 | ||||||||||||
Net cash provided by (used in) operating activities | (281,652 | ) | 193,645 | (287,528 | ) | 141,798 | ||||||||||
Cash flows from investing activities: | ||||||||||||||||
Purchase of intangible asset | (3,000 | ) | — | |||||||||||||
Repayments from shareholder loans receivable | 5,125 | — | — | 2,563 | ||||||||||||
Investment in undivided interest in real estate | (217,321 | ) | — | |||||||||||||
Net cash used in investing activities | (215,196 | ) | — | |||||||||||||
Net cash Provided by investing activities | — | 2,563 | ||||||||||||||
Cash flows from financing activities: | ||||||||||||||||
Proceeds from issuance of note payable | 32,600 | — | ||||||||||||||
Proceeds from advances, shareholder | 14,500 | — | 27,500 | — | ||||||||||||
Proceeds from issuances of convertible notes payable | 210,000 | — | ||||||||||||||
Repayments of note payable | (4,407 | ) | — | |||||||||||||
Repayments of advances, shareholder | (1,000 | ) | — | |||||||||||||
Repayments of principal of convertible note payable | (38,500 | ) | — | |||||||||||||
Net cash provided by financing activities | 14,500 | — | 226,193 | — | ||||||||||||
Net increase (decrease) in cash and cash equivalents | (482,348 | ) | 193,645 | (61,335 | ) | 144,361 | ||||||||||
Cash and cash equivalents, Beginning of period | 493,514 | 67,841 | 84,720 | 493,514 | ||||||||||||
Cash and cash equivalents, End of period | $ | 11,166 | $ | 261,486 | $ | 23,385 | $ | 637,875 | ||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||
Cash paid for interest | $ | 4,521 | $ | 10,785 | $ | 5,707 | $ | 368 | ||||||||
Cash paid for income taxes | $ | — | $ | 24,758 | $ | — | $ | — | ||||||||
Schedule of non-cash Investing or Financing Activity: | ||||||||||||||||
Issuance of note payable for investment in undivided interest in real estate | $ | 1,007,930 | $ | — | ||||||||||||
Reclassification of derivative liabilities upon principal repayments of convertible notes | $ | 61,044 | $ | — | ||||||||||||
See notes to condensed consolidated financial statements. |
4 |
INNERSCOPE HEARING TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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. ISAAThe 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 “Hearable”, and “Wearable” Personal Sound Amplifier Products (PSAPs).
On June 20, 2012, ISAAthe Company entered into an Acquisition and Plan of Share Exchange with InnerScope Advertising Agency, LLC (“ILLC”), a commonly owned entity, whereby ISAAthe Company acquired 100% of ILLC. On November 1, 2013, ISAAthe Company entered into an Acquisition and Plan of Share Exchange with Intela-Hear, LLC (“Intela-Hear”), a commonly owned entity, whereby ISAAthe Company acquired 100% of the outstanding equity of Intela-Hear in exchange for 27,000,000 shares of the Company’s common stock. This resulted in Intela-Hear becoming a wholly-owned subsidiary of the Company. On August 25, 2017, the Company changed its name to InnerScope Hearing Technologies, Inc.
InnerScope is a technology driven company with scalable Business to Business (“BTB”) and Business to Consumer (“BTC”) solutions. The Company offers a BTB SaaS based Patient Management System (PMS) software program, designed to improve operations and communication with patients. InnerScope also offers a Buying Group experience for audiology practice, enabling owners to lower product costs and increase their margins. The Company will compete in the DTC (Direct-to-Consumer) over the counter hearing aid markets with its own line of “Hearables”, and “Wearables”, including APPs on the iOS and Android markets. The company also plans on opening, operating and expanding a chain of audiological and retail hearing device clinics.
The Company also provides a comprehensive range of services (including consulting services), grouped into four fundamental disciplines: advertising/marketing, customer relationship management, public relations and specialty communications. The Company serves the retail hearing aid dispensing community through generating traffic and consumer interest for hearing aid dispensing practices and providing consulting services to hearing aid dispensaries. For the three and nine months ended September 30, 2017, approximately 24.8% and 15.1%, respectively, of revenues were from a related party, compared to the three and nine months ended September 30, 2016, where revenues from a that same related party were 83.1% and 69.9%, respectively. On August 5, 2016, the Company and the related party agreed to cancel their Marketing Agreement as a result of the sale by the related party of substantially all of their assets (see note 5).
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 has decided to open only one location and delay the opening of any other new stores. For the ninethree months ended September 30,March 31 2017, the Company has recognized $100,000 of income for the one new store, opened in January 2017, and $400,000$160,000 in other income, net, for payments received for the Expansion Agreement pursuant to the cancellation. The Clientclient also paid an additional $30,000 for the cancellation of the Store Expansion Agreement and a marketing 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 willwere 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 includesincluded a demand that all monies paid pursuant to the Consulting Agreement be returned. The Company believes the claim is frivolous and without merit, as well as not providing sufficient cause for the Agreement to be terminated (See Note 9)12).
5 |
NOTE 2 – 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 consolidated financial statements and notes thereto included in Form 10-Kthe Annual Report for the year ended December 31, 2017, filed with the SECUnited States Securities and Exchange Commission (the “SEC”) on March 31, 2017.April 17, 2018. Interim results of operations for the three and nine months ended September 30,March 31, 2018, and 2017, and 2016 are not necessarily indicative of future results for the full year. Certain amounts from the 20162017 period have been reclassified to conform to the presentation used in the current period.
The condensed consolidated financial statements of the Companyinclude 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.
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. Significant estimates relied upon in preparing these financial statements include collectability of notes receivable from an officer, and through July 31, 2016, the allocation of our President’s compensation to the Company. 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 expenses. 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,March 31, 2018, and December 31, 2017, management’s evaluation did not require anyresulted in the establishment of an allowance for uncollectible receivables.receivables of $63,799.
Advertising and Promotion
The Company expenses advertising costs as incurred. Advertising expenses for the three months ended March 31, 2018 and 2017, was $25,321 and $-0-, respectively.
6 |
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,March 31, 2018 and 2017, and 2016, and accounts receivable balance as of September 30, 2017:March 31, 2018:
Accounts | ||||||||||||||||||||
Receivable | ||||||||||||||||||||
September 30, 2017 | September 30, 2016 | as of | ||||||||||||||||||
3 months % | 9 months % | 3 months % | 9 months % | September 30, 2017 | ||||||||||||||||
Customer A | 29.3% | — | — | — | $ | 5,660 | ||||||||||||||
Customer B | 22.9% | 17.8% | — | — | 55,799 | |||||||||||||||
Customer C, related | 24.8% | 16.1% | 42.7% | 69.9% | 57,890 | |||||||||||||||
Customer D | — | 33.3% | 57.3% | 30.1% | — |
Deferred Commission and Commission Payable, Stockholder
The Company records deferred commission when cash has been paid, but the related services have not been provided by the party (stockholder). Commission expense will be recognized when the services are provided. As of December 31, 2016, the Company had advanced $133,334, and in January, an additional $375,000. For the nine months ended September 30, 2017, the Company expensed $508,334 (included in other expenses in the Condensed Consolidated Statements of Operations), due to uncertainty of future services being provided, based on the Complaint filed on May 26, 2017 (see Note 9).
Accounts | ||||||||||||
March 31, | Receivable | |||||||||||
2018 | 2017 | as of | ||||||||||
% | % | March 31, 2018 | ||||||||||
Customer A, related | 51.3% | — | $ | 97,804 | ||||||||
Customer B | 24.4% | — | — | |||||||||
Customer C | — | 90.0% | — |
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.
Notes Receivable, Officer
The Company records notes receivable when a recipient has issued a note to the Company in exchange for cash. The Company records as a current asset, any portion of the note that is due in the subsequent twelve (12) months for the date of the balance sheet, and any payments due in excess of twelve months of the balance sheet are classified as long term. As of September 30, 2017, $12,925 (includes $121 of interest due) is due by June 30, 2018. The Company received payments of $5,337 of principal and interest during the nine months ended September 30, 2017.
Intangible Assets
Costs for intangible assets are accounted for through the capitalization of those costs incurred in connection with developing or obtaining such assets. Capitalized costs are included in intangible assets in the consolidated balance sheet. During the nine monthsyear ended September 30,December 31, 2017, the Company purchased the domain namewww.innd.comfrom a third party for $3,000.
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 |
The Company's property and equipment consisted of the following at September 30, 2017march 31, 2018, and December 31, 2016:2017:
September 30, 2017 | December 31, 2016 | March 31, 2018 | December 31, 2017 | |||||||||||||
Computer equipment | $ | 2,650 | $ | 2,650 | $ | 2,651 | $ | 2,651 | ||||||||
Accumulated depreciation | (846 | ) | (183 | ) | (1,289 | ) | (1,068 | ) | ||||||||
Balance | $ | 1,804 | $ | 2,467 | $ | 1,362 | $ | 1,583 |
Depreciation expense of $221 and $663 was recorded for the three and nine months ended September 30, 2017, respectively.March 31, 2018, and 2017.
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 three months ended September 30, 2017,March 31, 2018, the Company recognized a gain of $2,962 and a loss of $983 for the nine months ended September 30, 2017.$2,305. As of September 30,March 31, 2018, and December 31, 2017, the carrying value of our equity methodthe Company’s investment in this privately-held companyundivided interest in real estate was $1,221,341$1,222,598 and $1,224,903, respectively (see Note 7)8).
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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 March 31, 2018, and December 31, 2017, for each fair value hierarchy level:
March 31, 2018 | Derivative Liabilities | Total | ||||||
Level I | $ | — | $ | — | ||||
Level II | $ | — | $ | — | ||||
Level III | $ | 724,289 | $ | 724,289 | ||||
December 31, 2017 | ||||||||
Level I | $ | — | $ | — | ||||
Level II | $ | — | $ | — | ||||
Level III | $ | 540,965 | $ | 540,965 |
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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 recognizeshas 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 accordance with FASB ASC 605, Revenue Recognition. ASC 605 requires that four basic criteriatime 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 met (1) persuasive evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably assured. The Company recognizes revenuerecorded as assets to be expensed during the period in which the services are performed. In addition torelated revenue is recognized. For the revenue recognized for the delivery of services and product, for the ninethree months ended September 30,March 31, 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.
Deferred Revenue
The Company records deferred revenues from the Consulting Agreement when cash has been received, but the related services have not been provided. Revenue will be recognized when the services are provided and the terms of the agreement have been fulfilled. As of September 30, 2017, the Company has deferred revenue of $847,223 related to the Consulting Agreement. On May 26, 2017, the Company and the Moores were named in an action filed that includes a demand that all monies paid pursuant to the Consulting Agreement be returned. The Company believes the claim is frivolous and without merit, as well as not providing sufficient cause for the Agreement to be terminated (See Note 9). The Company has not recognized any revenue in 2017 from the Consulting Agreement as a result of this litigation.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, notes and interest receivable, officer and accounts payable and amount due to a related party (MFHC). The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities. The estimated fair value is not necessarily indicative of the amounts the Company would realize in a current market exchange or from future earnings or cash flows.
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), after deducting preferred stock dividends accumulated during the period, 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,March 31, 2018, the Company’s outstanding convertible debt is convertible into approximately 18,095,361 shares of common stock. This amount is not included in the computation of dilutive loss per share because their impact is antidilutive. As of March 31, 2017, and 2016, the Company did not have any outstanding common stock equivalents or any other potentially dilutive securities.
Recent Accounting Pronouncements
Recent accounting pronouncements issued byIn 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 SECamended 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, 2017 under the modified retrospective transition approach and it did not have, or are not believed by management to have a material impact on the Company's present or futurecondensed 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 three months ended March 31, 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.
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NOTE 3 – GOING CONCERN AND MANAGEMENT’S PLANS
These unaudited condensedThe accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted inassuming the United States of America (“US GAAP”), which contemplates continuation of the Company will continue as a going concern,concern. which assumes the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The Company experienced a net losses from continuing operationsloss of $279,403, and $1,189,635$697,943 for the three and nine months ended September 30, 2017, respectively.March 31, 2018. At September 30, 2017,March 31, 2018, the Company had a working capital deficit of $1,052,500,$2,310,296, and an accumulated deficit of $1,063,315.$2,484,955. 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.
Through August 5, 2016, the Company was dependent on the Marketing Agreement with MFHC, (the Company and MFHC agreed to cancel the Marketing Agreement, which generated approximately 43% and 70%, respectively, of the Company’s revenues for the three and nine months ended September 30, 2016, as a result of the sale by MFHC of substantially all of their assets) and is now dependent on the sale of our products and services to third parties and the Consulting Agreement.parties. On May 2, 2017, the Company received a demand that all monies paid pursuant to the Consulting Agreement be returned. On May 26, 2017, the Company and the Moores were named in an action filed that includes a demand that all monies paid pursuant to the Consulting Agreement be returned. The Company believes the claim is frivolous and without merit, as well as not providing sufficient cause for the Agreement to be terminated (See Note 9)12). The Company has filed a countersuit for breach of contract, demanding that all monies owed to it, pursuant to the Consulting Agreement, be paid, together with interest thereon.
Management’s Plans
The Company’s plans include the realization of the Consulting AgreementCompany has begun to provide the Company with working capital. Additionally, the Company plans to develop and deploy aimplement an industry encompassing revenue eco-system strategy, including expanding the current revenue model to other major sectors of the global hearing industry. The Company recently announced plans to acquire AUDserv Inc., and will createinclude generating revenues from 7 separate revenue-generating divisions. Each division will generate revenue streams, and be poisedin the three months ended March 31, 2018, has begun to market and sell products direct to consumers online.
NOTE 4 – ADVANCES PAYABLE, SHAREHOLDERS
Chief Executive Officer
A summary of the activity for growth, increasingthe three months ended March 31, 2018, and the year ended December 31, 2017, representing amounts paid by the Company’s market penetration.CEO (stockholder) on behalf of the Company and amounts reimbursed is as follows.
March 31, 2018 | December 31, 2017 | |||||||
Beginning Balance | $ | 138,637 | $ | -0- | ||||
Amounts paid on Company’s behalf | 100,387 | 149,370 | ||||||
Reimbursements | (87,385 | ) | (10,733 | ) | ||||
Ending Balance | $ | 151,639 | $ | 138,637 |
The ending balances as of March 31, 2018, and December 31, 2017, are included in Advances payable, stockholders on the condensed consolidated balance sheet included herein.
Director
A summary of the activity for the three months ended March 31, 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.
March 31, 2018 | December 31, 2017 | |||||||
Beginning Balance | $ | 38,201 | $ | -0- | ||||
Amounts paid on Company’s behalf | 17,920 | 39,201 | ||||||
Reimbursements | (20,000 | ) | (1,000 | ) | ||||
Ending Balance | $ | 36,121 | $ | 38,201 |
The ending balances as of March 31, 2018, and December 31, 2017, are included in Advances payable, stockholders on the condensed consolidated balance sheet included herein.
The 7 separate divisions are:
Patient Management System (PMS) Division: a SaaS based software program which was created, designed and customized by and for audiologists, specifically to fill a much-needed clinical gap solved in other multidiscipline software programs. It allows audiological retail clinics to better manage their day-to-day operations through efficient clinical workflow, patient follow up, and logical organization of data. The PMS software platform delivers a comprehensive business solution. Once the data is uploaded, the platform seamlessly integrates the needs of the audiologist, management, patient and marketing. The software also provides a link between an electronic medical record (EMR) system containing patient's medical history, all while seamlessly integrating the schedule and patient files of the clinics’ patient management platform. EMR systems are not designed for Audiology and the records are often not integrated. The Company’s PMS software solves that problem by linking the two platforms.
Buying Group Division: The Company will create an exclusive Buying Group experience that will permit hearing aid practices of all sizes to reduce their wholesale costs by aggregating their orders with other practices to obtain a lower per unit cost.
Direct-to-Consumer (DTC) Division: The Company will be competing within the new emerging “Hearables” and “Wearables” markets in “Personal Sound Amplification Products” (PSAP’s) and the Over-the-Counter (OTC) hearing aid market created by the result of recently passed Congressional legislation, H.R.1652 - Over-the-Counter Hearing Aid Act of 2017 (OTC). The Hearing Aid Act of 2017, allows the purchase of hearing aids and related products without seeking a medical professional. The Company will invest in “Hearable” technology, as well as create its own brands and technology in the PSAP and OTC hearing aids in the DTC markets.
APP Development Division: The Company plans on building apps for the iOS and Android markets that will be dedicated to serving the hearing impairment population around the world. The APPs will be developed to help the audiology and hearing aid retail practices that have joined the Buying Group or using the Company’s PMS software as well as APPs for the hearing-impaired consumer to use for a better hearing experience.
Advertising and Marketing Division: This division will be built on the Company’s current business and will include graphic artists, digital and print marketing experts, and telemarketers. This division will assist all divisions in helping to market and deploy all products and services to practices and consumers, as well as assisting Buying Group members with advertising and marketing for their own practices.
Retail Division: The Company plans to open a chain of Audiological and Hearing Aid Clinics throughout the United States and eventually abroad.
Research and Development Division (“R&D”): Management has been researching and developing products and solutions for the Business to Business (“BTB”) and Business to Consumer (“BTC”) hearing impaired markets for more than 3 decades. The R&D team which will comprised of world renowned scientists, business professionals and industry leaders will develop and deploy products.
NOTE 4 – NOTE RECEIVABLE, OFFICER
On April 1, and June 25, 2013, in exchange for two notes receivable, the Company loaned the President of the Company $10,000 and $10,500, respectively. The terms of the notes include an interest rate of 1.5% per annum and the notes, as amended are due on their fifth-year anniversary, with quarterly payment beginning October 1, 2016. Interest income, related party of $57 and $179 was recorded for the three and nine months ended September 30, 2017, respectively, and $77 and $231 for the three and nine months ended September 30, 2016, respectively. As of September 30, 2017, and December 31, 2016, notes and interest receivable, related party was $12,925 and $18,084, respectively.
NOTE 5 – NOTE PAYABLE, OFFICERSTOCKHOLDER
DuringA summary of the nineactivity for the three months ended September 30,March 31, 2018, and the year ended December 31, 2017, an officer made, inof amounts the aggregate, advances toCompany’s CEO (stockholder) loaned the Company of $14,500. These advances areand amounts repaid is as follows:
March 31, 2018 | December 31, 2017 | |||||||
Beginning Balance | $ | 65,000 | $ | -0- | ||||
Amounts loaned to the Company | 27,500 | 65,000 | ||||||
Repaid | (1,000 | ) | -0- | |||||
Ending Balance | $ | 91,500 | $ | 65,000 |
The ending balance amount is due on demand.demand, carries interest at 8% per annum and is included Notes payable, stockholder on the condensed consolidated balance sheet included herein.
NOTE 6 – NOTE PAYABLE
On February 27, 2018, the Company entered into a Business Loan Agreement (the “BLA”) for $43,358 with a third- party, whereby the Company received $32,600 on March 1, 2018. The 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 thru twelve.
NOTE 67 – RELATED PARTY TRANSACTIONS
The Company loaned the PresidentCEO $20,500 during the year ended December 31, 2013 (see Note 4).2013. The note and interest were paid in full during the year ended December 31, 2017. The Company recorded interest income of $57 and $179$64 for the three and nine months ended September 30, 2017, respectively, and $77 and $231 for the three and nine months ended September 30, 2016.March 31, 2017.
During the ninethree months ended September 30,March 31, 2018 and the year ended December 31, 2017, an officer made, in the aggregate, advances toour CEO (stockholder) paid expenses of the Company and accounts payable on behalf of $14,500. These advances are duethe Company (see Note 4). As of March 31, 2018, and December 31, 2017, the Company owed the CEO $151,639 and $138,637, respectively, which is included in Advances payable, stockholders on demand.the condensed consolidated balance sheet included herein.
During the three months ended March 31, 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 4). As of March 31, 2018, and December 31, 2017, the Company owed the Chairman $36,121 and $38,201, respectively, which is included in Advances payable, stockholders on the condensed consolidated balance sheet 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 (see Note 9).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 three and nine monthsyear ended September 30,December 31, 2016 (through August 5, 2016), there were 20 stores resulting in revenue of $74,667 and $458,667, respectively.$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 during the year endedthrough December 31, 2016, the balance due to MFHC as of September 30, 2017March 31, 2018, and December 31, 20162017, was $22,548, and $13,048, respectively,which is included in accountsAccounts payable, related party.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 ninethree months ended September 30,March 31, 2017, the Company expensed $1,500 and for the three and nine months ended September 30, 2016, the Company expensed $4,500 and $13,500, respectively, related to this lease.
On February 1, 2016, the Company entered into a one-year sublease agreement with MFHC to sublease approximately 2,119 square feet of office space for $4,026 per month. The monthly rent reduced the amounts owed to the Company from MFHC for the marketing services provided to MFHC. Effective April 30, 2016, MFHC released the Company from the sublease. For the nine months ended September 30, 2016, the Company expensed $12,078 related to this lease.
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Prior to August 1, 2016, the Company’s President was being compensated from MFHC, as he also held a position with MFHC. During that time the Company estimated the portion of the President’s salary that should be allocated to the Company, and subsequent toEffective August 1, 2016, the Company agreed to compensation of $225,000 per year. Effective August 1, 2016, the Company agreed to compensate our Chief Financial Officerand $125,000 per annum.year for the Company’s CEO and CFO, respectively. On November 15, 2016, the Company entered into employment agreements with ourits CEO and CFO, which includes antheir annual base salarysalaries of $225,000 and $125,000, respectively. The Company expensed $56,250 and $168,750 for the President, for the three and nine months ended September 30, 2017, respectively and $31,250 and $93,750, respectively, of expense for the CFO. For the three and nine months ended September 30, 2016,March 31, 2018, and 2017, the Company expensed $37,500 and $81,625, respectively, forrecorded expenses to its officers in the allocation of the President’s salary. following amounts:
Three months ended March 31, | ||||||||||
2018 | 2017 | |||||||||
CEO | $ | 56,250 | $ | 56,250 | ||||||
CFO | 30,289 | 31,250 | ||||||||
Total | $ | 86,538 | $ | 87,500 |
As of September 30,March 31, 2018, the Company owes the CEO and CFO $38,324 and $56,868, respectively, and as of December 31, 2017, the Company owed the CEO $34,615 and the CFO $14,423$4,327 and $40,385, respectively for accrued and unpaid wages, as well as $1,877 of accrued payroll taxes. Accordingly $50,915 is reported as officerwages. These amounts are included in Officer salaries payable as of September 30, 2017. 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 $35,000$5,000 of revenues for the three and nine months ended September 30,March 31, 2018, and 2017, respectively. Additionally, for the three and nine months ended September 30, 2017,March 31, 2018, the Company invoiced LLC1 $10,948 and $27,890, respectively,$12,421 for the Company’s production, printing and mailing services.services and $1,275 for sale of products. As of March 31, 2018, and December 31, 2017, LLC1 owes the Company $97,804 and $73,996, respectively. On May 9, 2017, the Company and LLC1 purchased certain real property from an unaffiliated party (see Note 7)8). On June 14, 2017, the companyCompany 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, 2017, March 31, 2018,the Company expensed $36,000 and $40,499, respectively, related to this lease.
During the nine months ended September 30, 2017, the officers of the corporation paid expenses on behalf of the Company. As of September 30, 2017, the net amount owed the officers is $132,032lease and is included in accounts payable,Rent, related party. 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 ninethree months ended September 30,March 31, 2017, the Company paid LLC2the LLC an additional $771,000 ($96,000 of which reduced previous amounts owed) and expensed $808,334$300,000 ($60,000 as commissions for services performed and $748,334$240,000 as other expense). for services performed. As of September 30,December 31, 2017, the deferred commissions-stockholder is $-0-.$-0-, as the Company wrote off $508,334 during the remainder of 2017, due to uncertainty of future services being provided, based on the Complaint filed on May 26, 2017.
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 7)8).
NOTE 7–8– 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 Company accounted for the investment using the equity method.
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The allocated portion of the results in an equity method investment in a privately-held, related party, company are included in the Company’s condensed consolidated statements of operations. For the three and nine months ended September 30, 2017, $2,962 (net income) and $983 (net loss), respectively, areMarch 31, 2018, a net loss of $2,305 is included in “Other income (expense), net”. As of September 30, 2017,March 31, 2018, the carrying value of our equity method investment in this privately-held companyundivided interest in real estate was $1,221,341.$1,222,598.
The unaudited condensed balance sheet as of March 31, 2018 and the unaudited condensed statement of operation for the three months ended March 31, 2018, for the real property is as follows:
Current assets: | ||||
Cash and cash equivalents | $ | 5,626 | ||
Accounts receivable, net | 3,000 | |||
Prepaid expenses and other current assets | 56,255 | |||
Total current assets | 64,480 | |||
Land and Building, net | 2,386,956 | |||
Other assets, net | 55,693 | |||
Total assets | $ | 2,505,529 | ||
Current portion of mortgage payable | $ | 38,353 | ||
Other current liabilities | 38,448 | |||
Total current liabilities | 76,801 | |||
Mortgage payable, long-term | 1,994,886 | |||
Total liabilities | 2,071,687 | |||
Total equity | 433,842 | |||
Total liabilities and equity | $ | 2,505,529 |
Rental income | $ | 63,211 | ||
Expenses: | ||||
Property taxes | 6,646 | |||
Depreciation and amortization | 11,446 | |||
Insurance | 2,033 | |||
Repairs and maintenance | 5,349 | |||
Other | 10,087 | |||
Interest expense | 32,355 | |||
Total expenses | 67,916 | |||
Net loss | $ | (4,705 | ) |
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NOTE 8–9– 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 aan 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, 2017,March 31, 2018, the current and long-term portion of the SBA Note is $18,243$18,793 and $986,760,$977,494, respectively. Future principal payments for the Company’s portion are:
Year | Amount | |||||
2017 | $ | 4,494 | ||||
2018 | 18,518 | |||||
2019 | 19,660 | |||||
2020 | 20,708 | |||||
2021 | 22,150 | |||||
Thereafter | 919,473 | |||||
Total | $ | 1,005,003 |
Twelve months ending March 31, | Amount | |||||
2019 | $ | 18,793 | ||||
2020 | 19,795 | |||||
2021 | 21,173 | |||||
2022 | 23,865 | |||||
2023 | 25,195 | |||||
Thereafter | 887,466 | |||||
Total | $ | 996,287 |
NOTE 10– 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 is due and payable July 15, 2018, and 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 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 three months ended March 31, 2018, amortization of the debt discount of $12,994 was charged to interest expense. The Company also recorded a discount for debt issuance costs of $3,000 and has amortized $967 to interest expense for the three months ended March 31, 2018. As of March 31, 2018, and December 31, 2017, the note balance is $48,000, with a carrying value on March 31, 2018, of $32,157, net of unamortized discounts of $15,843.
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 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 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 requires 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 three months ended March 31, 2018, amortization of the debt discount of $66,668 was charged to interest expense. The Company also recorded an original issue discount and debt issue discount of $49,000 and amortized $13,067 to interest expense for the three months ended March 31, 2018. During the three months ended March 31, 2018, the Company made principal payments of $38,500 and as of March 31, 2018, and December 31, 2017, the note balance is $242,300 and $280,800, respectively, with a carrying value as of March 31, 2018, of $72,568, net of unamortized discounts of $169,732.
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 three months ended March 31, 2018, amortization of the debt discount of $3,302 was charged to interest expense. As of March 31, 2018, and December 31, 2017, the note balance is $50,000, with a carrying value as of March 31, 2018, of $40,498, net of unamortized discounts of $9,502.
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 three months ended March 31, 2018, amortization of the debt discount of $1,592 was charged to interest expense. As of March 31, 2018, the note balance is $35,000, with a carrying value of $27,038, net of unamortized discounts of $7,962.
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 is due and payable November 8, 2018, and 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 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 three months ended March 31, 2018, amortization of the debt discount of $8,912 was charged to interest expense. The Company also recorded a debt issue discount of $8,300 and has amortized $1,480 to interest expense for the three months ended March 31, 2018. As of March 31, 2018, the note balance is $58,300, with a carrying value of $10,392, net of unamortized discounts of $47,908.
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 three months ended March 31, 2018, amortization of the debt discount of $1,117 was charged to interest expense. As of March 31, 2018, the note balance is $50,000, with a carrying value of $37,718, net of unamortized discounts of $12,282.
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 carries a 10% annual interest rate and is in the principal amount of $50,000. Principal and interest is due and payable March 26, 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 $13,420, and an initial derivative liability of $13,420. For the three months ended March 31, 2018, amortization of the debt discount of $112 was charged to interest expense. As of March 31, 2018, the note balance is $50,000, with a carrying value of $36,692, net of unamortized discounts of $13,308.
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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 three months ended March 31, 2018, amortization ofthe debt discount of $56 was charged to interest expense. As of March 31, 2018, the note balance is $25,000, with a carrying value of $18,320, net of unamortized discounts of $6,680.
The following is a roll-forward of the Company’s convertible notes and related discounts for the three months ended March 31, 2018:
Convertible notes | $ | 558,600 | ||
Unamortized note discounts | (283,216 | ) | ||
Balance at March 31, 2018 | $ | 275,834 |
The following is a summary of the Company’s convertible notes and related discounts as of March 31, 2018:
Principal Balance | Debt Discounts | Total | ||||||||||
Balance at January 1, 2018 | $ | 378,800 | $ | (292,073 | ) | $ | 86,727 | |||||
New issuances | 218,300 | (101,409 | ) | 116,891 | ||||||||
Cash payments | (38,500 | ) | — | (38,500 | ) | |||||||
Amortization | — | 110,266 | 110,266 | |||||||||
Balance at March 31, 2018 | $ | 558,600 | $ | (283,216 | ) | $ | 275,384 |
NOTE 11 – 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 10.
The Company valued the derivative liabilities at issuance, March 31, 2018, and December 31, 2017, at $108,634, $724,289 and $540,965, respectively. The Company used the Monte Carlo simulation valuation model with the following assumptions for new notes issued during the three months ended March 31, 2018, risk-free interest rates from 1.82% to 2.10% and volatility of 303% to 308%, and as of March 31, 2018, risk-free interest rates from 1.93% to 2.09% and volatility of 313% to 518%.
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A summary of the activity related to derivative liabilities for the three months ended on March 31, 2018, is as follows:
March 31, 2018 | ||||
Beginning Balance | $ | 540,965 | ||
Initial Derivative Liability | 108,634 | |||
Fair Value Change | 135,734 | |||
Reclassification for principal payments | (61,044 | ) | ||
Ending Balance | $ | 724,289 |
Derivative liability expense of $151,259 for the three months ended March 31, 2018, consisted of the initial derivative expense of $15,525 and the above fair value change of $135,734.
NOTE 9–12– COMMITMENTS AND CONTINGENCIES
Lease Agreements
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.
On February 1, 2014, the Company entered into a two-year sublease agreement for approximately 2,119 square feet of office space in Roseville, Ca, for $3,000 per month.
On February 1, 2017, the Company and MFHC terminated any remaining subleases with MFHC and the Company agreed to a month-to-month lease directly with the landlord for $8,436 per month.
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 March 31, | Amount | |||||
2019 | $ | 144,000 | ||||
2020 | 144,000 | |||||
2021 | 144,000 | |||||
2022 | 72,000 | |||||
Total | $ | 504,000 |
Rent expense for the three months ended March 31, 2018, and 2017 was $36,000 (related party and $18,372 ($1,500 related party), respectively.
Consulting Agreements
Effective June 20, 2012, the Company entered into an eighteen-month Business Consulting Agreement (the “BCA”). Pursuant to the BCA, the consultant is to assist the Company in becoming a “public” company and the Company agreed to a monthly compensation of $2,500 and the issuance of the number of shares equal to 4.9% of the outstanding shares of the Company at all times until the completion of the transaction. The Company has issued the consultant 2,940,000 shares of common stock. The Company continues to use the services of the consultant on a month-to-month basis at the rate of $2,500 per month. For the three and nine months ended September 30, 2017 and 2016, the Company has recorded expenses of $7,500 and $22,500, respectively, in professional fees.
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 bewere 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 ninethree months ending September 30,ended March 31, 2017, the Company has received and recognized $400,000$160,000 in other income, net, for payments received for the cancellation of the Expansion Agreement.
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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 willwere 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 continueswas 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 believes the Complaint by the third party is frivolous and without merit, as well as not providing sufficient cause for the Agreement to be terminated. The Company has 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 has not recognized revenue from the Consulting Agreement.Agreement, and accordingly, $847,223 is classified as deferred revenue on the condensed consolidated balance sheets presented herein.
Effective August 5, 2016, the Company entered into a Marketing Agreement (the “Marketing Agreement”). Pursuant to the Marketing Agreement, the Company will provide marketing concepts and designs to promote its’ products and use the Company’s advertising services for an initial six-month period. Pursuant to the Marketing Agreement and the current structure, the Company will receive $50,000 per month. On January 6, 2017, the Marketing Agreement was cancelled.
On November 17, 2016, the Company entered into an Agreement with a Limited Liability Company, whose sole member is the Company’s Chairman. Pursuant to the Agreement, consulting services are to be provided to the Company related to the physical plant and marketing of new store openings for hearing aid dispensaries as well as the marketing and general operations of hearing aid dispensary business. 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). A summary of the activity for the nine months ended September 30, 2017, is as follows:
Deferred commissions-stockholder | 2017 | |||
Beginning balance | $ | 133,334 | ||
Payments made | 771,000 | |||
Reduction of commissions owed | (96,000 | ) | ||
Commission expense recorded | (60,000 | ) | ||
Other expense recorded | (748,334 | ) | ||
Ending balance | $ | — |
On April 3,December 1, 2017, the Company entered into a one (1) year Financial Consultingone-year Marketing Services Agreement (the “FC Agreement”), with a Consultant (the “FC Consultant”“MSA”). Pursuant to the FC Agreement,terms of the FC Consultant will assistMSA, the Company in its’ public company filing requirements.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 has agreed to compensatewill pay consideration for the FC Consultant $4,500 per monthservices of $5,000 cash and to$5,000 of common stock each month. The Company will issue 333,334the number of shares of restricted common stock ofequal to a twenty-five percent (25%) discount to the Company. The Company valued the shares at $0.30 per share (the marketlowest closing price of the common stock on the date of the agreement) and will amortize the cost over the one-year life of the agreement, accordingly, the Company recorded stock compensation expense of $25,000 and $50,000, respectively, for the three and nine months ended September 30, 2017, and there remains a $50,000 balance of deferred stock compensation (in the equity section of the balance sheet herein) that will be amortized over the remaining term of the agreement. Under certain circumstances, the monthly fee can be reduced to $3,500 after the first six months of the FC Agreement. The FC Consultant was previously providing services for the Company. For the three and nine months ended September 30, 2017, the Company expensed fees to the FC Consultant of $13,500 and $40,500 respectively, and for the three and nine months ended September 30, 2016, the Company paid the FC Consultant $11,250 and $33,750, respectively.
On April 7, 2017, the Company entered into a Consulting and Representation Agreement (the “CR Agreement”), with a consultant (the “CR Consultant”). Pursuant to the CR Agreement the CR Consultant will assist the Company to broaden its visibility to the investing public. The Company has agreed to compensate the CR Consultant $700 per month and to issue 300,000 restricted shares of the Company’s common stock to the CR Consultant. The Company valued the shares at $0.30 per share (the market pricefive (5) last trading days of the common stock onfor that month. For the datethree months ended March 31, 2018, the Company recorded $15,000 of consulting expense and recorded $7,778 of stock-based compensation expense (pursuant to the terms of the agreement) andMSA) from the issuance of 111,111 shares of common stock. The Company also recorded stock compensation expense of $90,000 for the nine months ended September 30, 2017. The initial term was for fifteen (15) days with an automatic extension for one hundred seventy (170) days.
On August 18, 2017, the Company signed a Letter of Intent (the “LOI”) to acquire all of the outstanding equity interests (the “Stock”) of AUDserv, Inc. (“AUDserve”), a Delaware corporation and any and all of its affiliates and/or subsidiaries. This transaction has not yet occurred and is subject to the execution of a fully executed agreement. AUDserv operates three divisions, predominantly in the business-to-business sector, including a highly scalable SaaS based practice management platform, and key infrastructure. The LOI contemplates a future executed agreement calling for the Company to acquire the AUDserv Stock in exchange for Company stock worth $1,000,000 at the date of closing, or a minimum of 2,898,550266,401 shares of common stock subject to an increase inbe issued as of March 31, 2018, and recorded stock- based compensation expense of $17,184 (pursuant to the numberterms of shares basedthe MSA). Lastly, on the market price at the closing. Among the conditions of a contemplated closing is thatFebruary 27, 2018, the Company is requiredissued 102,564 shares of common stock that were previously recorded as common stock to pay all debts and payablesbe issued.as of AUDserve at the time of closing, unless other agreements are reached with such creditors, with the Company providing sufficient evidence to the satisfaction of the creditors. The LOI, as amended, contemplates a closing date no later than December 31, 2017, and if such closing does not occur by said date, the parties are released from their obligations under the LOI. The closing is subject to the Company performing due diligence satisfactory to the Company. 2017.
Legal Matters
On May 26, 2017, Helix Hearing Care (California), Inc. a California corporation (“Helix”), filed a complaint (the “Complaint”) against the CompanyInnerScope and the Moores, in the Circuit Court of the 11th 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 the CompanyInnerScope 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 counterclaimcounterclaim. On February 27, 2018, the Counterclaim was amended to include four claims for specific performance and three counts of breach of contract.contract, one claim for anticipatory breach of contract, one claim for negligent misrepresentation, and one claim for account stated. The plaintiff has filed a motion to dismiss the counterclaim, in addition to their answerparties have also sent each other written discovery requests and have served written responses to the counterclaim. A hearing on the Motion to Dismiss has not been set at this time.same.
NOTE 1013 – STOCKHOLDERS’ EQUITY
Common Stock
The Company has 225,000,000 authorized shares of $0.0001 common stock. As of September 30,March 31, 2018, and December 31, 2017, there are 61,763,406 and 61,539,334, respectively, shares of common stock outstanding.
On April 3, 2017,February 23, 2018, the Company issued 333,334111,111 shares of restricted common stock to a consultant. The Companyshares were valued the shares at $0.30 per share (the$7,778, based on the market price of the common stock on January 31, 2018, the date of the agreement) and will amortize the cost over the one-year life of the agreement, accordingly, the Company recorded stock compensation expense of $25,000 and $50,000, respectively, foragreed to issue the three and nine months ended September 30, 2017, and there remains a balance of $50,000 of deferred stock compensation (in the equity section of the balance sheet herein) that will be amortized over the remaining term of the agreement.shares.
On April 7, 2017,February 23, 2018, the Company issued 300,00010,397 shares of restricted common stock to a consultant.an employee. The Companyshares were valued the shares at $0.30 per share (the$728, based on the market price of the common stock on January 31, 2018, the date the Company agreed to issue the shares.
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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.
Common Stock to be issued
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 agreement)common stock on that date). On March 31, 2018, the Company recorded 133,333 shares of common stock to be issued to the same marketing consultant and recorded stock$9,067 of stock-based compensation expense (based on the market price of $90,000 for the nine months ended September 30, 2017.common stock on that date).
Preferred Stock
The Company has 25,000,000 authorized shares of $0.0001 preferred stock. As of September 30,December 31, 2017, and December 31, 2016, there were no shares of preferred stock issued and outstanding.
NOTE 1114 – SUBSEQUENT EVENTS
On October 11, 2017,The Company has evaluated subsequent events through the date the financial statements were issued and filed with the Securities and Exchange Commission. The Company completed the closing of a private placement financing transaction (the “Transaction”) with Power Up Lending Group, LTD (“Power Up”), pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) dated October 5, 2017. Pursuant to the Purchase Agreement, Power Up purchased a 12% Convertible Promissory Note (the “Note”), dated October 5, 2017,has determined that there are no other such events that warrant disclosure or recognition in the principal amount of $48,000.00. financial statements, except as stated herein.
On October 11, 2017, the Company received proceeds of $45,000 which excluded transaction costs, fees, and expenses of $3,000. Principal and interest is due and payable July 15,April 8, 2018, and 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 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.
On November 10, 2017, the Company issued a convertible promissory note (the “Note”), with a face value of $299,000,$95,450, maturing on January 12,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 thenote 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,April 11, 2018, when the Company received proceeds of $250,000,$75,000, after disbursements for the lender’s transaction costs, fees and expenses. The Note also requires daily payments of $700$375 per day via ACH untilthrough July 8, 2019, when all unpaid principal and interest is due.
On April 18, 2018, the Company issued 549,451 shares of common stock in satisfaction of $10,000 of principal pursuant to a conversion notice received by the Company from a convertible debt holder.
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 is satisfied in full.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.
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 2015, filed by the Company on Form 10-K with the Securities and Exchange Commission on March 31, 2017.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, 20162017 and 20152016 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,Advertising Agency, Inc. (“InnerScope” or the “Company”)(IAA) is a Nevada Corporation incorporated June 15, 2012, with its principal place of business in Roseville, California. On June 20, 2012, InnerScopeIAA acquired InnerScope Advertising Agency, LLC, (“ILLC”), to provide advertising/marketing services to the hearing device industry. Through this Acquisition and Plan of Share Exchange with ILLC,InnerScope Advertising Agency, LLC (“ILLC”), a commonly owned entity, InnerScopeIAA acquired 100% of all membership interests in ILLC. On November 1, 2013, InnerScopeIAA entered into an Acquisition and Plan of Share Exchange with Intela-Hear, LLC (“Intela-Hear”), a commonly owned entity, whereby InnerScopeIAA acquired 100% of the outstanding membership interests of Intela- Hear.
InnerScope is a technology driven company with scalable Business to Business (“BTB”) and Business to Consumer (“BTC”) solutions. The Company offers a BTB SaaS based Patient Management System (PMS) software program, designed to improve operations and communication with patients. InnerScope also offers a Buying Group experience for audiology practice, enabling owners to lower product costs and increase their margins. The Company will compete in the DTC (Direct-to-Consumer) markets with its own line of “Hearables”, and “Wearables”, including APPs on the iOS and Android markets. The company also plans on opening, operating and expanding a chain of audiological and retail hearing device clinics.
Pursuant to a Marketing Agreement (cancelled August 5, 2016), the Company provided, developed, and implemented marketing programs to promote and sell hearing aid instruments and related devices to MFHC on a per store basis. 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 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 ninethree months ending September 30,March 31, 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 will 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 continues 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”)returned on the basis that an injunction against certain Officers and Directors renders the Consulting Agreement impossible to perform. The Company was filed againstnot 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 the Company and the Moores, which includes a request for rescission of the Consulting Agreement. The Company believes the Complaintthis threat by the third party is frivolous and without merit, as well as not providing sufficient cause for the Consulting Agreement to be terminated (See Note 6).terminated. The Company intends to vigorously defend against any lawsuit filed against it in this matter, as well as take any required action to see that the obligations of the third party in this matter are strictly enforced. However, effective January 1, 2017, the Company has not recognized revenue from the Consulting Agreement.
Results of Operations
For the three and nine months ended September 30, 2017,March 31, 2018 compared to the three and nine months ended September 30, 2016
RevenuesMarch 31, 2017
Revenues for the three and nine months ended September 30, 2017March 31, 2018 were $104,781 and $390,391$55,977 compared to $689,818 and $1,312,063$144,460 for the three and nine months ended September 30, 2016.
March 31, 2017. The revenue decrease was primarily the result of the cancellationcancellations of the third-party Consulting and Marketing Agreement, partially offset by revenue recognized fromAgreements in January 2017. For the Store Expansion Agreementthree months ended March 31, 2018, a related customer accounted for 51% of our revenues and cancellation fees received, as well as new clients thatanother customer accounted for approximately 24%. During the three months ended March 31, 2018, the Company is servicing.began to market and sell Personal Sound Amplifier Products (“PSAP’s”) online on a direct to consumer basis. For the three months ended March 31, 2017, one customer accounted for 90% of our revenues. A breakdown of the net decrease in sales is as follows:
For the three months ended March 31, | ||||||||
2018 | 2017 | |||||||
Related party - Marketing and consulting fee | $ | 15,000 | $ | 5,000 | ||||
Related party - Direct print and mail services | 13,696 | -0- | ||||||
Total related party | 28,696 | 5,000 | ||||||
Online sales | 9,832 | -0- | ||||||
Consulting fees | -0- | 130,000 | ||||||
Direct print, mail services and misc. | 17,449 | 9,460 | ||||||
Sub total | 27,281 | 139,460 | ||||||
Total revenues | $ | 55,977 | $ | 144,460 |
Related Party
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
Description | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Consulting fees | $ | 15,500 | $ | 246,325 | $ | 147,500 | $ | 246,325 | ||||||||
Direct print, mail services and misc. | 63,333 | 148,718 | 180,001 | 148,718 | ||||||||||||
Sub total | 78,833 | 395,043 | 327,501 | 395,043 | ||||||||||||
Related party- direct print and mail services | 10,948 | 92,108 | 27,890 | 330,353 | ||||||||||||
Related party- marketing and consulting fees | 15,000 | 202,667 | 35,000 | 586,667 | ||||||||||||
Sub total | 25,948 | 294,775 | 62,890 | 917,020 | ||||||||||||
Total revenues | $ | 104,781 | $ | 689,818 | $ | 390,391 | $ | 1,312,063 |
Beginning in March 2017, the Company provided consulting and marketing services to Value Hearing, LLC, (“Value Hearing”), a related party, of $5,000, comprised of a monthly of $2,500 for each of the 2 stores that operate under Value Hearing. For the three months ending March 31, 2018, the Company also provided direct print and mail advertising services to the Value Hearing stores.
Online sales
During the three months ended March 31, 2018, the Company began to market a line of PSAP hearables and wearables and has currently expanded their line of products to include FDA approved hearing aid devices. The Company plans to introduce the products through new marketing campaigns in the quarter of 2018, to bring awareness to the products and anticipates sales of these products to increase during the remainder of 2018.
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Other
Consulting and design and marketing
For the ninethree months ended September 30,March 31, 2017, the Company recorded $100,000 of income related to the Store Expansion Agreement and $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 $17,500, respectively, of consulting income from new clients. The Company intends to pursue additional new consulting clients.Agreements.
Direct print, mail service and miscellaneous
DuringFor the three and nine months ended September 30,March 31, 2018 and 2017, the Company developed marketing materials, including printing and mailing services, for direct marketing campaigns and the sale of accessory products and recorded revenues of $63,333$17,449 and $180,001, respectively. The Company has enrolled 16 new clients, representing 43 locations since January 1, 2017. The potential revenue per client is $4,500 per month, comprised of the Company’s printing and mailing services, as well as monthly consulting services.
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 each of the stores to provide telemarketing and design and marketing services for $2,500 per month per store, resulting on $15,000 and $35,000, respectively, of revenues for the three and nine months ended September 30, 2017. For the three and nine months ended September 30, 2017, the Company also provided direct print and mailing services for the two retail sales and recognized revenue of $10,948 and $27,890, respectively, for the services. For the three and nine months ended September 30, 2016, the Company recorded consulting income, related party of $202,667 and $586,667, respectively from MFHC, based on the Company charging MHFC $3,200 per store per month. The Company also provided direct print and mail advertising services to MFHC of $92,108 and $330,353 for the three and nine months ended September 30, 2016,$9,460, respectively.
On August 5, 2016, MFHC and the Company agreed to cancel the Marketing Agreement as a result of the sale by MFHC of substantially all of their assets. Prior to the sale, MFHC owned and operated twenty (20) stores and the Company charged MHFC $3,200 per store per month, resulting in $192,000 and $384,000, respectively, of revenue for the three and nine months ended September 30, 2016.
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 as well as the licensing of telemarketing software. Cost of sales for the three and nine months ended September 30,March 31, 2018 and 2017 was $80,904$38,864 and $231,223,$15,392, respectively. The three and nine months ended September 30, 2017, included related party cost of sales of $10,597 and $26,412, respectively. For the three and nine months ended September 30, 2016, cost of sales was $241,752 and $495,654, respectively, all of which was related party.
Operating Expenses
Operating expenses were $303,418 and $995,216, respectively,increased to $430,230 for the three and nine months ended September 30, 2017, compared to $293,589 and $682,865, respectively,March 31, 2018 from $291,903 for the three and nine months ended September 30, 2016.March 31, 2017. The increase in expenses in the current periods was as follows:
Description | 2018 | 2017 | ||||||
Compensation and benefits | $ | 159,539 | $ | 156,673 | ||||
Professional fees | 115,487 | 41,250 | ||||||
Investor relations | 52,641 | 5,314 | ||||||
Commissions, stockholder | — | 60,000 | ||||||
Advertising and promotion | 25,321 | — | ||||||
Rent, including related party $36,000 (2018) and $1,500 (2017) | 36,000 | 18,372 | ||||||
General and other administrative | 41,242 | 10,294 | ||||||
Total | $ | 430,230 | $ | 291,903 |
Professional fees for the three months ended March 31, 2018, were $115,487 compared to $41,250 for the three months ended March 31, 2017, respectively. Professional fees consisted of:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
Description | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Compensation and benefits | $ | 159,114 | $ | 149,056 | $ | 482,382 | $ | 441,397 | ||||||||
Stock compensation | 25,000 | — | 140,000 | — | ||||||||||||
Professional fees | 56,226 | 27,785 | 162,122 | 92,734 | ||||||||||||
Commissions, stockholder | — | 91,666 | 60,000 | 91,666 | ||||||||||||
Rent, related party | 36,000 | 4,500 | 75,377 | 28,578 | ||||||||||||
General and other administrative | 27,078 | 20,582 | 75,335 | 28,490 | ||||||||||||
Total | $ | 303,418 | $ | 293,589 | $ | 995,216 | $ | 682,865 |
2018 | 2017 | |||||||
Legal fees | $ | 32,686 | $ | 4,900 | ||||
Business consulting | 12,000 | 7,500 | ||||||
Stock-based compensation | 50,690 | — | ||||||
Accounting and auditing fees | 15,848 | 27,106 | ||||||
Information technology | 4,262 | 1,744 | ||||||
Total | $ | 115,487 | $ | 41,250 |
Compensation and benefitsLegal fees increased in the current three and nine-month periods as a result ofperiod for the Company, effective August 1, 2016, compensatingcosts incurred regarding the CEO and CFO at an annual rate of $225,000 and $125,000, respectively, offset by decreased personnel costs related to telemarketing services.Helix matter, see Note 12.
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Stock based compensation was as a result of on April 3, 2017,for the three months ended March 31, 2018, is comprised of:
Professional fees, excluding stock based compensation expense described above,Commissions, stockholder, for the three and nine months ended September 30,March 31, 2017, were $56,226 and $162,122, respectively, compared to $27,785 and $92,734, respectively, for the three and nine months ended September 30, 2016, respectively. Professional fees, excluding stock based compensation, consisted of:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
Description | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Legal fees | $ | 17,840 | $ | 2,345 | $ | 42,520 | $ | 7,245 | ||||||||
Business consulting | 7,500 | 8,195 | 22,500 | 23,445 | ||||||||||||
Accounting and auditing fees | 21,900 | 17,245 | 68,803 | 59,702 | ||||||||||||
Information technology | 8,986 | — | 28,299 | 2,342 | ||||||||||||
Total | $ | 56,226 | $ | 27,785 | $ | 162,122 | $ | 92,734 |
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 increased for the three and nine months ended September 30, 2017March 31, 2018 compared to the three and nine months ended September 30, 2016March 31, 2017 as a result of the Company enteringon June 14, 2017, entered into a five-year lease agreement, effective June 14, 2017, with a related party. Pursuant to the lease the Company is leasingLLC1 for approximately 6,944 square feet for $12,000 per month. The increase was alsoand a resultmonthly rent of the Company leasing directly from the landlord on a month to month basis at a cost $8,436 per month from February 1, 2017 to May 31, 2017. The Company terminated the month to month lease in June 2017,$12,000.
General and administrative costs increased to $27,078 and $75,335, respectively,$41,242 for the three and nine months ended September 30, 2017,March 31, 2018, compared to $20,582 and $28,490, respectively,$10,294 for the three and nine months ended September 30, 2016, respectively, and is comprised of the following:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
Description | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Advertising and marketing | $ | — | $ | — | $ | 4,700 | $ | — | ||||||||
Office supplies and expenses | 483 | 219 | 10,571 | 219 | ||||||||||||
Public company expenses | 13,694 | 14,311 | 29,958 | 14,997 | ||||||||||||
Other general and other administrative | 12,901 | 6,052 | 30,106 | 13,274 | ||||||||||||
Total | $ | 27,078 | $ | 20,582 | $ | 75,335 | $ | 28,490 |
Office expenses include telephone, office supplies and computer and internet costs. Public company expenses include transfer agent costs, filing fees and investor relations, all of which increased for the three and nine months ended September 30,March 31, 2017, for expenses related to Company’s common stock to begin trading as a DTC eligible entity. Investor relations costs include web hosting on our website investor information as well as press releases.respectively.
Other income (expense), net
Other incomeexpense, net was $138$284,827 for the three months ended September 30, 2017, and other expenses were $353,587 for the nine months ended September 30, 2017,March 31, 2018, compared to other expensesincome of $2,187 and $10,554$159,744 for the three and nine months ended September 30, 2016, respectively.March 31, 2017. The nine-month increase2018 period was comprised of interest expense of $131,263 pursuant to the terms and conditions of the convertible notes issued by the Company, and derivative expense of $151,529 comprised of the initial derivative expense recorded on the convertible notes of $15,525 and change in the fair value of the derivatives of $135,734. The 2017 period was primarily as a result of the write off of deferred commissions of $508,334 related to the Consulting Agreement, due to the uncertainty of future services being provided, based on the Complaint (see Note 9). The increase 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 ninethree months ended September 30,March 31, 2017 and also paid $240,000 to a stockholder for services provided related to the income received pursuant to the Cancellation Agreement.
Net incomeIncome (loss)
Net loss for the three and nine months ended September 30, 2017,March 31, 2018, was $279,403 and $1,189,635$697,943 compared to net income of $90,743 and $61,443$3,091 for the three and nine months ended September 30, 2016.March 31, 2017. This resulted from the lower revenues as well as increased costsincrease in the loss of operating income and the change in other expenses other income, as described above. Additionally, the Company has not recognized $847,223 of deferred revenue pending the outcome of the Complaint.
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, 2017,March 31, 2018, we had cash and cash equivalents of $11,166,$23,385, a decrease of $482,348,$61,335, from $493,514$84,720 as of December 31, 2016.2017. As of September 30, 2017,March 31, 2018, we had current liabilities of $1,232,685$2,561,733 (including deferred revenues of $847,223) compared to current assets of $180,184$251,437 which resulted in working capital deficit of $1,052,501.$2,310,296. The current liabilities are comprised of accounts payable, accrued expenses, current portion of notes payable, convertible notes payable, derivative liabilities and deferred revenue.
For the next twelve months, we expect to be able to meet our cash needs for our current operations from the revenues we receive from providing advertising and marketing services to our clients, as well as the cash provided from the Consulting Agreement (See Note 9 to the financial statements), based on a successful outcome in the Litigation. We are continuing to actively pursue additional clients and we are seeking other revenue streams within the industry.
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Our ability to operate over the next twelve months, is contingent upon continuing to realize sales revenue sufficient to fund our ongoing expenses, as well as achieving a successful outcome in the Litigationlitigation which would provide cash legally owed pursuant to the Consulting Agreement. 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. On October 11, 2017,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 March, 2019, is contingent upon continuing to realize sales revenue sufficient to fund our ongoing expenses, as well as the Company completedcash from the closingConsulting Agreement. 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 March 31, 2018, we have received $150,825, from the issuance of a private placement$195,450 of convertible notes. 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 (see note 11), whereby, the Company received proceeds of $45,000, which excluded transaction costs, fees, and expenses of $3,000. Principal and interest is due and payable July 15, 2018, and the Note is convertible into shares of the Company’s common stockwill be available to us on acceptable terms, or 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. On November 10, 2017, the Company completed the closing of a private placement financing (see note 11), whereby, the Company received proceeds of $250,000, which excluded transaction costs, fees, and expenses of $49,000. Principal and interest is due and payable January 19, 2019, and the Note is convertible into shares of the Company’s common stock at any time after ninety (90) days, at the lowest trading price during the twenty (20) 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 Note also requires daily payments of $700 per day via ACH until the note is satisfied in full.all.
Operating Activities
Cash used in operating activities was $281,652operations for the ninethree months ended September 30, 2017March 31, 2018, was $287,528 compared to cash provided by operating activities of $193,465$141,798 for the ninethree months ended September 30, 2016.March 31, 2017. For the ninethree months ended September 30, 2017,March 31, 2018, the cash used in operations was a result of the net loss of $1,189,635$697,943 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$23,278, offset by increases in liabilities of $118,951 and the non- cash expensesexpense items of $140,000depreciation and amortization of $110,487, derivative expense of $151,259 and stock based compensation decrease of deferred commissions, stockholder of $133,334 an increase of deferred revenue of $625,000, increase of accounts payable and accrued expenses of $65,802 and amounts due officers and related parties of $185,717.$50,690. For the ninethree months ended September 30, 2016,March 31, 2017, the cash provided by operations was a result of the net incomeloss of $61,443$3,091 and changesincreases in operatingaccounts payable and accrued expenses of $38,211, deferred revenue of $625,000 and amount due to related party (MFHC) of $9,500, offset by decreases in commissions payable stockholder of $96,000, and increases of $375,000 for deferred commissions stockholder, $44,755 for prepaid assets and liabilities of $125,176 and $7,026 related to a security deposit used for a rent payment.$9,460 in accounts receivables.
Investing Activities
Cash used inprovided by investing activities was $215,196$2,563 for the ninethree months ended September 30, 2017. Such investing activities was materiallyMarch 31, 2017, comprised of the purchaseamount received by the Company of a 49% interest in a building. The Company also received $5,125 as payments on a note receivable from an officer and paid $3,000 to acquire the web address innd.com.officer.
Financing Activities
For the ninethree months ended September 30, 2017,March 31, 2018, the Company has received $14,500$270,100 from the issuance of $218,300 of convertible notes, a note issued of $43,358, and related party notes payable issued of in advances from a stockholder.the aggregate of $27,500. For the three months ended March 31, 2018, the Company made principal payments of $38,500 on convertible notes and $4,407 on notes payable. There was no financing activity for the ninethree months ended September 30, 2016.March 31, 2017.
Off Balance Sheet ArrangementsOFF 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.
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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 recognizeshas 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 accordance with FASB ASC 605, Revenue Recognition. ASC 605 requires that four basic criteriatime 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 met (1) persuasive evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably assured. The Company recognizes revenuerecorded as assets to be expensed during the period in which the services are performed. In addition torelated revenue is recognized. For the revenue recognized for the delivery of services and product, for the ninethree months ended September 30, 2017,March 31, 2018, the Company received and recognized 100,000$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.
Deferred Revenue
The Company records deferred revenues from the Store Expansion and Consulting Agreements when cash has been received, but the related services have not been provided. Deferred revenue will be recognized when the services are provided and the terms of the agreements have been fulfilled. As of September 30, 2017, the Company has deferred revenue of $847,223 related to the Consulting Agreement.
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 income (loss) per common share
Net loss per common share is computed pursuant to
The Company reports earnings (loss) per share in accordance with ASC No. 260, "Earnings Perper Share." Basic net incomeearnings (loss) per share is computed by dividing net income (loss) by the weighted averageweighted-average number of shares of common stock outstanding during theeach period. Diluted net incomeearnings per share is computed by dividing net incomeloss by the weighted averageweighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding during the period. As of March 31, 2018, the Company’s outstanding convertible debt is convertible into approximately 18,095,361 shares of common stock. This amount is not included in the computation of dilutive loss per share because their impact is antidilutive. As of March 31, 2017, the Company did not have any outstanding common stock during each period. There were noequivalents or any other potentially dilutive shares outstanding as of September 30, 2017 and 2016.securities.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable to smaller reporting companies.
Item 4. Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC. This information is accumulated to allow our management to make timely decisions regarding required disclosure. Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report and he determined that our disclosure controls and procedures were not effective due to control deficiencies. During the period we did not have additional personnel to allowsegregation of duties to ensure the completeness or accuracy of our information. The Company does not have an Audit Committee to oversee management activities, and the Company is dependent on third party consultants for the financial reporting function.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act that occurred during the quarter ended September 30, 2017March 31, 2018, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Part II.Other Information
Item 1.Legal Proceedings
On May 2,26, 2017, Helix Hearing Care (California), Inc. a California corporation (“Helix”), filed a complaint (the “Complaint”) against the Company receivedInnerScope and the Moores, in the Circuit Court of the 11th Judicial Circuit in and for Miami-Dade County, Florida, that includes a demand letter threatening litigation unless all monies paid pursuant torescission of the Consulting Agreement, are returned on the basis that an injunction against certain Officers and Directors renders the Consulting Agreement impossible to perform. The CompanyInnerScope 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 the CompanyInnerScope 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.
On May 26, 2017, Helix Hearing Care (California), Inc. a California corporation (“Helix”), filed a complaint (the “Complaint”) against the Company and the Moores, in the Circuit Court of the 11th Judicial Circuit in and for Miami-Dade County, Florida, that includes a request for rescission of the Consulting Agreement. 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 counterclaimcounterclaim. On February 27, 2018, the Counterclaim was amended to include four claims for specific performance and three counts of breach of contract.contract, one claim for anticipatory breach of contract, one claim for negligent misrepresentation, and one claim for account stated. The plaintiff has filed a motion to dismiss the counterclaimparties have also sent each other written discovery requests. The parties have also sent each other written discovery requests and respondedhave served written responses to the complaint that has not been set for hearing. same.
Item 1A. Risk Factors
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Act of 1934 and are not required to provide the information under this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.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.
The issuances described above were made in reliance on the exemption from registration provided by Sections 3(a)(9) and 4(a)(1) of the Securities Act as the common stock was issued in exchange for debt securities of the Company held by each shareholder, there was no additional consideration for the exchange, there was no remuneration for the solicitation of the exchange, the shareholders were not affiliates, and they had held the underlying debt securities for a long time. The holders provided legal opinions pursuant to Section 4(a)(1) of Securities Act, or Rule 144 promulgated thereunder.
Item 3. Defaults upon Senior Securities
None.
Item4.Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Item 6. Exhibits
Exhibit Number | Description of Exhibit | |
3.1* | Articles of Incorporation | |
3.2* | Bylaws of InnerScope Advertising Agency, Inc. | |
3.3* | Amended and Restated Articles of Incorporation | |
3.4* | Amended and Restated Articles of Incorporation dated August 25, 2017 | |
4.3* | Private Placement Offering Memorandum | |
10.2* | InnerScope, Inc. Marketing Agreement between the Company and Moore Family Hearing Company, Inc. | |
10.3* | Acquisition Agreement and Plan of Share Exchange dated June 20, 2012, between the Company and InnerScope Advertising Agency, LLC | |
10.4* | Acquisition Agreement and Plan of Share Exchange dated November 1, 2013, between the Company and Intela-Hear, LLC | |
10.5* | Promissory Note dated April 1, 2013, between the Company and Matthew Moore | |
10.6* | Promissory Note dated June 25, 2013, between the Company and Matthew Moore | |
10.7* | June 2012 Business Consulting Agreement | |
10.8+* | GN ReSound Sales Agreement | |
10.9+* | Store Expansion Consulting Agreement | |
10.10+* | Consulting Agreement | |
10.11#* | Employment Agreement with Matthew Moore, CEO | |
10.12#* | Employment Agreement with Kimberly Moore, CFO | |
10.13* | Financial Consulting Agreement between the Company and Venture Equity, LLC | |
10.14* | Consulting and Representation Agreement between the Company and CorporateAds.com | |
10.15* | Business Loan Agreement, dated May 5, 2017, between InnerScope Advertising Agency, Inc. and Moore Holdings, LLC and First Community Bank. | |
10.16* | Commercial Security Agreement, dated May 5, 2017, between InnerScope Advertising Agency, Inc. and Moore Holdings, LLC and First Community Bank. | |
10.17* | U.S. Small Business Administration Note. | |
10.18* | Deed of Trust, dated May 5, 2017, among InnerScope Advertising Agency, Inc. and Moore Holdings, LLC. and First Community Bank and Placer Title Company. | |
10.19* | Securities Purchase Agreement dated October 5, 2017 by and between InnerScope Hearing Technologies, Inc. and Power Up Lending Group, LTD. | |
10.20* | Convertible Promissory Note dated October 5, 2017, by and between InnerScope Hearing Technologies, Inc. and Power Up Lending Group, LTD. | |
10.21* | Securities Purchase Agreement dated November 10, 2017, by and between InnerScope Hearing Technologies, Inc. and Carebourn Capital, L.P. | |
10.22* | Convertible Promissory Note dated November 10, 2017, by and between InnerScope Hearing Technologies, Inc. and Carebourn Capital, L.P. | |
10.23* | Securities Purchase Agreement dated February 8, 2018 by and between InnerScope Hearing Technologies, Inc. and Power Up Lending Group, LTD. | |
10.24* | Convertible Promissory Note dated February 8, 2018, by and between InnerScope Hearing Technologies, Inc. and Power Up Lending Group, LTD. | |
10.25* | Securities Purchase Agreement dated April 8, 2018, by and between InnerScope Hearing Technologies, Inc. and Carebourn Capital, L.P. | |
10.26* | Convertible Promissory Note dated April 8, 2018, by and between InnerScope Hearing Technologies, Inc. and Carebourn Capital, L.P. | |
10.27** | Securities Purchase Agreement dated May 11, 2018, by and between InnerScope Hearing Technologies, Inc. and One44 Capital LLC | |
10.28** | Convertible Promissory Note dated May 11, 2018, by and between InnerScope Hearing Technologies, Inc. and One44 Capital LLC | |
10.29** | Convertible Back- End Promissory Note dated May 11, 2018, by and between InnerScope Hearing Technologies, Inc. and One44 Capital LLC | |
31.1** | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer | |
31.2** | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer | |
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer | ||
101.INS** | XBRL Instance | |
101.SCH** | XBRL Taxonomy Extension Schema | |
101.CAL** | XBRL Taxonomy Extension Calculation Linkbase | |
101.DEF** | XBRL Taxonomy Extension Definition Linkbase | |
101.LAB** | XBRL Taxonomy Extension Labels Linkbase | |
101.PRE** | XBRL Taxonomy Extension Presentation Linkbase |
* | Previously filed. |
+ | Confidential Treatment has been requested for certain portions thereof pursuant to Confidential Treatment Request under Rule 406 promulgated under the Securities Act. Such provisions and attachments have been filed with the Securities and Exchange Commission. |
** | Filed Herewith |
# | Denotes management contract or compensatory plan or arrangement. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 20, 2017May 25, 2018
INNERSCOPE HEARING TECHNOLOGIES, INC.
By:/s/ Matthew Moore
Matthew Moore
Chief Executive Officer (principal executive officer)
By:/s/ Kimberly Moore
Kimberly Moore
Chief Financial Officer (principal financial and accounting officer)
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