INNERSCOPE HEARING TECHNOLOGIES, INC.
|
CONDENSED CONSOLIDATED BALANCE SHEETS
|
(unaudited)
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
23,385
|
|
|
$
|
84,720
|
|
Accounts receivable, net
|
|
|
14,596
|
|
|
|
12,950
|
|
Accounts receivable from related party
|
|
|
97,804
|
|
|
|
73,996
|
|
Prepaid assets
|
|
|
86,918
|
|
|
|
101,110
|
|
Inventory
|
|
|
28,734
|
|
|
|
5,959
|
|
Total current assets
|
|
|
251,437
|
|
|
|
278,735
|
|
|
|
|
|
|
|
|
|
|
Domain name
|
|
|
3,000
|
|
|
|
3,000
|
|
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
|
|
|
1,222,598
|
|
|
|
1,224,903
|
|
Total assets
|
|
$
|
1,478,397
|
|
|
$
|
1,508,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
222,004
|
|
|
$
|
161,919
|
|
Accounts payable to related party
|
|
|
22,548
|
|
|
|
22,548
|
|
Notes payable - stockholder
|
|
|
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
|
|
|
18,793
|
|
|
|
18,518
|
|
Note payable
|
|
|
43,358
|
|
|
|
—
|
|
Officer salaries payable
|
|
|
95,192
|
|
|
|
47,248
|
|
Income taxes payable
|
|
|
33,682
|
|
|
|
33,682
|
|
Derivative liability
|
|
|
724,289
|
|
|
|
540,965
|
|
Deferred revenue
|
|
|
847,223
|
|
|
|
847,223
|
|
Total current liabilities
|
|
|
2,561,733
|
|
|
|
1,988,081
|
|
|
|
|
|
|
|
|
|
|
Long term portion of note payable
|
|
|
977,494
|
|
|
|
982,176
|
|
Long term portion of convertible note payable, net of discounts
|
|
|
—
|
|
|
|
12,587
|
|
Total liabilities
|
|
|
3,539,227
|
|
|
|
2,982,844
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
417,922
|
|
|
|
331,227
|
|
Deferred stock compensation
|
|
|
—
|
|
|
|
(25,000
|
)
|
Accumulated deficit
|
|
|
(2,484,955
|
)
|
|
|
(1,787,012
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders' deficit
|
|
|
(2,060,830
|
)
|
|
|
(1,474,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,478,397
|
|
|
$
|
1,508,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
INNERSCOPE HEARING TECHNOLOGIES, INC.
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(Unaudited)
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
2018
|
|
|
|
2017
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
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
|
|
|
221
|
|
|
|
221
|
|
Stock compensation expense
|
|
|
50,690
|
|
|
|
—
|
|
Loss on investment in undivided interest in real estate
|
|
|
2,305
|
|
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease (increase) in:
|
|
|
|
|
|
|
|
|
Interest receivable, related party
|
|
|
—
|
|
|
|
82
|
|
Accounts receivable
|
|
|
(1,646
|
)
|
|
|
(9,460
|
)
|
Inventory
|
|
|
(22,775
|
)
|
|
|
(2,910
|
)
|
Deferred commissions, stockholder
|
|
|
—
|
|
|
|
(375,000
|
)
|
Prepaid assets
|
|
|
24,951
|
|
|
|
(44,755
|
)
|
Accounts receivable, related party
|
|
|
(23,808
|
)
|
|
|
—
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
60,085
|
|
|
|
38,211
|
|
Commissions payable, stockholder
|
|
|
—
|
|
|
|
(96,000
|
)
|
Officer salaries payable
|
|
|
47,944
|
|
|
|
—
|
|
Deferred revenue
|
|
|
—
|
|
|
|
625,000
|
|
Due to related party
|
|
|
10,922
|
|
|
|
9,500
|
|
Net cash provided by (used in) operating activities
|
|
|
(287,528
|
)
|
|
|
141,798
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Repayments from shareholder loans receivable
|
|
|
—
|
|
|
|
2,563
|
|
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
|
|
|
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
|
|
|
226,193
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(61,335
|
)
|
|
|
144,361
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, Beginning of period
|
|
|
84,720
|
|
|
|
493,514
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, End of period
|
|
$
|
23,385
|
|
|
$
|
637,875
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
5,707
|
|
|
$
|
368
|
|
Cash paid for income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Schedule of non-cash Investing or Financing Activity:
|
|
|
|
|
|
|
|
|
Reclassification of derivative liabilities upon principal repayments of convertible notes
|
|
$
|
61,044
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
|
NOTE 1 - ORGANIZATION
Business
InnerScope
Hearing Technologies, Inc. (“Company”, “InnerScope”) is a Nevada Corporation incorporated on June 15,
2012, with its principal place of business in Roseville, California. The Company was originally named InnerScope Advertising Agency,
Inc. and was formed to provide advertising and marketing services to retail establishments in the hearing device industry. On
August 25, 2017, the Company changed its name to InnerScope Hearing Technologies, Inc. to better reflect the Company’s current
direction as a technology driven company with a scalable business to business (B2B) solution and business to consumer (and B2C)
solution. Recently, the Company began offering its own line of “Hearable”, and “Wearable” Personal Sound
Amplifier Products (PSAPs).
On
June 20, 2012, the Company entered into an Acquisition and Plan of Share Exchange with InnerScope Advertising Agency, LLC (“ILLC”),
a commonly owned entity, whereby the Company acquired 100% of ILLC. On November 1, 2013, the Company entered into an Acquisition
and Plan of Share Exchange with Intela-Hear, LLC (“Intela-Hear”), a commonly owned entity, whereby the 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 5, 2016, the Company along with Mark Moore (“Mark”, the Company’s Chairman of the Board), Matthew
Moore (“Matthew”, the Company’s Chief Executive Officer) and Kim Moore (“Kim”, the Company’s
Chief Financial Officer) entered into a Store Expansion Consulting Agreement (the “Expansion Agreement”) with a third
party (the “Client”). Mark, Matthew and Kim are herein referred to collectively as the “Moores”. Pursuant
to the Expansion Agreement, the Company and the Moores were responsible for all physical plant and marketing details for the Client’s
new store openings during the initial term of six-months. The Expansion Agreement was cancelled on January 6, 2017. The Client
has decided to do their own marketing in-house and eliminate this out-sourced contract and decided to open only one location
and delay the opening of any other new stores. For the three months ended March 31 2017, the Company has recognized
$100,000 of income for the one new store, opened in January 2017, and $160,000 in other income, net, for payments received for
the Expansion Agreement pursuant to the cancellation. The client 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 were to provide unlimited licensing of the Intela-Hear brand
name, exclusive access to the Aware Aural Rehab Program within 10 miles of retail stores, exclusive territory of all services
within 10 miles of retail stores and up to 40 hours per month of various consulting services. The Consulting Agreement continues
until January 31, 2019, unless terminated for cause, as defined in the Consulting Agreement. On May 26, 2017, the Company and
the Moores were named in an action filed by the Client, that included a demand that all monies paid pursuant to the Consulting
Agreement be returned. 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 12).
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 financial statements
and notes thereto included in the Annual Report for the year ended December 31, 2017, filed with the United States Securities
and Exchange Commission (the “SEC”) on April 17, 2018. Interim results of operations for the three months ended March
31, 2018, and 2017, are not necessarily indicative of future results for the full year. Certain amounts from the 2017 period have
been reclassified to conform to the presentation used in the current period.
Emerging
Growth Companies
The
Company qualifies as an “emerging growth company” under the 2012 JOBS Act. Section 107 of the JOBS Act provides that
an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities
Act for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption
of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to take
advantage of the benefits of this extended transition period.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses
during the reported period. Actual results could differ from those estimates.
Cash and Cash
Equivalents
The
Company considers all highly liquid investments with an original term of three months or less to be cash equivalents. These investments
are carried at cost, which approximates fair value. Cash and cash equivalent balances may, at certain times, exceed federally
insured limits. If the amount of a deposit at any time exceeds the federally insured amount at a bank, the uninsured portion of
the deposit could be lost, in whole or in part, if the bank were to fail.
Accounts receivable
The
Company records accounts receivable at the time products and services are delivered. An allowance for losses is established through
a provision for losses charged to 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 March
31, 2018, and December 31, 2017, management’s evaluation resulted in the establishment of an allowance for uncollectible
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.
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 months ended
March 31, 2018 and 2017, and accounts receivable balance as of March 31, 2018:
|
|
|
|
|
|
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.
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 year ended December
31, 2017, the Company purchased the domain name
www.innd.com
from
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 march 31, 2018, and December 31, 2017:
|
|
March
31,
2018
|
|
December
31,
2017
|
Computer equipment
|
|
$
|
2,651
|
|
|
$
|
2,651
|
|
Accumulated
depreciation
|
|
|
(1,289
|
)
|
|
|
(1,068
|
)
|
Balance
|
|
$
|
1,362
|
|
|
$
|
1,583
|
|
Depreciation
expense of $221 was recorded for the three months ended 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 March 31, 2018, the Company recognized a loss of $2,305. As of March 31, 2018, and December
31, 2017, the carrying value of the Company’s investment in undivided interest in real estate was $1,222,598 and $1,224,903,
respectively (see Note 8).
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
|
|
Embedded
Conversion Features
The
Company evaluates embedded conversion features within convertible debt under ASC 815 "Derivatives and Hedging" to determine
whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at
fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under
ASC 815, the instrument is evaluated under ASC 470-20 "Debt with Conversion and Other Options" for consideration of
any beneficial conversion feature.
Derivative
Financial Instruments
The
Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates
all of it financial instruments, including stock purchase warrants, to determine if such instruments are derivatives or contain
features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the
derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the
fair value reported as charges or credits to income.
For
option-based simple derivative financial instruments, the Company uses the Monte Carlo simulations to value the derivative instruments
at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.
Debt
Issue Costs and Debt Discount
The
Company may record debt issue costs and/or debt discounts in connection with raising funds through the issuance of debt. These
costs may be paid in the form of cash, or equity (such as warrants). These costs are amortized to interest expense through the
maturity of the debt. If a conversion of the underlying debt occurs prior to maturity a proportionate share of the unamortized
amounts is immediately expensed.
Original
Issue Discount
For
certain convertible debt issued, the Company may provide the debt holder with an original issue discount. The original issue discount
would be recorded to debt discount, reducing the face amount of the note and is amortized to interest expense through the maturity
of the debt. If a conversion of the underlying debt occurs prior to maturity a proportionate share of the unamortized amounts
is immediately expensed.
Revenue
Recognition
The
Company has adopted ASU 2014-09, as amended effective January 1, 2018, and determined that there was no significant impact on
its revenue recognition. The Company’s contracts with customers are generally on a purchase order basis and represent
obligations that are satisfied at a point in time as defined in the new guidance. Accordingly, revenue for each project
is recognized when each project is complete, and any costs incurred before this point in time, are recorded as assets to be expensed
during the period the related revenue is recognized. For the three months ended 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.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740-10, Income Taxes. Deferred tax assets and liabilities are recognized
to reflect the estimated future tax effects, calculated at the tax rate expected to be in effect at the time of realization. A
valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred
tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and
rates of the date of enactment.
ASC
740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements
and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure
and transition issues. Interest and penalties are classified as a component of interest and other expenses. To date, the Company
has not been assessed, nor paid, any interest or penalties.
Uncertain
tax positions are measured and recorded by establishing a threshold for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition
threshold at the effective date may be recognized or continue to be recognized.
Earnings
(Loss) Per Share
The
Company reports earnings (loss) per share in accordance with ASC 260, "Earnings per Share." Basic earnings (loss) per
share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during each
period. Diluted earnings per share is computed by dividing net loss by the weighted-average number of shares of common stock,
common stock equivalents and other potentially dilutive securities outstanding during the period. As of 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 equivalents or any other potentially dilutive securities.
Recent
Accounting Pronouncements
In
May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606).
ASU 2014-09 is amended
by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12, ASU 2016-20, ASU 2017-10, ASU 2017-13 and ASU 2017-14, which
FASB issued in August 2015, March 2016, April 2016, May 2016, May 2016, December 2016, May 2017, September 2017 and November 2017,
respectively (collectively, the amended ASU 2014-09). The amended ASU 2014-09 provides a single comprehensive model for the recognition
of revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific
guidance. It requires an entity to recognize revenue when the entity transfers promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amended
ASU 2014-09 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s). The
amended ASU 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows
arising from customer contracts, including qualitative and quantitative information about contracts with customers, significant
judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The effective date
for the amended ASU 2014-09 is for years beginning after December 15, 2017 with early adoption permitted. The Company adopted
the new guidance effective January 1, 2017 under the modified retrospective transition approach and it did not have a material
impact on the condensed consolidated financial statements of the Company.
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-02, “Leases (Topic 842)”. Under this guidance, an entity is required to recognize right-of-use assets and
lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific
accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative
and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing
and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December
15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption
permitted. The Company is currently evaluating the impact of the adoption of this standard will have on our consolidated financial
statements.
With
the exception of the new standard discussed above, there have been no other recent accounting pronouncements or changes in accounting
pronouncements during the 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.
NOTE
3 – GOING CONCERN AND MANAGEMENT’S PLANS
The
accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. which
assumes the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The Company
experienced a net loss of $697,943 for the three months ended March 31, 2018. At March 31, 2018, the Company had a working capital
deficit of $2,310,296, and an accumulated deficit of $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, 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. 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 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 has begun to implement an industry encompassing revenue strategy, including the current revenue model to other major sectors
of the global hearing industry. The Company plans include generating revenues from 7 separate revenue streams, and in 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 the three months ended March 31, 2018, and the year ended December 31, 2017, representing amounts
paid by the Company’s CEO (stockholder) on behalf of the Company and amounts reimbursed is as follows.
|
|
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.
NOTE
5 – NOTE PAYABLE, STOCKHOLDER
A
summary of the activity for the three months ended March 31, 2018, and the year ended December 31, 2017, of amounts the Company’s
CEO (stockholder) loaned the Company and 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, 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
7 – RELATED PARTY TRANSACTIONS
The
Company loaned the CEO $20,500 during the year ended December 31, 2013. The note and interest were paid in full during the year
ended December 31, 2017. The Company recorded interest income of $64 for the three months ended March 31, 2017.
During
the three months ended March 31, 2018 and the year ended December 31, 2017, our CEO (stockholder) paid expenses of the Company
and accounts payable on behalf of the Company (see Note 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 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. On August 11, 2016, MFHC paid $229,622 to the
Company (inclusive of the balance owed as of June 30, 2016, the Cancellation Fee and other related party activity).
Pursuant
to the Marketing Agreement, beginning in January 2014, the monthly fee was increased from $2,500 to $3,200 per retail location.
For the year ended December 31, 2016 (through August 5, 2016), there were 20 stores resulting in revenue of $458,667. The Company
has offset the accounts receivable owed from MFHC for expenses of the Company that have been paid by MFHC. As a result of these
payments, in addition to MFHC’s payments to the Company through December 31, 2016, the balance due to MFHC as of March 31,
2018, and December 31, 2017, was $22,548, which is included in Accounts payable, related party, on the condensed consolidated
balance sheet included herein.
On
April 1, 2013, the Company entered into a five-year sublease agreement with MFHC to sublease approximately 729 square feet of
office space for $1,500 per month. The monthly rent reduced the amounts owed to the Company from MFHC for the marketing services
provided to MFHC. For the three months ended March 31, 2017, the Company expensed $1,500 related to this lease.
Effective
August 1, 2016, the Company agreed to compensation of $225,000 and $125,000 per year for the Company’s CEO and CFO, respectively.
On November 15, 2016, the Company entered into employment agreements with its CEO and CFO, which includes their annual base salaries
of $225,000 and $125,000, respectively. For the three months ended March 31, 2018, and 2017, the Company recorded expenses to
its officers in the 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 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 and CFO $4,327 and $40,385, respectively for accrued and unpaid wages. These amounts are included in Officer salaries
payable on the balance sheets included herein.
In
September 2016, the officers and directors of the Company formed a California Limited Liability Company
(“LLC1”), for the purpose of acquiring commercial real estate and other business activities. On December 24,
2016, LLC1 acquired two retail stores from the buyer of the MFHC stores. On March 1, 2017, the Company entered into a
twelve-month Marketing Agreement with each of the stores to provide telemarketing and design and marketing services for
$2,500 per month per store, resulting in $15,000 and $5,000 of revenues for the three months ended March 31, 2018, and 2017,
respectively. Additionally, for the three months ended March 31, 2018, the Company invoiced LLC1 $12,421 for the
Company’s production, printing and mailing 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 8). On June 14, 2017, the Company entered into a five-year lease with LLC1
for approximately 6,944 square feet and a monthly rent of $12,000. For the three months ended March 31, 2018,
the
Company expensed $36,000 related to this lease and is included in Rent, related party, on the condensed consolidated
statement of operations, included herein.
In
November 2016, the Company’s Chairman formed a California Limited Liability Company (“LLC2”), for the purpose
of providing consulting services to the Company. The Company entered into an agreement with LLC2, and paid LLC2 $375,000 during
the year ended December 31, 2016, for services performed and to be performed. Of the $375,000 amount paid, $241,667 was recognized
as consulting fees- stockholder for the year ended December 31, 2016, and the remaining $133,334 was recorded as deferred commissions-
stockholder as of December 31, 2016. For the three months ended March 31, 2017, the Company paid the LLC an additional $771,000
and expensed $300,000 ($60,000 as commissions and $240,000 as other expense) for services performed. As of December 31, 2017,
the deferred commissions-stockholder is $-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 8).
NOTE
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
allocated portion of the results in an equity method investment in a privately-held, related party, company are included in the
Company’s consolidated statements of operations. For the three months ended March 31, 2018, a net loss of $2,305 is included
in “Other income (expense), net”. As of March 31, 2018, the carrying value of our investment in undivided interest
in real estate was $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
|
)
|
NOTE
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 an initial interest rate of 6% per annum, adjustable to the Prime interest rate plus
2%, and is secured by a first position Deed of Trust and business assets located at the property. The Company initially recorded
a liability of $1,007,930 for its portion of the SBA Note, with the offset being to Investment in undivided interest in real estate
on the balance sheet presented herein. As of March 31, 2018, the current and long-term portion of the SBA Note is $18,793 and
$977,494, respectively. Future principal payments for the Company’s portion are:
|
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.
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 of
the 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%.
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
12– COMMITMENTS AND CONTINGENCIES
Lease Agreements
On
June 14, 2017, the company entered into a five-year lease with LLC1 for approximately 6,944 square feet and a monthly rent of
$12,000.
Future
principal payments for the Company’s portion are:
|
For the twelve months ending 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
On
August 5, 2016, the Company along with Mark Moore (“Mark”, the Company’s chairman), Matthew Moore (“Matthew”,
the Company’s Chief Executive Officer) and Kim Moore (“Kim”, the Company’s Chief Financial Officer) entered
into a Store Expansion Consulting Agreement (the “Expansion Agreement”) Mark, Matthew and Kim are herein referred
to collectively as the Moores. Pursuant to the Expansion Agreement, the Company and the Moores were responsible for all physical
plant and marketing details for new store openings during the initial term of six-months. The Expansion Agreement was cancelled
on January 6, 2017. The Company’s client has decided to do their own marketing in-house and eliminate this out-sourced contract
and has decided to delay the opening of any new stores. For the three months ended March 31, 2017, the Company has received
and recognized $160,000 in other income, net, for payments received for the cancellation of the Expansion Agreement.
Also
on August 5, 2016, the Company and the Moores entered into a Consulting Agreement (the “Consulting Agreement”) with
the same party as the store Expansion Agreement. Under the Consulting Agreement, including the Non-Compete provision covering
a ten- mile radius of any retail store, the Company and the Moores were to provide unlimited licensing of the Intela-Hear brand
name, exclusive access to the Aware Aural Rehab Program within 10 miles of retail stores, exclusive territory of all services
within 10 miles of retail stores and 40 hours per month of various consulting services. The Consulting Agreement was to continue
until January 31, 2019, unless terminated for cause, as defined in the Consulting Agreement. On May 2, 2017, the Company received
a demand letter threatening litigation unless all monies paid pursuant to the Consulting Agreement are returned. On May 26, 2017,
a complaint (the “Complaint”) was filed against the Company and the Moores, which includes a request for rescission
of the Consulting Agreement. The Company 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, and accordingly, $847,223 is classified as deferred revenue
on the condensed consolidated balance sheets presented herein.
Effective
December 1, 2017, the Company entered into a one-year Marketing Services Agreement (the “MSA”). Pursuant to the terms
of the MSA, the Company will receive consulting and advisory services regarding the implementation of marketing programs, including
the design and creation of commercial websites and commercialization of products through social media or other marketing methods.
The Company will pay consideration for the services of $5,000 cash and $5,000 of common stock each month. The Company will issue
the number of shares of common stock equal to a twenty-five percent (25%) discount to the lowest closing price of the common stock
for the five (5) last trading days of the common stock for that month. For the three 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 MSA)
from the issuance of 111,111 shares of common stock. The Company also recorded 266,401 shares of common stock to be issued as
of March 31, 2018, and recorded stock- based compensation expense of $17,184 (pursuant to the terms of the MSA). Lastly, on February
27, 2018, the Company issued 102,564 shares of common stock that were previously recorded as common stock to be issued.as of December
31, 2017.
Legal
Matters
On
May 26, 2017, Helix Hearing Care (California), Inc. a California corporation (“Helix”), filed a complaint (the “Complaint”)
against the InnerScope and the Moores, in the Circuit Court of the 11
th
Judicial Circuit in and for Miami-Dade
County, Florida, that includes a rescission of the Consulting Agreement and a demand that all monies paid pursuant to the Consulting
Agreement be returned, on the basis that an injunction against certain Officers and Directors renders the Consulting Agreement
impossible to perform. The Company had previously received $1,250,000 under the Consulting Agreement. InnerScope was not named
as an enjoined party in such previous litigation, and the services contemplated under the Consulting Agreement are not within
the scope of the injunction, thus InnerScope believes the accusation by the third party is frivolous and without merit, as well
as not providing sufficient cause for the Agreement to be terminated.
InnerScope
and the Moores filed their Answer and Affirmative Defenses to the Complaint on June 27, 2017. On the same date, InnerScope,
the Moores, and MFHC filed a counterclaim. On February 27, 2018, the Counterclaim was amended to include four claims for breach
of contract, one claim for anticipatory breach of contract, one claim for negligent misrepresentation, and one claim for account
stated. The parties have also sent each other written discovery requests and have served written responses to the same.
NOTE
13 – STOCKHOLDERS’ EQUITY
Common
Stock
The
Company has 225,000,000 authorized shares of $0.0001 common stock. As of March 31, 2018, and December 31, 2017, there are 61,763,406
and 61,539,334, respectively, shares of common stock outstanding.
On
February 23, 2018, the Company issued 111,111 shares of common stock to a consultant. The shares were valued at $7,778, based
on the market price of the common stock on January 31, 2018, the date the Company agreed to issue the shares.
On
February 23, 2018, the Company issued 10,397 shares of common stock to an employee. The shares were valued at $728, based on the
market price of the common stock on January 31, 2018, the date the Company agreed to issue the shares.
On
February 27, 2018, the Company issued 102,564 shares of common stock that were classified as common stock to be issued as of December
31, 2017.
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 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 $9,067 of
stock-based compensation expense (based on the market price of the common stock on that date).
Preferred
Stock
The
Company has 25,000,000 authorized shares of $0.0001 preferred stock. As of December 31, 2017, and 2016, there were no shares of
preferred stock issued and outstanding.
NOTE
14 – SUBSEQUENT EVENTS
The
Company has evaluated subsequent events through the date the financial statements were issued and filed with the Securities and
Exchange Commission. The Company has determined that there are no other such events that warrant disclosure or recognition in
the financial statements, except as stated herein.
On
April 8, 2018, the Company issued a convertible promissory note (the “Note”), with a face value of $95,450,
maturing on July 8, 2019, and stated interest of 10% to a third-party investor. The note is convertible at any time after
ninety (90) days of the funding of the
note into a variable number of the Company's common stock, based on a
conversion ratio of 65% of the lowest trading price for the 20 days prior to conversion. The note was funded on April 11,
2018, when the Company received proceeds of $75,000, after disbursements for the lender’s transaction costs, fees and
expenses. The Note also requires daily payments of $375 per day via ACH through July 8, 2019, when all unpaid principal and
interest is due.
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 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 filed by the Company on Form 10-K with
the Securities and Exchange Commission on April 17, 2018.
This
discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that
any conclusion reached herein will necessarily be indicative of actual operating results in the future.
While
our financial statements are presented on the basis that we are a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business over a reasonable length of time, our independent auditor’s
report on our financial statements for the years ended December 31, 2017 and 2016 includes a “going concern” explanatory
paragraph that describes substantial doubt about our ability to continue as a going concern. Management’s plans in regard
to the factors prompting the explanatory paragraph are discussed below and also in Note 3 to the unaudited condensed consolidated
financial statements.
Corporate
History and Current Business
InnerScope
Advertising Agency, Inc. (IAA) is a Nevada Corporation incorporated June 15, 2012, with its principal place of business in Roseville,
California. On June 20, 2012, IAA acquired InnerScope Advertising Agency, LLC, to provide advertising/marketing services to the
hearing device industry. Through this Acquisition and Plan of Share Exchange with InnerScope Advertising Agency, LLC (“ILLC”),
a commonly owned entity, IAA acquired 100% of all membership interests in ILLC. On November 1, 2013, IAA entered into an Acquisition
and Plan of Share Exchange with Intela-Hear, LLC (“Intela-Hear”), a commonly owned entity, whereby IAA acquired 100%
of the outstanding membership interests of Intela- Hear.
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 three months ending 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 the basis that an injunction
against certain Officers and Directors renders the Consulting Agreement impossible to perform. The Company 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 Company believes this threat by the third party is frivolous and without merit, as well as not providing
sufficient cause for the Agreement to be 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 months ended March 31, 2018 compared to the three months ended March 31, 2017
Revenues
for the three months ended March 31, 2018 were $55,977 compared to $144,460 for the three months ended March 31, 2017. The revenue
decrease was primarily the result of the cancellations of the third-party Consulting and Marketing Agreements in January 2017.
For the three months ended March 31, 2018, a related customer accounted for 51% of our revenues and another customer accounted
for approximately 24%. During the three months ended March 31, 2018, the Company 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
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.
Other
Consulting
and design and marketing
For
the three months ended 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.
Direct
print, mail service and miscellaneous
For
the three months ended 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 $17,449 and $9,460, respectively.
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 months ended March
31, 2018 and 2017 was $38,864 and $15,392, respectively.
Operating
Expenses
Operating
expenses increased to $430,230 for the three months ended March 31, 2018 from $291,903 for the three months ended 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:
|
|
|
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
|
|
Legal
fees increased in the current period for the costs incurred regarding the Helix matter, see Note 12.
Stock
based compensation for the three months ended March 31, 2018, is comprised of:
|
•
|
On
February 23, 2018, the Company issued 111,111 shares of common stock to a marketing consultant.
The shares were valued at $7,778, based on the market price of the common stock on January
31, 2018, the date the Company agreed to issue the shares.
|
|
•
|
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 28, 2018, the Company recorded 133,067 shares of common stock to be issued to
a marketing consultant (see Note 12) and recorded $8,117 of stock-based compensation
expense (based on the market price of the common stock on that date).
|
|
•
|
On
March 31, 2018, the Company recorded 133,333 shares of common stock to be issued to the
same marketing consultant and recorded $9,067 of stock-based compensation expense (based
on the market price of the common stock on that date).
|
|
•
|
The
amortiz
ation of deferred stock compensation
of $25,000.
|
Commissions,
stockholder, for the three months ended March 31, 2017, 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 months ended March 31, 2018 compared to the three months ended March 31, 2017 as a result of the Company
on June 14, 2017, entered into a five-year lease with LLC1 for approximately 6,944 square feet and a monthly rent of $12,000.
General
and administrative costs increased to $41,242 for the three months ended March 31, 2018, compared to $10,294 for the three months
ended March 31, 2017, respectively.
Other
income (expense), net
Other
expense, net was $284,827 for the three months ended March 31, 2018, compared to other income of $159,744 for the three months
ended March 31, 2017. The 2018 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 Company recognizing a gain $160,000 on the cancellation of Store Expansion Agreement. The Company received
$400,000 during the three months ended 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
Income (loss)
Net
loss for the three months ended March 31, 2018, was $697,943 compared to $3,091 for the three months ended March 31, 2017. This
resulted from the increase in the loss of operating income and the change in other expenses other income, as described above.
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 March
31, 2018, we had cash and cash equivalents of $23,385, a decrease of $61,335, from $84,720 as of December 31, 2017. As of March
31, 2018, we had current liabilities of $2,561,733 (including deferred revenues of $847,223) compared to current assets of $251,437
which resulted in working capital deficit of $2,310,296. The current liabilities are comprised of accounts payable, accrued expenses,
notes payable, convertible notes payable, derivative liabilities and deferred revenue.
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 litigation which would provide cash 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. 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 cash from 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. Since March 31, 2018, we have received $150,825, from the issuance of $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 will be available to us on acceptable terms, or at all.
Operating
Activities
Cash
used in operations for the three months ended March 31, 2018, was $287,528 compared to cash provided by operating activities of
$141,798 for the three months ended March 31, 2017. For the three months ended March 31, 2018, the cash used in operations was
a result of the net loss of $697,943 and increases in assets of $23,278, offset by increases in liabilities of $118,951 and the
non- cash expense items of depreciation and amortization of $110,487, derivative expense of $151,259 and stock based compensation
of $50,690. For the three months ended March 31, 2017, the cash provided by operations was a result of the net loss of $3,091
and increases in accounts 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 $9,460 in accounts receivables.
Investing
Activities
Cash
provided by investing activities was $2,563 for the three months ended March 31, 2017, comprised of the amount received by the
Company of a note receivable from an officer.
Financing
Activities
For
the three months ended March 31, 2018, the Company has received $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 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 three months ended March 31, 2017.
OFF
BALANCE SHEET ARRANGEMENTS
We
do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition or results of operations.
Critical
Accounting Policies
Basis
of presentation
The
accompanying condensed consolidated financial statements are prepared in accordance with Generally Accepted Accounting Principles
in the United States of America ("US GAAP"). The condensed consolidated financial statements of the Company include
the consolidated accounts of InnerScope and its’ wholly owned subsidiaries ILLC and Intela-Hear, a California limited liability
company. All intercompany accounts and transactions have been eliminated in consolidation.
Use
of estimates
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue
Recognition
The
Company has adopted ASU 2014-09, as amended effective January 1, 2018, and determined that there was no significant impact on
its revenue recognition. The Company’s contracts with customers are generally on a purchase order basis and represent
obligations that are satisfied at a point in time as defined in the new guidance. Accordingly, revenue for each project
is recognized when each project is complete, and any costs incurred before this point in time, are recorded as assets to be expensed
during the period the related revenue is recognized. For the three months ended March 31, 2018, the Company received and recognized
$100,000 of revenue related to the Store Expansion agreement, and $30,000 of income from the cancellation of the Marketing and
Store Expansion Agreements.
Income
taxes
The
Company uses the liability method of accounting for Income Taxes. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. A valuation allowance can be provided for a net deferred tax asset, due to uncertainty
of realization.
Net loss per common
share
The
Company reports earnings (loss) per share in accordance with ASC 260, "Earnings per Share." Basic earnings (loss) per
share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during each
period. Diluted earnings per share is computed by dividing net loss by the weighted-average number of shares of common stock,
common stock equivalents and other potentially dilutive securities outstanding during the period. As of 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 equivalents or any other potentially dilutive securities.