INNERSCOPE HEARING TECHNOLOGIES, INC.
|
CONDENSED CONSOLIDATED BALANCE SHEETS
|
(Unaudited)
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2019
|
|
2018
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
5,017
|
|
|
$
|
87,826
|
|
Accounts receivable, allowance
for doubtful accounts $18,383
|
|
|
22,568
|
|
|
|
6,112
|
|
Accounts receivable from
related party
|
|
|
283,064
|
|
|
|
203,325
|
|
Employee advances
|
|
|
59,721
|
|
|
|
40,942
|
|
Prepaid expenses
|
|
|
107,503
|
|
|
|
167,992
|
|
Inventory
|
|
|
118,331
|
|
|
|
91,510
|
|
Total
current assets
|
|
|
596,204
|
|
|
|
597,707
|
|
|
|
|
|
|
|
|
|
|
Security deposits
|
|
|
34,537
|
|
|
|
11,056
|
|
Domain name
|
|
$
|
3,000
|
|
|
$
|
3,000
|
|
Intangible assets, net of
accumulated amortization of $80,420 (2019) and $2,168 (2018)
|
|
|
932,588
|
|
|
|
1,010,840
|
|
Property and equipment,
net of accumulated depreciation of $12,587 (2019) and $4,705 (2018)
|
|
|
81,833
|
|
|
|
43,450
|
|
Operating leases right-of-use
assets, net
|
|
|
1,302,184
|
|
|
|
—
|
|
Investment
in undivided interest in real estate
|
|
|
1,231,779
|
|
|
|
1,226,963
|
|
Total
assets
|
|
$
|
4,182,125
|
|
|
$
|
2,893,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
$
|
1,092,778
|
|
|
$
|
1,233,653
|
|
Accounts payable to related
party
|
|
|
22,548
|
|
|
|
22,548
|
|
Notes payable - stockholder
|
|
|
95,800
|
|
|
|
95,800
|
|
Advances payable, stockholders
|
|
|
63,642
|
|
|
|
57,526
|
|
Convertible notes payable,
net of discounts
|
|
|
958,827
|
|
|
|
151,166
|
|
Current portion of notes
payable, net of deferred loan fees
|
|
|
28,721
|
|
|
|
29,270
|
|
Current portion of note
payable-undivided interest in real estate
|
|
|
20,096
|
|
|
|
19,660
|
|
Customer deposits
|
|
|
71,409
|
|
|
|
56,698
|
|
Officer salaries payable
|
|
|
156,201
|
|
|
|
188,942
|
|
Income taxes payable
|
|
|
23,998
|
|
|
|
23,998
|
|
Derivative liabilities
|
|
|
3,082,068
|
|
|
|
1,807,404
|
|
Operating
lease liabilities, current portion
|
|
|
323,209
|
|
|
|
—
|
|
Total
current liabilities
|
|
|
5,939,297
|
|
|
|
3,686,665
|
|
|
|
|
|
|
|
|
|
|
Long term portion of note
payable- undivided interest in real estate
|
|
|
956,542
|
|
|
|
964,847
|
|
Operating
lease liabilities, less current portion
|
|
|
994,739
|
|
|
|
—
|
|
Total
liabilities
|
|
|
7,890,578
|
|
|
|
4,651,512
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Deficit:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value; 25,000,000
shares authorized;
|
|
|
|
|
|
|
|
|
Series A preferred stock,
par value $0.0001, 9,510,000 shares authorized and -0- issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Series B preferred stock,
par value $0.0001, 900,000 shares authorized and issued and outstanding
|
|
|
90
|
|
|
|
90
|
|
Common stock, $0.0001 par value; 490,000,000 shares authorized; 161,826,468 (2019) and 120,425,344 (2018) shares
issued and outstanding, respectively
|
|
|
16,182
|
|
|
|
12,042
|
|
Common stock to be issued,
$0.0001 par value, 2,881,316 (2019) and 6,373,848 (2018) shares, respectively
|
|
|
288
|
|
|
|
637
|
|
Additional paid-in capital
|
|
|
6,397,967
|
|
|
|
4,836,557
|
|
Deferred stock compensation
|
|
|
(242,402
|
)
|
|
|
(235,694
|
)
|
Accumulated
deficit
|
|
|
(9,880,578
|
)
|
|
|
(6,372,129
|
)
|
|
|
|
|
|
|
|
|
|
Total
stockholders' deficit
|
|
|
(3,708,453
|
)
|
|
|
(1,758,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,182,125
|
|
|
$
|
2,893,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
|
INNERSCOPE HEARING TECHNOLOGIES, INC.
|
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
219,673
|
|
|
$
|
26,691
|
|
|
$
|
391,202
|
|
|
$
|
53,972
|
|
Revenues,
related party
|
|
|
—
|
|
|
|
23,323
|
|
|
|
15,000
|
|
|
|
52,019
|
|
Total
revenues
|
|
|
219,673
|
|
|
|
50,014
|
|
|
|
406,202
|
|
|
|
105,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
99,463
|
|
|
|
24,477
|
|
|
|
181,827
|
|
|
|
49,258
|
|
Cost
of sales, related
|
|
|
—
|
|
|
|
7,325
|
|
|
|
—
|
|
|
|
21,408
|
|
Total
cost of sales
|
|
|
99,463
|
|
|
|
31,802
|
|
|
|
181,827
|
|
|
|
70,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
120,210
|
|
|
|
18,212
|
|
|
|
224,375
|
|
|
|
35,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
(including stock- based fees of $35,917 and $50,000 for the three and six months ended June 30, 2019 and $772,600 for the
three and six months ended June 30, 2018)
|
|
|
435,086
|
|
|
|
925,767
|
|
|
|
798,823
|
|
|
|
1,085,306
|
|
Advertising and promotion
|
|
|
143,800
|
|
|
|
66,007
|
|
|
|
311,584
|
|
|
|
91,328
|
|
Professional fees (including
stock- based fees of $197,876 and $308,292 for three and six months ended June 30, 2019 and $21,327 and $64,240 for three
and six months ended June 30, 2018)
|
|
|
239,923
|
|
|
|
115,419
|
|
|
|
377,317
|
|
|
|
230,906
|
|
Rent (including related
party of $36,000 for three months ended June 30, 2019 and 2018 and $72,000 for six months ended June 30, 2019 and 2018
|
|
|
98,133
|
|
|
|
36,000
|
|
|
|
194,062
|
|
|
|
72,000
|
|
Investor relations
|
|
|
89,528
|
|
|
|
23,778
|
|
|
|
164,776
|
|
|
|
76,419
|
|
Other
general and administrative
|
|
|
132,487
|
|
|
|
6,073
|
|
|
|
269,126
|
|
|
|
47,316
|
|
Total
operating expenses
|
|
|
1,138,958
|
|
|
|
1,173,044
|
|
|
|
2,115,689
|
|
|
|
1,603,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(1,018,748
|
)
|
|
|
(1,154,832
|
)
|
|
|
(1,891,314
|
)
|
|
|
(1,567,949
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative (income) expense
|
|
|
235,478
|
|
|
|
(518,711
|
)
|
|
|
(342,360
|
)
|
|
|
(669,970
|
)
|
Gain on investment in undivided
interest in real estate
|
|
|
5,856
|
|
|
|
3,046
|
|
|
|
4,816
|
|
|
|
741
|
|
Gain (loss) on debt extinguishment
|
|
|
459
|
|
|
|
—
|
|
|
|
(44,393
|
)
|
|
|
—
|
|
Interest
expense and finance charges
|
|
|
(728,456
|
)
|
|
|
(182,528
|
)
|
|
|
(1,235,198
|
)
|
|
|
(313,792
|
)
|
Total
other expense, net
|
|
|
(486,664
|
)
|
|
|
(698,193
|
)
|
|
|
(1,617,135
|
)
|
|
|
(983,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,505,411
|
)
|
|
$
|
(1,853,025
|
)
|
|
$
|
(3,508,449
|
)
|
|
$
|
(2,550,969
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding Basic and diluted
|
|
|
155,732,524
|
|
|
|
57,711,814
|
|
|
|
145,156,477
|
|
|
|
59,761,633
|
|
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' DEFICIT
|
SIX MONTHS ENDED JUNE 30, 2019 and 2018
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Preferred Stock
|
|
|
|
Series
B Preferred Stock
|
|
|
|
Common
Stock
|
|
|
|
Common
Stock To Be Issued
|
|
|
|
Additional Paid-in
|
|
|
|
Deferred Stock
|
|
|
|
Retained
|
|
|
|
Total Stockholders’
|
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Capital
|
|
|
|
Compensation
|
|
|
|
Deficit
|
|
|
|
Deficit
|
|
Balances January 1, 2019
|
|
|
—
|
|
|
$
|
—
|
|
|
|
900,000
|
|
|
$
|
90
|
|
|
|
120,425,344
|
|
|
$
|
12,042
|
|
|
|
6,373,848
|
|
|
$
|
637
|
|
|
$
|
4,836,556
|
|
|
$
|
(235,694
|
)
|
|
$
|
(6,372,129
|
)
|
|
$
|
(1,758,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
870,826
|
|
|
|
87
|
|
|
|
113,637
|
|
|
|
11
|
|
|
|
26,485
|
|
|
|
97,917
|
|
|
|
—
|
|
|
|
124,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued from common stock to be issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,550,893
|
|
|
|
355
|
|
|
|
(3,550,893
|
)
|
|
|
(355
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for convertible notes and accrued interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24,741,320
|
|
|
|
2,474
|
|
|
|
—
|
|
|
|
—
|
|
|
|
282,792
|
|
|
|
—
|
|
|
|
—
|
|
|
|
285,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock to be issued for settlement of accounts payable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
625,000
|
|
|
|
63
|
|
|
|
40,563
|
|
|
|
—
|
|
|
|
—
|
|
|
|
40,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of derivative liabilities upon payment of convertible debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
580,908
|
|
|
|
—
|
|
|
|
—
|
|
|
|
580,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the three months ended March 31, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,003,038
|
)
|
|
|
(2,003,038
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances March 31, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
900,000
|
|
|
|
90
|
|
|
|
149,588,383
|
|
|
|
14,958
|
|
|
|
3,561,592
|
|
|
|
356
|
|
|
|
5,767,304
|
|
|
|
(137,777
|
)
|
|
|
(8,375,167
|
)
|
|
|
(2,730,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,780,303
|
|
|
|
478
|
|
|
|
355,008
|
|
|
|
36
|
|
|
|
337,902
|
|
|
|
(270,500
|
)
|
|
|
—
|
|
|
|
67,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
165,875
|
|
|
|
—
|
|
|
|
165,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued from common stock to be issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
410,284
|
|
|
|
41
|
|
|
|
(410,284
|
)
|
|
|
(41
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for settlement of accounts payable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
625,000
|
|
|
|
63
|
|
|
|
(625,000
|
)
|
|
|
(63
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for convertible notes and accrued interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,422,498
|
|
|
|
642
|
|
|
|
—
|
|
|
|
—
|
|
|
|
135,557
|
|
|
|
—
|
|
|
|
—
|
|
|
|
136,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of derivative liabilities upon payment of convertible debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
157,204
|
|
|
|
—
|
|
|
|
—
|
|
|
|
157,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the three months ended June 30, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,505,411
|
)
|
|
|
(1,505,411
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances June 30, 2019
|
|
|
—
|
|
|
$
|
—
|
|
|
|
900,000
|
|
|
$
|
90
|
|
|
|
161,826,468
|
|
|
$
|
16,182
|
|
|
|
2,881,316
|
|
|
$
|
288
|
|
|
$
|
6,397,967
|
|
|
$
|
(242,402
|
)
|
|
$
|
(9,880,578
|
)
|
|
$
|
(3,708,453
|
)
|
|
|
|
Series
A Preferred Stock
|
|
|
|
Series
B Preferred Stock
|
|
|
|
Common
Stock
|
|
|
|
Common
Stock To Be Issued
|
|
|
|
Additional
Paid-in
|
|
|
|
Deferred Stock
|
|
|
|
Retained
|
|
|
|
Total Stockholders’
|
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Capital
|
|
|
|
Compensation
|
|
|
|
Deficit
|
|
|
|
Deficit
|
|
Balances January 1, 2018
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
61,539,334
|
|
|
$
|
6,153
|
|
|
|
102,564
|
|
|
$
|
10
|
|
|
$
|
331,227
|
|
|
$
|
(25,000
|
)
|
|
$
|
(1,787,012
|
)
|
|
$
|
(1,474,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
224,072
|
|
|
|
23
|
|
|
|
266,401
|
|
|
|
27
|
|
|
|
25,640
|
|
|
|
25,000
|
|
|
|
—
|
|
|
|
50,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued from common stock to be issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(102,564
|
)
|
|
|
(10
|
)
|
|
|
10
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of derivative liabilities upon
payment of convertible debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
61,044
|
|
|
|
—
|
|
|
|
—
|
|
|
|
61,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the three months ended March 31, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(697,945
|
)
|
|
|
(697,945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances March 31, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
61,763,406
|
|
|
|
6,176
|
|
|
|
266,401
|
|
|
|
27
|
|
|
|
417,921
|
|
|
|
—
|
|
|
|
(2,484,957
|
)
|
|
|
(2,060,834
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
547,619
|
|
|
|
55
|
|
|
|
13,495
|
|
|
|
—
|
|
|
|
|
|
|
|
13,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series B preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
900,000
|
|
|
|
90
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
817,510
|
|
|
|
—
|
|
|
|
—
|
|
|
|
817,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued or to be issued for convertible notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,213,539
|
|
|
|
621
|
|
|
|
—
|
|
|
|
—
|
|
|
|
68,749
|
|
|
|
—
|
|
|
|
—
|
|
|
|
69,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock shares cancelled in exchange for
Series A preferred stock
|
|
|
9,510,000
|
|
|
|
951
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(19,020,000
|
)
|
|
|
(1,902
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
951
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of derivative liabilities upon
payment of convertible debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
182,502
|
|
|
|
—
|
|
|
|
—
|
|
|
|
182,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the three months ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,853,025
|
)
|
|
|
(1,853,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances June 30, 2018
|
|
|
9,510,000
|
|
|
$
|
951
|
|
|
|
900,000
|
|
|
$
|
90
|
|
|
|
48,956,945
|
|
|
$
|
4,896
|
|
|
|
814,020
|
|
|
$
|
81
|
|
|
$
|
1,501,129
|
|
|
$
|
—
|
|
|
$
|
(4,337,982
|
)
|
|
$
|
(2,830,837
|
)
|
INNERSCOPE HEARING TECHNOLOGIES, INC.
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(Unaudited)
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,508,449
|
)
|
|
$
|
(2,550,969
|
)
|
Adjustments to reconcile
net loss to net cash used in operations:
|
|
|
|
|
|
|
|
|
Loss on fair value of derivatives
|
|
|
342,360
|
|
|
|
669,970
|
|
Amortization of debt discounts
|
|
|
1,181,202
|
|
|
|
273,705
|
|
Depreciation and amortization
|
|
|
212,492
|
|
|
|
442
|
|
Stock compensation expense
|
|
|
358,292
|
|
|
|
836,840
|
|
Non cash interest expense
|
|
|
2,500
|
|
|
|
—
|
|
Gain on investment in undivided
interest in real estate
|
|
|
(4,816
|
)
|
|
|
(741
|
)
|
Loss on debt extinguishment
|
|
|
44,393
|
|
|
|
—
|
|
Changes in operating assets
and liabilities:
|
|
|
|
|
|
|
|
|
Decrease (increase) in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(16,456
|
)
|
|
|
(2,699
|
)
|
Employee advances
|
|
|
(18,779
|
)
|
|
|
—
|
|
Inventory
|
|
|
(26,821
|
)
|
|
|
(18,651
|
)
|
Prepaid assets
|
|
|
60,489
|
|
|
|
28,878
|
|
Accounts receivable, related
party
|
|
|
(79,739
|
)
|
|
|
(15,076
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
|
(100,162
|
)
|
|
|
109,181
|
|
Officer salaries payable
|
|
|
(32,741
|
)
|
|
|
135,445
|
|
Customer deposits
|
|
|
14,711
|
|
|
|
—
|
|
Due to related party
|
|
|
—
|
|
|
|
(38,946
|
)
|
Operating
lease liabilities
|
|
|
(110,586
|
)
|
|
|
—
|
|
Net
cash used in operating activities
|
|
|
(1,682,111
|
)
|
|
|
(572,621
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Payment of security deposits
|
|
|
(23,481
|
)
|
|
|
—
|
|
Purchases
of office and computer equipment
|
|
|
(46,274
|
)
|
|
|
—
|
|
Net
cash used in investing activities
|
|
|
(69,755
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of
note payable
|
|
|
21,000
|
|
|
|
32,600
|
|
Advances to stockholder,
net
|
|
|
6,116
|
|
|
|
31,200
|
|
Proceeds from issuances
of convertible notes payable, net of debt issuance costs
|
|
|
1,678,725
|
|
|
|
592,250
|
|
Repayments of note payable
|
|
|
(36,784
|
)
|
|
|
(20,671
|
)
|
Repayments of advances,
shareholder
|
|
|
—
|
|
|
|
(6,000
|
)
|
Repayments
of principal of convertible note payable
|
|
|
—
|
|
|
|
(94,725
|
)
|
Net
cash provided by financing activities
|
|
|
1,669,057
|
|
|
|
534,654
|
|
|
|
|
|
|
|
|
|
|
Net decrease
in cash
|
|
|
(82,809
|
)
|
|
|
(37,967
|
)
|
|
|
|
|
|
|
|
|
|
Cash,
Beginning of period
|
|
|
87,826
|
|
|
|
84,720
|
|
|
|
|
|
|
|
|
|
|
Cash,
End of period
|
|
$
|
5,017
|
|
|
$
|
46,753
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
11,256
|
|
|
$
|
16,284
|
|
Cash
paid for income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Schedule
of non-cash Investing or Financing Activity:
|
|
|
|
|
|
|
|
|
Reclassification
of derivative liabilities upon principal repayments of convertible notes
|
|
$
|
738,112
|
|
|
$
|
243,546
|
|
Intangible
assets in accounts payable
|
|
$
|
536,000
|
|
|
|
—
|
|
Conversion
of notes payable and accrued interest in common stock
|
|
$
|
389,738
|
|
|
$
|
—
|
|
Common
stock issued for settlement of accounts payable
|
|
$
|
25,000
|
|
|
|
—
|
|
Operating
lease right-of-use assets and liabilities
|
|
$
|
1,428,534
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 model, encompassing;
business to business (B2B) solutions, direct to consumer (DTC) sales and marketing and business to consumer (and B2C)
solutions. The Company is a manufacturer and a DTC distributor/retailer of FDA (Food and Drug Administration) registered
hearing aids, personal sound amplifier products (“PSAP’s”), hearing related treatment therapies, doctor-formulated
dietary hearing supplements and proprietary CDB oil for treating tinnitus. The
Company also owns and operates audiological and retail hearing device clinics and plans to continue to open and acquire
additional clinics. As of the date of this filing, the Company owns nine retail hearing device clinics in California and
manages two additional clinics that are owned by a related party.
NOTE 2 – Asset Purchase Acquisition
of Kathy L Amos Audiology
Effective September 10, 2018, the Company acquired
all of the assets and assumed certain liabilities of Kathy L Amos Audiology (“Amos Audiology”) in exchange for 340,352
shares of common stock (the “Acquisition”). Amos Audiology provides retail hearing
aid sales and audiological services in the East Bay area of San Francisco.
Based on the fair value of the common stock
issued of $22,974 and the assumed liabilities of $33,049, the total purchase consideration was $56,023.
The following table summarizes the purchase
price allocation of the fair value of assets acquired and liabilities assumed in the acquisition:
|
|
Purchase
Price Allocation
|
Fair value of consideration for Acquisition
|
|
$
|
22,974
|
|
Liabilities assumed
|
|
|
33,049
|
|
Total purchase consideration
|
|
$
|
56,023
|
|
|
|
|
|
|
Tangible assets acquired
|
|
$
|
43,016
|
|
Intangible assets
|
|
|
13,007
|
|
|
|
$
|
56,023
|
|
The total purchase price of $56,023 has been
allocated to the tangible and intangible assets acquired and liabilities assumed based on estimated fair values as of the completion
of the Acquisition. The fair value of Amos Audiology’s identifiable intangible assets was estimated primarily using the income
approach which requires an estimate or forecast of all the expected future cash flows, either through the use of the relief-from-royalty
method or the multi-period excess earnings method. The Company determined the identifiable intangible assets, consisting of a customer
base and non-compete had fair values of $300 and $12,707, respectively.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Basis of Presentation and Principles
of Consolidation
The accompanying condensed consolidated financial
statements in this report have been prepared by the Company without audit. In the opinion of management, all adjustments necessary
to present the financial position, results of operations and cash flows for the stated periods have been made. Except as described
below, these adjustments consist only of normal and recurring adjustments. Certain information and note disclosures normally included
in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted. These condensed consolidated unaudited financial statements should be
read in conjunction with a reading of the Company’s financial statements and notes thereto included in the Annual Report
for the year ended December 31, 2018, filed with the United States Securities and Exchange Commission (the “SEC”) on
April 16, 2019. Interim results of operations for the three and six months ended June 30, 2019, and 2018, are not necessarily indicative
of future results for the full year. Certain amounts from the 2018 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 for certain accounting standards.
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
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. We held no cash equivalents as of June 30, 2019, and December 31, 2018. Cash balances may, at certain times, exceed
federally insured limits. If the amount of a deposit at any time exceeds the federally insured amount at a bank, the uninsured
portion of the deposit could be lost, in whole or in part, if the bank were to fail.
Accounts receivable
The Company records accounts receivable at
the time products and services are delivered. An allowance for losses is established through a provision for losses charged to
expense. Receivables are charged against the allowance for losses when management believes collectability is unlikely. The allowance
(if any) is an amount that management believes will be adequate to absorb estimated losses on existing receivables, based on evaluation
of the collectability of the accounts and prior loss experience. As of June 30, 2019, and December 31, 2018, management’s
evaluation required the establishment of an allowance for uncollectible receivables of $18,383.
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 six months ended June 30, 2018. No customer accounted
for more than ten percent (10%) of the Company’s revenues for the three and months ended June 30, 2019.
|
|
|
|
|
|
Accounts Receivable
|
|
|
June 30, 2018
|
|
as of
|
|
|
3 months
|
|
6 months
|
|
June 30,
|
|
|
%
|
|
%
|
|
2019
|
Customer A, related
|
|
|
46.6
|
%
|
|
|
49.1
|
%
|
|
$
|
283,064
|
|
Customer B
|
|
|
27.0
|
%
|
|
|
25.6
|
%
|
|
$
|
—
|
|
Inventory
Inventory is valued at the lower of cost or
net realizable 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. As of June 30, 2019, and December
31, 2018, management’s analysis did not require any provisions to be recognized.
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 sheets. On October 3, 2018, the Company entered into a Manufacturing
Design and Marketing Agreement (the “Agreement”) with Zounds Hearing, Inc., a Delaware corporation (“Zounds”),
whereby, Zounds as the Subcontractor will provide design, technology, manufacturing and supply chain services to the Company (see
Note 15) for a period of ten years. The Company will pay Zounds One Million ($1,000,000) for the right to use proprietary technology
(the “Technology Access Fee”). As of December 31, 2018, the Company has capitalized the $1,000,000 Technology Access
Fee as an intangible asset on the condensed consolidated balance sheets. The Technology Access Fee will be amortized over the term
of the Agreement. The Company also acquired intangible assets from an asset purchase agreement (see Note 2).
Property and Equipment
Property and equipment are stated at cost,
and depreciation is provided by use of a straight-line method over the estimated useful lives of the assets. The Company reviews
property and equipment for potential impairment whenever events or changes in circumstances indicate that the carrying amounts
of assets may not be recoverable. The estimated useful lives of property and equipment are as follows:
Computer equipment
|
3 years
|
Machinery and equipment
|
5 years
|
Furniture and fixtures
|
5 years
|
The Company's property and equipment consisted
of the following at June 30, 2019, and December 31, 2018:
|
|
June 30,
2019
|
|
December 31,
2018
|
Computer equipment
|
|
$
|
4,272
|
|
|
$
|
2,651
|
|
Machinery and equipment
|
|
|
52,102
|
|
|
|
31,122
|
|
Furniture and fixtures
|
|
|
21,840
|
|
|
|
2,160
|
|
Leasehold improvements
|
|
|
16,206
|
|
|
|
12,222
|
|
Accumulated depreciation
|
|
|
(12,587
|
)
|
|
|
(4,705
|
)
|
Balance
|
|
$
|
81,833
|
|
|
$
|
43,450
|
|
Depreciation expense of $5,032 and $7,882 was
recorded for the three and six months ended June 30, 2019, respectively, and $221 and $442, for the three and six months ended
June 30, 2018, respectively.
Investment
in Undivided Interest in Real Estate
The Company
accounts for its’ investment in undivided interest in real estate using the equity method, as the Company is severally liable
only for the indebtedness incurred with its interest in the property. The Company includes its allocated portion of net income
or loss in Other income (expense) in its Statement of Operations, with the offset to the equity investment account on the balance
sheet. For the six months ended June 30, 2019 and 2018, the Company recognized a gain of $4,816 and $741, respectively. As of June
30, 2019, and December 31, 2018, the carrying value of the Company’s investment in undivided interest in real estate was
$1,231,779 and $1,226,963 respectively (see Note 11).
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 June 30, 2019 and December 31, 2018, for each
fair value hierarchy level:
June
30, 2019
|
|
|
Derivative
Liabilities
|
|
|
|
Total
|
|
Level I
|
|
$
|
—
|
|
|
$
|
—
|
|
Level II
|
|
$
|
—
|
|
|
$
|
—
|
|
Level
III
|
|
$
|
3,082,068
|
|
|
$
|
3,082,068
|
|
|
|
|
|
|
|
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
Level I
|
|
$
|
—
|
|
|
$
|
—
|
|
Level II
|
|
$
|
—
|
|
|
$
|
—
|
|
Level III
|
|
$
|
1,807,404
|
|
|
$
|
1,807,404
|
|
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
Effective
January 1, 2018, the Company adopted ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”)
and all the related amendments. The Company elected to adopt this guidance using the modified retrospective method. The
adoption of this guidance did not have a material effect on the Company’s financial position, results of operations or cash
flows.
The core principle
of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines
a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required
within the revenue recognition process than required under U.S. GAAP including identifying performance obligations in the contract,
estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each
separate performance obligation.
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, generally upon delivery or has services are provided. Accordingly,
revenue for each sale is recognized when the Company has completed its performance obligations. Any costs incurred before this
point in time, are recorded as assets to be expensed during the period the related revenue is recognized. The Company accepts prepayments
on hearing aids and records the amount received as customer deposits on its’ balance sheet. When the Company delivers the
hearing aid to the customer, revenue is recognized as well as the corresponding cost of sales.
As of June 30, 2019,
the Company had received $71,409 of customer deposits, that will be recognized as revenue after June 30, 2019, when the hearing
aids are delivered to the customer.
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.
Advertising and Marketing Expenses
The Company expenses advertising and marketing
costs as incurred. For the three and six months ended June 30, 2019, advertising and marketing expenses were $143,800 and $311,584,
respectively, and for the three and six months ended June 30, 2018, advertising and marketing expenses were $66,007 and $91,328,
respectively.
Leases
Effective January
1, 2019, the Company began accounting for leases under ASU 2016-02 (see Note 14). Operating leases are included in operating lease
right-of-use (“ROU”) assets and operating lease liabilities on the condensed consolidated balance sheets. The
Company leases an office space and several retail locations used to conduct our business. On January 1, 2019, the Company adopted
ASU No. 2016-02, applying the package of practical expedients to leases that commenced before the effective date whereby the Company
elected to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification
for any expired or existing leases; and (iii) initial direct costs for any existing leases. For contracts entered into on or after
the effective date, at the inception of a contract the Company assess whether the contract is, or contains, a lease. Our assessment
is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially
all the economic benefit from the use of the asset throughout the period, and (3) whether we have the right to direct the use of
the asset. We allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine
the lease payments. Leases entered into prior to January 1, 2019, are accounted for under ASC 840 and were not reassessed. We have
elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a term of 12 months or less.
Operating lease ROU
assets represent the right to use the leased asset for the lease term and
operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term
at commencement date. As most leases do not provide an implicit rate, the Company use an incremental borrowing rate based on the
information available at the adoption date in determining the present value of future payments. Operating lease expense is recognized
on a straight-line basis over the lease term and is included in rent in the condensed consolidated statements of operations.
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 June 30, 2019, and 2018, the Company’s outstanding convertible debt is convertible
into approximately 155,394,444 and 90,570,304 shares of common stock, subject to adjustment based on changes in the Company’s
stock price, respectively. This amount is not included in the computation of dilutive loss per share because their impact is antidilutive.
Recent Accounting Pronouncements
In July 2017, the Financial Accounting Standards
Board (“FASB”) issued ASU 2017-11 “Earnings Per Share (Topic 260)”. The amendments in the
update change the classification of certain equity-linked financial instruments (or embedded features) with down round features.
The amendments also clarify existing disclosure requirements for equity-classified instruments. For freestanding equity-classified
financial instruments, the amendments require entities that present earnings per share (“EPS”) in accordance with Topic
260, Earnings Per Share, to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend
and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options
that have down round features would be subject to the specialized guidance for contingent beneficial conversion features (in Subtopic
470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). For public business
entities, the amendments in Part I of this update are effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2018 with early adoption permitted. The Company adopted this pronouncement as of fiscal 2017.
In June
2018, the FASB issued ASU No. 2018-07 “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting.” These amendments expand the scope of Topic 718, Compensation - Stock Compensation (which currently
only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services.
Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes
Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. The guidance is effective for public companies for fiscal years,
and interim fiscal periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, but no earlier
than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company does not anticipate this
ASU having a material impact on the Company’s financial statements.
In August
2018, the FASB issued ASU 2018-13, “Changes to Disclosure Requirements for Fair Value Measurements”, which
will improve the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard
removes, modifies, and adds certain disclosure requirements, and is effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2019. The Company will be evaluating the impact this standard will have on the Company’s
consolidated financial statements.
Other accounting standards that have been issued
or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated
financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact
on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
NOTE 4 –
GOING CONCERN AND MANAGEMENT’S PLANS
The accompanying
unaudited condensed 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 $3,508,499 for the six months ended June 30, 2019. At June 30, 2019, the Company had a working
capital deficit of $5,343,093, and an accumulated deficit of $9,880,578. These factors raise substantial doubt about the
Company’s ability to continue as a going concern and to operate in the normal course of business. These consolidated
financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts
or amounts and classification of liabilities that might result from this uncertainty.
Management’s Plans
The
Company continues to implement an industry encompassing revenue strategy, including the current revenue model to other major sectors
of the global hearing industry. On September 10, 2018, the Company acquired all of the assets and assumed certain liabilities
of Amos Audiology (see Note 2). This transaction is part of management’s plans to expand the Company’s retail clinic
business by opening multiple clinics in the next 12 months. During the six months ended June 30, 2019, the Company opened 5 more
retail clinics, and opened another clinic in July 2019. The Company currently owns and operates 9 clinics.
NOTE 5 – INTANGIBLE ASSETS, NET (OTHER THAN GOODWILL)
The Company’s intangible assets consist
of a customer list and non-compete acquired from Amos Audiology (see Note 2) and a Technology Access Fee required to be paid by
the Company in connection with a manufacturing design and marketing agreement executed with a supplier (see Note 13). The estimated
useful lives of these intangible assets are as follows:
Customer list
|
2 years
|
Non-compete
|
2 years
|
Technology access fee
|
10 years
|
The Company's intangible assets consisted of
the following at June 30, 2019, and December 31, 2018:
|
|
June 30,
2019
|
|
December 31,
2018
|
Customer list
|
|
$
|
300
|
|
|
$
|
300
|
|
Non-compete
|
|
|
12,708
|
|
|
|
12,708
|
|
Technology access fee
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
Amortization
|
|
|
(80,420
|
)
|
|
|
(2,168
|
)
|
Balance
|
|
$
|
932,588
|
|
|
$
|
1,010,840
|
|
The Company recognized $26,626 and $78,252
of amortization expense for the three and six months ended June 30, 2019, respectively.
NOTE 6 – ADVANCES PAYABLE, STOCKHOLDER
Chief Executive Officer
A summary of the activity for the six months
ended June 30, 2019, and the year ended December 31, 2018, representing amounts paid by the Company’s CEO (stockholder) on
behalf of the Company and amounts reimbursed is as follows.
|
|
June 30, 2019
|
|
December 31, 2018
|
Beginning Balance
|
|
$
|
57,526
|
|
|
$
|
138,637
|
|
Amounts paid on Company’s behalf
|
|
|
367,831
|
|
|
|
589,524
|
|
Amount applied to accrued officer salaries
|
|
|
17,228
|
|
|
|
—
|
|
Reimbursements
|
|
|
(378,943
|
)
|
|
|
(625,635
|
)
|
Cancelled in exchange for Series B preferred stock
|
|
|
—
|
|
|
|
(45,000
|
)
|
Ending Balance
|
|
$
|
63,642
|
|
|
$
|
57,526
|
|
The ending balances as of June 30, 2019, and
December 31, 2018, are included in Advances payable, stockholder on the condensed consolidated balance sheets included herein.
NOTE 7 – NOTE PAYABLE, STOCKHOLDER
A summary of the activity for the three months
ended June 30, 2019, and the year ended December 31, 2018, of amounts the Company’s CEO (stockholder) loaned the Company
and amounts repaid is as follows:
|
|
June 30,
2019
|
|
December 31,
2018
|
Beginning Balance
|
|
$
|
95,800
|
|
|
$
|
65,000
|
|
Amounts loaned to the Company
|
|
|
—
|
|
|
|
36,800
|
|
Repaid
|
|
|
—
|
|
|
|
—
|
|
Ending Balance
|
|
$
|
95,800
|
|
|
$
|
95,800
|
|
The ending balance amount is due on demand,
carries interest at 8% per annum and is included Notes payable, stockholder on the consolidated balance sheets included herein.
NOTE 8 – NOTE PAYABLE
On October 8, 2018, the Company entered into
a Business Loan Agreement (the “October BLA”) for $47,215 with a third- party, whereby the Company received $35,500
on October 10, 2018. The October BLA requires the Company to make the first six monthly payments of principal and interest of $4,467
per month, and then $3,402 for months seven through twelve. The note carries a 33% interest rate and matures on October 28, 2019.
As of June 30, 2019, and December 31, 2018, there was a balance of $17,010 and $38,280, respectively, on the October BLA, with
carrying values of $13,641 and $29,270, respectively, net of unamortized discounts of $3,379 and $9,011, respectively.
On February 4, 2019, the Company entered into
a Business Loan Agreement (the “Feb 2019 BLA”) for $8,584 with a third- party, whereby the Company received $7,400
on February 5, 2019. The Feb 2019 BLA requires the Company to make the first two monthly payments of principal and interest of
$1,640 per month, and then $1,326 for months three through six. The note carries a 16% interest rate and matures on August 4, 2019.
As of June 30, 2019, there was a balance of $2,653, with a carrying value of $2,455, net of unamortized discounts of $198.
On May 7, 2019, the Company entered into a
Business Loan Agreement (the “May 2019 BLA”) for $18,088 with a third- party, whereby the Company received $13,600
on May 7, 2019. The May 2019 BLA requires the Company to make the first six monthly payments of principal and interest of $1,711
per month, and then $1,303 for months seven through twelve. The note carries a 33% interest rate and matures on May 7, 2020. As
of June 30, 2019, there was a balance of $16,377, with a carrying value of $12,625, net of unamortized discounts of $3,752.
NOTE 9 – RELATED PARTY TRANSACTIONS
During the six months ended June 30, 2019,
and the year ended December 31, 2018, our CEO (stockholder) paid expenses and accounts payable on behalf of the Company (see Note
6). As of June 30, 2019, and December 31, 2018, the Company owed the CEO $63,642 and $57,526, respectively, which is included in
Advances payable, stockholder on the condensed consolidated balance sheets included herein.
Pursuant to a Marketing Agreement (cancelled
August 5, 2016), the Company provided marketing programs to promote and sell hearing aid instruments and related devices to Moore
Family Hearing Company (“MFHC”). MFHC owned and operated retail hearing aid stores. Based on common control of MFHC
and the Company, all transactions with MFHC are classified as related party transactions. The Company has offset the accounts receivable
owed from MFHC for these services with 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 June 30, 2019, and December 31,
2018, was $22,548, which is included in Accounts payable, related party, on the condensed consolidated balance sheets included
herein.
Effective August 1,
2016, the Company agreed to compensation of $225,000 and $125,000 per year for the Company’s CEO and CFO, respectively. On
November 15, 2016, the Company entered into employment agreements with its CEO and CFO, which includes their annual base salaries
of $225,000 and $125,000, respectively. For the three and six months ended June 30,
2019, and 2018, the Company recorded expenses to its officers in the following amounts:
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
Description
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
CEO
|
|
|
$
|
56,250
|
|
|
$
|
56,250
|
|
|
$
|
112,500
|
|
|
$
|
112,500
|
|
|
CFO
|
|
|
|
31,250
|
|
|
|
31,251
|
|
|
|
62,500
|
|
|
|
61,540
|
|
|
Total
|
|
|
$
|
87,500
|
|
|
$
|
87,501
|
|
|
$
|
175,000
|
|
|
$
|
174,040
|
|
As of June 30, 2019,
and December 31, 2018, the Company in the aggregate owes the CEO and CFO $156,201 and $188,942, 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
related party revenues of $15,000 for the three months ended June 30, 2019, and $15,000 and $30,000 for the three and six months
ended June 30, 2018, respectively. Additionally, for the three and six months ended June 30, 2018, the Company invoiced LLC1 $8,323
and $50,744, respectively, for the Company’s production, printing and mailing services and $1,275 for the six months ended
June 30, 2018, for sale of products. As of June 30, 2019, and December 31, 2018, LLC1 owes the Company $283,064 and $203,325, respectively,
for the consulting fees and mailing services as well as expenses of LLC1 paid by the Company.
On June 14, 2017,
the Company entered into a five-year lease with LLC1 for approximately 6,944 square feet and a monthly rent of $12,000. For the
three and six months ended June 30, 2019, and 2018, the Company expensed $36,000 and $72,000, respectively, related to this lease
and is included in Rent, on the condensed consolidated statement of operations, included herein. As of June 30, 2019, and December
31, 2018, the Company owed LLC1 $50,300 and $30,500, respectively, for unpaid rent.
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 10).
NOTE 10– 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
condensed consolidated statements of operations. For the three and six months ended June 30, 2019, a gain of $5,856 and $4,816,
respectively, and a net gain of $3,046 and $741, for the three and six months ended June 30, 2018, respectively, is included in
“Other income (expense), net”. As of June 30, 2019, and December 31, 2018, the carrying value of the Company’s
investment in undivided interest in real estate was $1,231,779 and $1,226,963, respectively.
The
unaudited condensed balance sheets as of June 30, 2019, and December 31, 2018, and the statement of operations for the six months
ended June 30, 2019, and 2018, for the real property is as follows:
|
|
(Unaudited)
|
|
(Unaudited)
|
Current assets:
|
|
June 30,
2019
|
|
December 31,
2018
|
Cash
|
|
$
|
380
|
|
|
$
|
2,257
|
|
Due from InnerScope
|
|
|
50,300
|
|
|
|
30,500
|
|
Prepaid expenses and other current assets
|
|
|
63,530
|
|
|
|
72,931
|
|
Total current assets
|
|
|
114,210
|
|
|
|
105,958
|
|
Land and Building, net
|
|
|
2,332,502
|
|
|
|
2,354,282
|
|
Other Assets, net
|
|
|
49,634
|
|
|
|
53,323
|
|
Total assets
|
|
$
|
2,496,345
|
|
|
$
|
2,513,563
|
|
|
|
|
|
|
|
|
|
|
Current portion of mortgage payable
|
|
$
|
41,022
|
|
|
$
|
40,122
|
|
Other current liabilities
|
|
|
47,894
|
|
|
|
48,551
|
|
Total current liabilities
|
|
|
88,916
|
|
|
|
88,673
|
|
Mortgage payable, long-term
|
|
|
1,941,786
|
|
|
|
1,969,076
|
|
Security deposits
|
|
|
13,064
|
|
|
|
13,064
|
|
Total liabilities
|
|
|
2,043,766
|
|
|
|
2,070,813
|
|
Total equity
|
|
|
452,579
|
|
|
|
442,750
|
|
Total liabilities and equity
|
|
$
|
2,496,345
|
|
|
$
|
2,513,563
|
|
|
|
2019
|
|
2018
|
Rental income
|
|
$
|
149,029
|
|
|
$
|
63,211
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Property taxes
|
|
|
4,430
|
|
|
|
6,646
|
|
Depreciation and amortization
|
|
|
21,780
|
|
|
|
11,446
|
|
Insurance
|
|
|
14,130
|
|
|
|
2,033
|
|
Repairs and maintenance
|
|
|
13,916
|
|
|
|
3,549
|
|
Utilities and other
|
|
|
20,703
|
|
|
|
10,087
|
|
Interest expense
|
|
|
64,242
|
|
|
|
32,355
|
|
Total expenses
|
|
|
139,201
|
|
|
|
67,916
|
|
Net income (loss)
|
|
$
|
9,828
|
|
|
$
|
(4,705
|
)
|
NOTE 11– 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 June 30, 2019, the current and long-term portion of the SBA Note is $20,096 and $956,542, respectively. Future principal
payments for the Company’s portion are:
|
Twelve months ending June 30,
|
|
Amount
|
|
2020
|
|
|
$
|
20,096
|
|
|
2021
|
|
|
|
21,495
|
|
|
2022
|
|
|
|
22,870
|
|
|
2023
|
|
|
|
24,228
|
|
|
2024
|
|
|
|
25,579
|
|
|
Thereafter
|
|
|
|
862,370
|
|
|
Total
|
|
|
$
|
976,638
|
|
NOTE 12– CONVERTIBLE NOTES PAYABLE
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 was 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 $13,399. For the six months ended June
30, 2019, amortization of the debt discount of $2,233 was charged to interest expense. During the six months ended June 30, 2019,
the investor converted $50,000 of principal and $2,514 of interest into 2,236,291 shares of common stock. As of June 30, 2019,
and December 31, 2018, the note balance was $-0- and $50,000, respectively, with a carrying value of $47,767 at December 31, 2018,
net of unamortized discounts of $2,333.
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 was 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 six months ended June 30, 2019, amortization of the debt discount of $1,628
was charged to interest expense. On April 29, 2019 the Note was sold to a third party investor (see below). As of June 30
2019, and December 31, 2018, the note balance is $-0- and $25,000, respectively, with a carrying value of $23,372, net of
unamortized discount of $1,628 as of December 31, 2018.
On May 11, 2018, the Company issued a convertible
promissory note (the “Note”), with a face value of $100,000, maturing on May 11, 2019, and stated interest of 10% to
a third-party investor. The note is convertible at any time after the funding of the note into a variable number of the Company's
common stock, based on a conversion ratio of 62% of the lowest trading price for the 20 days prior to conversion. The note was
funded on May 16, 2018, when the Company received proceeds of $75,825, after disbursements to vendors and for the lender’s
transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount
of $95,000, an initial derivative expense of $60,635 and an initial derivative liability of $155,635. For the six months ended
June 30, 2019, amortization of the debt discount of $17,020 was charged to interest expense. The Company also recorded a debt issue
discount of $5,000 and amortized $895 to interest expense for the six months ended June 30, 2019. During the six months ended June
30, 2019, the investor converted $50,000 of principal and $3,564 of interest into 5,539,273 shares of common stock. As of June
30, 2019, and December 31, 2018, the note balance is $-0- and $50,000, respectively, with a December 31, 2018, carrying value of
$32,085, net of unamortized discounts of $17,915.
On May 23, 2018, the Company issued a convertible
promissory note (the “Note”), with a face value of $60,000, with a maturity date of February 22, 2019, and stated interest
of 12% to a third-party investor. The note is convertible at any time after the funding of the note into a variable number of the
Company's common stock, based on a conversion ratio of 65% of the lowest trading price for the 20 days prior to conversion. The
note was funded on May 30, 2018, when the Company received proceeds of $57,000, after the lender’s transaction costs, fees
and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $57,000, an initial
derivative expense of $48,033 and an initial derivative liability of $105,033. For the three months ended June 30, 2019, amortization
of the debt discount of $11,292 was charged to interest expense. The Company also recorded a debt issue discount of $3,000 and
amortized $594 to interest expense for the six months ended June 30, 2019. During the six months ended June 30, 2019, the investor
converted $51,275 of principal and $9,838 of interest into 7,909,037 shares of common stock. As of June 30, 2019, and December
31, 2018, the note balance was $-0- and $51,275, respectively, with a carrying value of $39,389, net of unamortized discounts of
$11,886 at December 31, 2018.
On October 23, 2018, an investor funded the
$50,000 remaining of a convertible promissory note (the “Note”) issued on June 26, 2018, with an original face value
of $92,000, maturing on September 26, 2019, and stated interest of 10% to a third-party investor. The note is convertible at any
time after ninety (90) days of the funding of the note into a variable number of the Company's common stock, based on a conversion
ratio of 65% of the lowest trading price for the 20 days prior to conversion. On October 23, 2018, the Company recorded a note
balance of $50,000 when the Company received proceeds of $50,000. The embedded conversion feature included in the funding of October
23, 2018, resulted in an initial debt discount of $50,000, an initial derivative expense of $45,291 and an initial derivative liability
of $95,291. For the six months ended June 30, 2019, amortization of the debt discount of $25,230 was charged to interest expense.
During the six months ended June 30, 2019, the investor converted $50,000 of principal and $2,397 of interest into 2,495,107 shares
of common stock. As of June 30, 2019, and December 31, 2018, the note balance is $-0- and $50,000, respectively, with a carrying
value of $12,014, net of unamortized discounts of $37,986, at December 31, 2018.
On November 2, 2018, the Company issued a convertible
redeemable note with a face value of $280,500 and a back-end convertible redeemable note for $280,500 (the “Notes”),
maturing on November 2, 2019, and a stated interest of 8% to a third-party investor. The notes are convertible at any time after
funding of the note into a variable number of the Company's common stock, based on a conversion ratio of 70% of the lowest closing
bid price for the 15 days prior to conversion. The first note was funded on November 2, 2018, when the Company received proceeds
of $255,000, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included
in the first note resulted in an initial debt discount of $250,000, an initial derivative expense of $148,544 and an initial derivative
liability of $398,544. For the six months ended June 30, 2019, amortization of the debt discount of $125,000 was charged to interest
expense. The Company also recorded a debt issue discount of $30,500 and amortized $15,250 to interest expense for the six months
ended June 30, 2019. During the six months ended June 30, 2019, the investor converted $87,400 of principal and $2,822 of interest
into 7,837,442 shares of common stock. As of June 30, 2019, and December 31, 2018, the first note balance is $193,100 and $280,500,
respectively, with a carrying value of $99,600 and $46,750, respectively, net of unamortized discounts of $93,500 and $233,750,
respectively. On December 26, 2018, the investor partially funded $187,000 of the back-end note, when the Company received proceeds
of $166,667, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included
in the partial funding of the back-end note resulted in an initial debt discount of $166,667, an initial derivative expense of
$100,081 and an initial derivative liability of $266,748. For the six months ended June 30, 2019, amortization of the debt discount
of $97,803 was charged to interest expense. The Company also recorded a debt issue discount of $20,333 and amortized $11,932 to
interest expense for the six months ended June 30, 2019. As of June 30, 2019, and December 31, 2018, the partial back-end note
balance is $187,000, with carrying values of $112,661 and $2,926, respectively, net of unamortized discounts of $74,339 and $184,074,
respectively. On January 29, 2019, the investor funded $93,500, of and completing the back-end note, when the Company received
proceeds of $75,000, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature
included in the partial funding of the back-end note resulted in an initial debt discount of $75,000, an initial derivative expense
of $63,924 and an initial derivative liability of $138,924. For the six months ended June 30, 2019, amortization of the debt discount
of $41,178 was charged to interest expense. The Company also recorded a debt issue discount of $10,167 and amortized $5,582 to
interest expense for the six months ended June 30, 2019. As of June 30, 2019, the second partial back-end note balance is $93,500,
with carrying values of $55,093, net of unamortized discounts of $38,407.
On December 4, 2018, the Company issued a convertible
redeemable note (the “Note”) with a face value of $158,333 maturing on December 4, 2019, and a stated interest of 8%
to a third-party investor. The note is convertible at any time after funding of the note into a variable number of the Company's
common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The note
was funded on December 4, 2018, when the Company received proceeds of $137,250, after disbursements for the lender’s transaction
costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $137,500,
an initial derivative expense of $87,293 and an initial derivative liability of $224,793. For the six months ended June 30, 2019,
amortization of the debt discount of $68,750 was charged to interest expense. The Company also recorded a debt issue discount of
$20,833 and amortized $10,417 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, and December 31,
2018, the note balance is $158,333, with carrying values of $92,361 and $13,194, respectively, net of unamortized discounts of
$65,972 and $145,139, respectively.
On December 4, 2018, the Company issued to
a third-party investor a convertible redeemable note (the “Note”) with a face value of $230,000 and two back-end convertible
redeemable notes for $115,000 each. The notes mature on December 4, 2019, have a stated interest of 8% and each note is convertible
at any time following the funding of such note into a variable number of the Company's common stock, based on a conversion ratio
of 70% of the lowest closing bid price for the 15 days prior to conversion. The initial note was funded on December 4, 2018, when
the Company received proceeds of $210,000, after disbursements for the lender’s transaction costs, fees and expenses. The
embedded conversion feature included in the note resulted in an initial debt discount of $210,000, an initial derivative expense
of $108,922 and an initial derivative liability of $318,292. For the six months ended June 30, 2019, amortization of the debt discount
of $105,000 was charged to interest expense. The Company also recorded a debt issue discount of $20,000 and amortized $10,000 to
interest expense for the six months ended June 30, 2019. During the six months ended JUne 30, 2019, the investor converted $52,500
of principal and $1,167 of interest into 3,699,862 shares of common stock. As of June 30, 2019, and December 31, 2018, the initial
note balance is $177,500 and $230,000, respectively, with carrying values of $81,667 and $19,167, respectively, net of unamortized
discounts of $95,833 and $210,833, respectively. On February 12, 2019, the investor funded the first back-end note, when the Company
received proceeds of $94,100, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion
feature included in the first back-end note resulted in an initial debt discount of $94,100, an initial derivative expense of $64,364
and an initial derivative liability of $158,464. For the six months ended June 30, 2019, amortization of the debt discount of $35,288
was charged to interest expense. The Company also recorded a debt issue discount of $10,000 and amortized $3,750 to interest expense
for the six months ended June 30, 2019. As of June 30, 2019, the first back-end note balance is $115,000, with a carrying value
of $49,937 net of unamortized discounts of $65,063. On March 1, 2019, the investor funded the second back-end note, when the Company
received proceeds of $98,175, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion
feature included in the funding of the second back-end note resulted in an initial debt discount of $98,175, an initial derivative
expense of $62,254 and an initial derivative liability of $160,429. For the six months ended June 30, 2019, amortization of the
debt discount of $31,013 was charged to interest expense. The Company also recorded a debt issue discount of $10,000 and amortized
$3,159 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the second back-end note balance is $15,000,
with carrying values of $40,997, net of unamortized discounts of $74,003.
On December 24, 2018, the Company issued to
a third-party investor a convertible redeemable note (the “Note”) with a face value of $195,000 and two back-end convertible
redeemable notes for $97,500 each. The notes mature on December 24, 2019, have a stated interest of 8% and each note is convertible
at any time following the funding of such note into a variable number of the Company's common stock, based on a conversion ratio
of 70% of the lowest closing bid price for the 15 days prior to conversion. The initial note was funded on December 26, 2018, when
the Company received proceeds of $177,000, after disbursements for the lender’s transaction costs, fees and expenses. The
embedded conversion feature included in the note resulted in an initial debt discount of $177,000, an initial derivative expense
of $92,464 and an initial derivative liability of $269,464. For the six months ended June 30, 2019, amortization of the debt discount
of $88,500 was charged to interest expense. The Company also recorded a debt issue discount of $18,000 and amortized $9,000 to
interest expense for the six months ended June 30, 2019. As of June 30, 2019, and December 31, 2018, the initial note balance is
$195,000, with carrying values of $100,100 and $2,600, respectively, net of unamortized discounts of $94,900 and $192,400, respectively.
On January 22, 2019, the Company issued to
a third-party investor a convertible redeemable note (the “Note”) with a face value of $245,000 and two back-end convertible
redeemable notes for $122,500 each. The notes mature on January 22, 2020, have a stated interest of 8% and each note is convertible
at any time following the funding of such note into a variable number of the Company's common stock, based on a conversion ratio
of 70% of the lowest closing bid price for the 15 days prior to conversion. The initial note was funded on January 22, 2019, when
the Company received proceeds of $200,000, after disbursements for the lender’s transaction costs, fees and expenses. The
embedded conversion feature included in the note resulted in an initial debt discount of $200,000, an initial derivative expense
of $134,208 and an initial derivative liability of $334,208. For the six months ended June 30, 2019, amortization of the debt discount
of $87,500 was charged to interest expense. The Company also recorded a debt issue discount of $25,000 and amortized $10,938 to
interest expense for the six months ended June 30, 2019. As of June 30, 2019, the initial note balance is $245,000, with a carrying
value of $118,437, net of unamortized discounts of $126,563.
On February 22, 2019, the Company issued to
a third-party investor a convertible redeemable note (the “Note”) with a face value of $116,667. The note matures on
February 22, 2020, has a stated interest of 8% and is convertible at any time following the funding of such note into a variable
number of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior
to conversion. The note was funded on February 22, 2019, when the Company received proceeds of $90,000, after disbursements for
the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial
debt discount of $90,000, an initial derivative expense of $36,138 and an initial derivative liability of $126,138. For the six
months ended June 30, 2019, amortization of the debt discount of $31,875 was charged to interest expense. The Company also recorded
a debt issue discount of $16,667, and amortized $5,903 to interest expense for the six months ended June 30, 2019. As of June 30,
2019, the note balance is $116,667, with a carrying value of $47,778, net of unamortized discounts of 68,889.
On March 8, 2019, the Company issued to a third-party
investor a convertible redeemable note (the “Note”) with a face value of $133,333. The note matures on February 22,
2020, has a stated interest of 8% and is convertible at any time following the funding of such note into a variable number of the
Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion.
The note was funded on March 8, 2019, when the Company received proceeds of $106,200, after disbursements for the lender’s
transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount
of $106,200, an initial derivative expense of $82,538 and an initial derivative liability of $188,738. For the six months ended
June 30, 2019, amortization of the debt discount of $33,097 was charged to interest expense. The Company also recorded a debt issue
discount of $19,333, and amortized $6,025 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the
note balance is $133,333, with carrying values of $46,922, net of unamortized discounts of $86,411.
On March 20, 2019, the Company issued to a
third-party investor a convertible redeemable note (the “Note”) with a face value of $89,075 and a back-end convertible
redeemable note for $89,075. The notes mature on March 20, 2020, hasa stated interest of 8% and is convertible at any time following
the funding of such note into a variable number of the Company's common stock, based on a conversion ratio of 70% of the lowest
closing bid price for the 15 days prior to conversion. The initial note was funded on March 20, 2019, when the Company received
proceeds of $75,000, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature
included in the note resulted in an initial debt discount of $75,000, an initial derivative expense of $48,913 and an initial derivative
liability of $123,913. For the six months ended June 30, 2019, amortization of the debt discount of $20,756 was charged to interest
expense. The Company also recorded a debt issue discount of $9,210, and amortized $2,549 to interest expense for the six months
ended June 30, 2019. As of June 30, 2019, the initial note balance is $89,075, with carrying values of $28,170, net of unamortized
discounts of $60,905.
Also, on March 20, 2019, the Company issued
to a third-party investor a convertible redeemable note (the “Note”) with a face value of $89,075 and a back-end convertible
redeemable note for $89,075. The notes mature on March 20, 2020, has a stated interest of 8% and is convertible at any time following
the funding of such note into a variable number of the Company's common stock, based on a conversion ratio of 70% of the lowest
closing bid price for the 15 days prior to conversion. The initial note was funded on March 20, 2019, when the Company received
proceeds of $75,000, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature
included in the note resulted in an initial debt discount of $75,000, an initial derivative expense of $48,913 and an initial derivative
liability of $123,913.. For the six months ended June 30, 2019, amortization of the debt discount of $20,756 was charged to interest
expense. The Company also recorded a debt issue discount of $9,210, and amortized $2,549 to interest expense for the six months
ended June 30, 2019. As of June 30, 2019, the initial note balance is $89,075, with carrying values of $28,170, net of unamortized
discounts of $60,905.
On April 12, 2019, the Company issued to a
third-party investor a convertible redeemable note (the “Note”) with a face value of $208,000. The note matures on
April 12, 2020, has a stated interest of 8% and is convertible at any time following the funding of such note into a variable number
of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion.
The note was funded on April 12, 2019, when the Company received proceeds of $175,000, after disbursements for the lender’s
transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount
of $175,000, an initial derivative expense of $104,450 and an initial derivative liability of $279,450. For the six months ended
June 30, 2019, amortization of the debt discount of $36,359 was charged to interest expense. The Company also recorded a debt issue
discount of $21,550, and amortized $4,477 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the
note balance is $208,000, with a carrying value of $52,286, net of unamortized discounts of $155,714.
Also, on April 12, 2019, the Company issued
to a third-party investor a convertible redeemable note (the “Note”) with a face value of $208,000. The note matures
on April 12, 2020, has a stated interest of 8% and is convertible at any time following the funding of such note into a variable
number of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior
to conversion. The note was funded on April 12, 2019, when the Company received proceeds of $175,000, after disbursements for the
lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial
debt discount of $175,000, an initial derivative expense of $104,450 and an initial derivative liability of $279,450. For the six
months ended June 30, 2019, amortization of the debt discount of $36,359 was charged to interest expense. The Company also recorded
a debt issue discount of $21,550, and amortized $4,477 to interest expense for the six months ended June 30, 2019. As of June 30,
2019, the note balance is $208,000, with a carrying value of $52,286, net of unamortized discounts of $155,714.
On May 15, 2019, the Company issued to a third-party
investor a convertible redeemable note (the “Note”) with a face value of $208,000. The note matures on May 15, 2020,
has a stated interest of 8% and is convertible at any time following the funding of such note into a variable number of the Company's
common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The note
was funded on May 15, 2019, when the Company received proceeds of $175,000, after disbursements for the lender’s transaction
costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $175,000,
an initial derivative expense of $104,082 and an initial derivative liability of $279,082. For the six months ended June 30, 2019,
amortization of the debt discount of $21,815 was charged to interest expense. The Company also recorded a debt issue discount of
$21,550, and amortized $2,686 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the note balance
is $208,000, with a carrying value of $35,951, net of unamortized discounts of $172,049.
Also, on May 15, 2019, the Company issued to
a third-party investor a convertible redeemable note (the “Note”) with a face value of $167,352. The note matures on
May 15, 2020, has a stated interest of 8% and is convertible at any time following the funding of such note into a variable number
of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion.
The note was funded on May 15, 2019, when the Company received proceeds of $140,250, after disbursements for the lender’s
transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount
of $140,250, an initial derivative expense of $85,329 and an initial derivative liability of $225,579. For the six months ended
June 30, 2019, amortization of the debt discount of $17,483 was charged to interest expense. The Company also recorded a debt issue
discount of $17,352, and amortized $2,686 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the
note balance is $167,352, with a carrying value of $29,455, net of unamortized discounts of $137,897.
On June 13, 2019, the Company issued to a third-party
investor a convertible redeemable note (the “Note”) with a face value of $119,000. The note matures on June 13, 2020,
has a stated interest of 8% and is convertible at any time following the funding of such note into a variable number of the Company's
common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The note
was funded on June 13, 2019, when the Company received proceeds of $100,000, after disbursements for the lender’s transaction
costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $100,000,
an initial derivative expense of $49,779 and an initial derivative liability of $149,779. For the six months ended June 30, 2019,
amortization of the debt discount of $4,155 was charged to interest expense. The Company also recorded a debt issue discount of
$12,500, and amortized $520 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the note balance is
$119,000, with a carrying value of $11,175, net of unamortized discounts of $107,825.
Also, on June 13, 2019, the Company issued
to a third-party investor a convertible redeemable note (the “Note”) with a face value of $119,000. The note matures
on June 13, 2020, has a stated interest of 8% and convertible at any time following the funding of such note into a variable number
of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion.
The note was funded on June 13, 2019, when the Company received proceeds of $100,000, after disbursements for the lender’s
transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount
of $100,000, an initial derivative expense of $49,779 and an initial derivative liability of $149,779. For the six months ended
June 30, 2019, amortization of the debt discount of $4,155 was charged to interest expense. The Company also recorded a debt issue
discount of $12,500, and amortized $520 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the note
balance is $119,000, with a carrying value of $11,175, net of unamortized discounts of $107,825.
A summary of the convertible note balances
as of June 30, 2019, and December 31, 2018, is as follows:
|
|
June 30,
2019
|
|
December 31,
2018
|
Principal balance
|
|
$
|
2,936,955
|
|
|
$
|
1,277,108
|
|
Unamortized discounts
|
|
|
(1,978,128
|
)
|
|
|
(1,125,942
|
)
|
Ending balance, net
|
|
$
|
958,827
|
|
|
$
|
151,166
|
|
The following is a summary of the Company’s
convertible notes and related discounts as of June 30, 2019:
|
|
Principal Balance
|
|
Debt Discounts
|
|
Total
|
Balance at January 1, 2019
|
|
$
|
1,277,108
|
|
|
$
|
(1,125,942
|
)
|
|
$
|
151,166
|
|
New issuances
|
|
|
2,026,022
|
|
|
|
(2,026,022
|
)
|
|
|
—
|
|
Conversions
|
|
|
(366,175
|
)
|
|
|
—
|
|
|
|
(366,175
|
)
|
Amortization
|
|
|
—
|
|
|
|
1,173,836
|
|
|
|
1,173,836
|
|
Balance at June 30, 2019
|
|
$
|
2,936,955
|
|
|
$
|
(1,978,128
|
)
|
|
$
|
958,827
|
|
NOTE 13 – 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 12.
The Company used the Monte Carlo simulation
valuation model with the following assumptions for new notes issued during the six months ended June 30, 2019, risk-free interest
rates from 2.00% to 2.59% and volatility of 319% to 387%, and as of December 31, 2018, risk-free interest rates from 2.56% to
2.62% and volatility of 355% to 391%.
A summary of the activity related to derivative liabilities for
the six months ended June 30, 2019, is as follows:
|
|
June 30, 2019
|
Beginning Balance
|
|
$
|
1,807,404
|
|
Initial Derivative Liability
|
|
|
2,717,846
|
|
Fair Value Change
|
|
|
(696,761
|
)
|
Reclassification for conversions
|
|
|
(746,421
|
)
|
Ending Balance
|
|
$
|
3,082,068
|
|
Derivative liability expense of $342,360 for
the six months ended June 30, 2019, consisted of the initial derivative expense of $1,039,121 and the above decrease in the fair
value of $696,761.
NOTE 14- OPERATING LEASE RIGHT-OF-USE
ASSETS AND OPERATING LEASE LIABILITIES
Operating lease right-of-use
assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest
rate used to determine the present value is our incremental borrowing rate, estimated to be 7.5%, as the interest rate implicit
in most of our leases is not readily determinable. Operating lease expense is recognized on a straight-line basis over the lease
term. During the three and six months ended June 30, 2019, the Company recorded $98,133 and $194,062, respectively, and $36,000
and $72,000 for the three and six months ended June 30, 2018, respectively, as operating lease expense which is included in rent
expense on the statements of operations and includes $36,000 and $72,000 of rent to a related party during the three and six months
ended June 30, 2019, and 2018, respectively.
On June 14, 2017, the company entered into
a five-year lease with LLC1 (see Note 10) for approximately 6,944 square feet and a monthly rent of $12,000.
On September 10, 2018,
pursuant to the Amos Audiology acquisition, the Company assumed a lease dated December 1, 2017 and expiring April 30, 2023, in
Walnut Creek, California. Lease payments in the first year of the lease are $3, 988 per month and increase by 3% on December 1
each new lease year. As of December 31, 2018, the Company was in arrears of $25,182 (including late fees) in lease payments and
has agreed with the landlord to pay the arrears in seven monthly payments of $3,597 in addition to the monthly lease payments for
January 2019 through July 2019.
On October 15, 2018,
the Company entered into lease to operate a retail hearing aid clinic in Roseville, California expiring December 31, 2023. Initial
lease payments of $3,102 begin on January 1, 2019, and increase by 3% on January 1 each new lease year.
On December 1, 2018,
the Company entered into lease to operate a retail hearing aid clinic in Sacramento, California expiring March 31, 2024. Initial
lease payments of $3,002 begin on April 1, 2019, and increase by 3.33% on April 1, 2020 and 2021, and by 3% on April 1, 2022.
On February 1, 2019,
the Company entered into a lease to operate a retail hearing aid clinic in Elk Grove, California expiring January 31, 2024. Initial
lease payments of $2,307 begin on February 1, 2019, and increase by an average of 2.6% on February 1, each new lease year.
On February 1, 2019,
the Company entered into a lease to operate a retail hearing aid clinic in Fremont, California expiring February 28, 2021. Initial
lease payments of $2,019 begin on March 1, 2019, and increases by 3% on March 1, 2020.
On April 15, 2019,
the Company entered into a lease to operate a retail hearing aid clinic in Pleasanton, California expiring April 30, 2024. Initial
lease payments of $3,550 begin on May 1, 2019, and increases by 3% on each new lease year throughout the term.
On June 1, 2019, the
Company entered into a lease to operate a retail hearing aid clinic in Hayward, California expiring December 31, 2020. Initial
lease payments of $1,816 begin on June 1, 2019, and increases to $1,871 on January 1, 2020.
On June 1, 2019, the
Company entered into a lease to operate a retail hearing aid clinic in Santa Rosa, California expiring June 30, 2023. Initial lease
payments of $2,327 begin on June 1, 2019, and increases by approximately 2.5% annually beginning on July 1, 2020.
In adopting ASC Topic
842, Leases (Topic 842), the Company has elected the ‘package of practical expedients’, which permit it not to reassess
under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company
did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter is not applicable to the
Company. In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 month or less. During
the six months ended June 30, 2019, upon adoption of ASC Topic 842, the Company recorded right-of-use assets and lease liabilities
of $1,428,534.
Right-of- use assets
are summarized below:
|
|
June 30, 2019
|
Office and retail leases
|
|
$
|
1,428,534
|
|
Less accumulated amortization
|
|
|
(126,350
|
)
|
Right-of-us assets, net
|
|
$
|
1,302,184
|
|
Operating lease liabilities are summarized as follows:
|
|
June 30, 2019
|
Lease liability
|
|
$
|
1,317,947
|
|
Less current portion
|
|
|
(323,309
|
)
|
Long term portion
|
|
$
|
994,739
|
|
Maturity of lease liabilities are as follows:
|
|
Amount
|
For the six months ending December 31, 2019
|
|
$
|
205,506
|
|
For the year ending December 31, 2020
|
|
|
415,006
|
|
For the year ending December 31, 2021
|
|
|
378,257
|
|
For the year ending December 31, 2022
|
|
|
308,645
|
|
For the year ending December 31, 2023
|
|
|
192,785
|
|
Thereafter
|
|
|
28,407
|
|
Total
|
|
$
|
1,528,606
|
|
Less: present value discount
|
|
|
(210,659
|
)
|
Lease liability
|
|
$
|
1,317,947
|
|
NOTE 15– COMMITMENTS AND CONTINGENCIES
Consulting Agreements
On August 9, 2018, the Company entered into
a monthly Consulting Services Master Agreement (the “CSMA”). The CSMA requires a two- month minimum and a 30- day termination
notice. Pursuant to the CSMA, the Company is to compensate the consultant $12,500 per month by the issuance of restricted shares
of common stock, based on the average closing trading prices for the three days prior to each monthly payment. For the six months
ended June 30, 2019, the Company issued 515,818 shares of common stock under the CSMA and the parties agreed to terminate the CSMA.
On August 15, 2018, the Company entered into
a six-month Consulting Agreement (the “CA”). Pursuant to the CA, the Company agreed to issue 2,500,000 shares of restricted
common stock to the consultant.
On October 3, 2018, the Company entered
into a Manufacturing Design and Marketing Agreement (the “Agreement”) with Zounds, whereby,
Zounds will provide design, technology, manufacturing and supply chain services to the Company, to enable the Company to manufacture
comparable hearing aids and related components and accessories to be sold under the Company’s exclusive brand names (the
“Manufacturer’s Products”) through the Company’s various marketing and distribution channels. The Company
will pay Zounds One Million ($1,000,000) (the “Technology Access Fee”). The Technology Access Fee, as amended will
be paid in eight (8) installments of $75,000 each, in four- week intervals until $600,000 is paid and $400,000 is to be paid as
Product Surcharges based on $200 per unit manufactured for up to the first 2,000 units. Once $400,000 of Product Surcharges are
paid said per unit surcharge will be discontinued. During the six months ended June 30, 2019, the Company has paid $280,800 towards
the Technology Access Fee and as of June 30, 2019, and December 31, 2018, $536,000 and $816,800 is included in accounts payable
and accrued expenses, respectively.
On October 31, 2018, the Company entered
into a three-year Joint Development Agreement (the “JD Agreement”) and an Exclusive Distribution Agreement (the “ED
Agreement”) with Erchonia Corporation (“Erchonia”). As part of the JD Agreement, the Company and Erchonia will
conduct FDA clinical research and trials for the purposes of obtaining 510k FDA Clearances for devices, technologies, methods and
techniques used in the treatment of hearing relating conditions and disorders such as Tinnitus, Sensorineural hearing Loss, dizziness
and other disorders. The agreements give the Company the exclusive worldwide rights for all designs and any newly developed Erchonia
3LT lasers and related technologies and gives the Company the rights to license and distribute such products worldwide. Pursuant
to the JD Agreement, the Company has agreed to issue 1,000,000 shares of common stock. The Company valued the common stock to be
issued at $60,000, based on the market price of the common stock on the date of the JD Agreement, to be amortized over the three-year
term. For the three and six months ended June 30, 2019, the Company amortized $5,000 and $13,333, respectively, as stock-based
compensation. As of June 30, 2019, there remains $46,667, of deferred stock compensation on the condensed consolidated balance
sheet, to be amortized over the three-year contract term.
On December 7, 2018, the Company entered
into a one- year consulting agreement (the “Media Consulting Agreement”) with a third- party consultant (the “Consultant”).
The Consultant will provide communication and broadcast services, as well as strategic planning services. Pursuant to the Media
Consulting Agreement, the Company has agreed to issue the Consultant 3,125,000 shares of restricted common stock. On December 7,
2018, the Company recorded 3,125,000 shares of common stock to be issued. The Company valued the common stock to be issued at $125,000
based on the market price of the common stock on the date of the Media Consulting Agreement, to be amortized over the term of the
agreement. The Company issued 1,712,329 of the shares and there remain 1,412,671 shares to be issued. The Company amortized $31,250
and $62,500 for the three and six months ended June 30, 2019, respectively, and is included in Professional fees on the condensed
consolidated Statement of operations. As of June 30, 2019, there remains $54,861 of deferred stock compensation on the consolidated
balance sheet, to be amortized in 2019.
On April 1, 2019, the Company entered
into a six- month consulting agreement with a third- party consultant (the “Consultant”). The Consultant will provide
consulting services related to the conception and implementation of the Company’s business development plan, as well as other
strategic planning services. Pursuant to the agreement, the Company issued the Consultant 2,000,000 shares of restricted common
stock. The Company valued the common stock at $128,000 based on the market price of the common stock on the date of the agreement,
to be amortized over the term of the agreement. The Company amortized $64,000 for the three and six months ended June 30, 2019,
and is included in Professional fees on the condensed consolidated Statement of operations. As of June 30, 2019, there remains
$64,000 of deferred stock compensation on the consolidated balance sheet, to be amortized in 2019.
On April 3, 2019, the Company entered
into a six- month consulting agreement with a third- party consultant (the “Consultant”). The Consultant will provide
consulting services related to the conception and implementation of the Company’s marketing plans, promoting the goals and
objectives of the Company. Pursuant to the agreement, the Company paid $20,000 and issued 1,000,000 shares of restricted common
stock to the Consultant. The Company valued the common stock at $75,000 based on the market price of the common stock on the date
of the agreement, to be amortized over the term of the agreement. The Company amortized $37,500 for the three and six months ended
June 30, 2019, and is included in Professional fees on the condensed consolidated Statement of operations. As of June 30, 2019,
there remains $37,500 of deferred stock compensation on the consolidated balance sheet, to be amortized in 2019.
On April 17, 2019, the Company entered
into a six- month consulting agreement with a third- party consultant (the “Consultant”). The Consultant will provide
consulting services related to the corporate communications. Pursuant to the agreement, the Company issued 1,000,000 shares of
restricted common stock to the Consultant. The Company valued the common stock at $67,500 based on the market price of the common
stock on the date of the agreement, to be amortized over the term of the agreement. The Company amortized $28,125 for the three
and six months ended June 30, 2019, and is included in Professional fees on the condensed consolidated Statement of operations.
As of June 30, 2019, there remains $39,375 of deferred stock compensation on the consolidated balance sheet, to be amortized in
2019.
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 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 InnerScope believes the accusation by the third party is frivolous and without merit, as well
as not providing sufficient cause for the Agreement to be terminated. InnerScope and the Moores filed their Answer and Affirmative
Defenses to the Complaint on June 27, 2017. On the same date, InnerScope, the Moores, and MFHC filed a counterclaim. On
February 27, 2018, the Counterclaim was amended to include four claims for breach of contract, one claim for anticipatory breach
of contract, one claim for negligent misrepresentation, and one claim for account stated. On August 13, 2018, Helix, the Company
and the Moores signed a Settlement Agreement, whereby, the Company received $450,000, both
parties dismissing all claims against the other party with prejudice and Matthew, Mark and Kimberly have been released from their
covenant not to compete agreement signed in August 2016 with Helix.
NOTE
16 – STOCKHOLDERS’ EQUITY
Preferred
Stock
The Company has
25,000,000 authorized shares of $0.0001 preferred stock.
Series A Preferred
Stock
On June 4, 2018, the Company filed in the State of Nevada a Certificate of Designation of a series of preferred
stock, the Series A Preferred Stock. 9,510,000 shares were designated as Series A Preferred Stock. The Series A Preferred Stock
has mandatory conversion rights, whereby each share of Series A Preferred Stock will convert two (2) shares of common stock upon
the Company filing Amended and Restated Articles of Incorporation with the Secretary of State of Nevada, increasing the authorized
shares of common stock. The Series A Preferred Stock has voting rights on an is if converted basis. The Series A Preferred Stock
does not have any right to dividends. On June 4, 2018 the Company issued 3,170,000 shares of Series A Preferred Stock each to
Matthew, Mark and Kimberly, in exchange for each of them cancelling and returning to treasury 6,340,000 shares of common stock.
The issuances were made in reliance on the exemption from registration provided by Section
4(a)(2) of the Securities Act, and Rule 506(b) promulgated thereunder, as the shareholders are accredited investors, there was
no general solicitation, and the transaction did not involve a public offering. On August 8, 2018, Matthew, Mark and Kim
each converted 3,170,000 shares of Series A Preferred Stock for 6,340,000 shares of common stock. The common stock issued replaced
the 19,010,000 shares in the aggregate that the Moore’s cancelled in June 2018. As
of June 30, 2019, and December 31, 2018, there were no shares of Series A Preferred Stock issued and outstanding.
Series B Preferred Stock
On June 4, 2018, the Company also filed in
the State of Nevada a Certificate of Designation of a series of preferred stock, the Series B Preferred Stock. 900,000 shares were
designated as Series B Preferred Stock. The Series B Preferred Stock is not convertible into common stock, nor does the Series
B Preferred Stock have any right to dividends and any liquidation preference. The Series B Preferred Stock entitles its holder
to a number of votes per share equal to 1,000 votes. On June 4, 2018, the Company issued 300,000 shares of its Series B Preferred
Stock each to Matthew, Mark and Kimberly, in consideration of $45,000 of accrued expenses, the Company’s failure to timely
pay current and past salaries, and the willingness to accrue unpaid payroll and non-reimbursement of business expenses without
penalty or action for all amounts. The issuances were made in reliance on the exemption from
registration provided by Section 4(a)(2) of the Securities Act, and Rule 506(b) promulgated thereunder, as the shareholders are
accredited investors, there was no general solicitation, and the transaction did not involve a public offering. The Company
determined that fair value of the Series B Preferred Stock issued to the Company’s CEO was $817,600. The fair value was determined
as set forth in the Statement of Financial Accounting Standard ASC 820-10-35-37, Fair Value in Financial Instruments. As
of June 30, 2019, and December 31, 2018, there were 900,000 shares of Series B Preferred Stock issued and outstanding.
Common Stock
The Company has 490,000,000 authorized shares
of $0.0001 common stock. As of June 30, 2019, and December 31, 2018, there are 161,826,468 and 120,425,344, respectively, shares
of common stock outstanding.
On January 24, 2019, the Company issued 515,818
shares of restricted common stock pursuant to the CSMA (See Note 15). The shares were valued at $12,500 based on the average closing
price for the three days prior to the effective date of the CSMA.
During the six months ended June 30, 2019,
the Company issued 3,961,177 shares of common stock that were classified as common stock to be issued as of December 31, 2018.
During the six months ended June 30, 2019,
the Company issued 37,764 shares of common stock to an employee as part of their compensation. The Company agreed to issue $10,000
of stock, over a twelve- month period starting November 2018 based on continual employment, based on the average closing price
of the Company’s common stock for the 3 days prior to employment, and accordingly recorded stock-based compensation of $1,392
and $2,500 for the three and six months ended June 30, 2019, included in Compensation and benefits in the condensed consolidated
statement of operations, included herein.
.
During the six months ended June 30, 2019,
the Company issued 104,166 shares of common stock to an employee as part of their compensation. The Company agreed to issue $20,000
of stock, over a twelvemonth period based on continual employment, based on the highest closing price of the Company’s common
stock for the 5 days prior to employment, and accordingly recorded stock-based compensation of $1,146 and $5,000 for the three
and six months ended June 30, 2019, included in Compensation and benefits in the condensed consolidated statement of operations,
included herein.
During the six months ended June 30, 2019,
the Company issued 84,270 shares of common stock to an employee as part of their compensation. The Company agreed to issue $10,000
of stock, over a twelve- month period based on continual employment, based on the average closing price of the Company’s
common stock for the 3 days prior to employment, and accordingly recorded stock-based compensation of $2,500 for the six months
ended June 30, 2019, included in Compensation and benefits in the condensed consolidated statement of operations, included herein.
During the six months ended June 30, 2019,
the Company issued 64,404 shares of common stock each to two employees as part of their compensation. The Company agreed to issue
$20,000 of stock to each employee over a six- month period starting November 2018 based on continual employment, to each, based
on the average closing price of the Company’s common stock for the 3 days prior to employment, and accordingly recorded stock-based
compensation of $6,750 and $10,000 for the three and six months ended June 30, 2019, included in Compensation and benefits in the
condensed consolidated statement of operations, included herein.
During the six months ended June 30, 2019,
the Company issued 113,637 shares of common stock to an employee as part of their compensation. The Company agreed to issue $20,000
of stock, over a twelve- month period based on continual employment, based on the highest closing price of the Company’s
common stock for the 5 days prior to employment, and accordingly recorded stock-based compensation of $1,629 and $5,000 for the
three and six months ended June 30, 2019, included in Compensation and benefits in the consolidated statement of operations, included
herein.
On April 1, 2019, the Company issued
the to a consultant 2,000,000 shares of restricted common stock. The Company valued the common stock at $128,000 based on the market
price of the common stock on the date of the agreement, to be amortized over the term of the agreement.
On April 2, 2019, the Company issued
625,000 shares of restricted common stock in settlement of $25,000 of accounts payable owed. The Company valued the stock at $40,625
based on the market price of the common stock on the date of the agreement. The Company recorded a loss on debt extinguishment
of $15,625 related to the issuance of 625,000 shares.
On April 3, 2019, the Company issued
1,000,000 shares of restricted common stock to a consultant. The Company valued the common stock at $75,000 based on the market
price of the common stock on the date of the agreement, to be amortized over the term of the agreement.
On April 17, 2019, the Company issued
1,000,000 shares of restricted common stock to a consultant. The Company valued the common stock at $67,500 based on the market
price of the common stock on the date of the agreement, to be amortized over the term of the agreement.
On May 22, 2019, the Company issued 666,666
shares of restricted common stock to a consultant for financial services provided. The Company valued the common stock at $32,000
based on the market price of the common stock on the date of the agreement, and is included in stock-based compensation expense
for the three and six months ended June 30, 2019.
During the six months ended June 30, 2019,
the Company issued 31,163,818 shares of common stock for conversion of $366,175 of principal and $52,790 of accrued interest and
fees, for a total of $418,965.
Common Stock to be issued
During the six months ended June 30, 2019,
the Company issued 3,961,177 shares of common stock that were classified as common stock to be issued as of December 31, 2018.
During the six months ended June 30, 2019,
the Company recorded 468,645 shares of common stock to be issued to employees as part of their compensation. The Company agreed
to issue stock, over a twelve- month period based on continual employment, based on their offer of employment, and, accordingly,
recorded $25,000 for the three and six months ended June 30, 2019, for the common stock to be issued (issued on July 5, 2019).
As of June 30, 2019, there were 2,881,316 shares
of common stock to be issued.
NOTE 17 –
SUBSEQUENT EVENTS
From July 1, 2019, through August
24, 2019, the Company received conversion notices for the issuances of 35,281,904 shares of common stock for conversion of $365,600
of principal and $19,006 of accrued interest on convertible notes.
On May 31, 2019, the
Company entered into a lease beginning July 1, 2019, to operate a retail hearing aid clinic in Greenhaven, California expiring
June 30, 2022. Initial lease payments of $1,450 begin on July 1, 2019, and increase by approximately 5% annually beginning on July
1, 2020.
On July 1, 2019, the Company issued to a third-party
investor a convertible redeemable note (the “Note”) with a face value of $183,975. The note matures on July 1, 2020,
has a stated interest of 8% and is convertible at any time following the funding of such note into a variable number of the Company's
common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The note
was funded on July 1, 2019, when the Company received proceeds of $150,000, after disbursements for the lender’s transaction
costs, fees and expenses.
On July 5, 2019, the Company issued 468,645
shares of restricted common stock to employees (see note 16).
On July 18, 2019, the Company received proceeds
of $100,000, after disbursements for the lender’s transaction costs, fees and expenses of the $122,500 back-end note dated
January 22, 2019.
On August 9, 2019, the Company issued to a
third-party investor a convertible redeemable note (the “Note”) with a face value of $122,650. The note matures on
August 9, 2020, has a stated interest of 8% and is convertible at any time following the funding of such note into a variable number
of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion.
The note was funded on August 9, 2019, when the Company received proceeds of $100,000, after disbursements for the lender’s
transaction costs, fees and expenses.
On August 20, 2019, the Company received proceeds
of $75,000, after disbursements for the lender’s transaction costs, fees and expenses of the $89,085 back-end note dated
March 20, 2019.
On August 26, 2019, the Company filed Amended
and Restated Articles of Incorporation (the “Amendment”) with the Nevada Secretary of State, pursuant to which the
Company increased the authorized shares of capital stock of the Company to 1,000,000,000, consisting of 975,000,000 shares of common
stock, par value $0.0001, and 25,000,000 shares of preferred stock, par value $0.0001 (the “Preferred Stock”), with
the Preferred Stock issuable in such series, and with such designations, rights and preferences, as the Board of Directors may
determine from time to time.
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.