INNERSCOPE HEARING TECHNOLOGIES, INC.
|
CONDENSED CONSOLIDATED BALANCE SHEETS
|
(Unaudited)
|
|
|
|
September
30,
|
|
December
31,
|
|
|
2019
|
|
2018
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
10,477
|
|
|
$
|
87,826
|
|
Accounts receivable, allowance
for doubtful accounts of $29,700 (2019) and $18,383 (2018)
|
|
|
32,272
|
|
|
|
6,112
|
|
Accounts receivable from
related party
|
|
|
345,574
|
|
|
|
203,325
|
|
Employee advances
|
|
|
58,990
|
|
|
|
40,942
|
|
Prepaid expenses
|
|
|
118,825
|
|
|
|
167,992
|
|
Inventory
|
|
|
134,161
|
|
|
|
91,510
|
|
Total
current assets
|
|
|
700,298
|
|
|
|
597,707
|
|
|
|
|
|
|
|
|
|
|
Security deposits
|
|
|
34,537
|
|
|
|
11,056
|
|
Domain name
|
|
|
3,000
|
|
|
|
3,000
|
|
Intangible assets, net of
accumulated amortization of $107,046 (2019) and $2,168 (2018)
|
|
|
905,962
|
|
|
|
1,010,840
|
|
Property and equipment,
net of accumulated depreciation of $17,806 (2019) and $4,705 (2018)
|
|
|
79,963
|
|
|
|
43,450
|
|
Operating leases right-of-use
assets, net
|
|
|
1,273,841
|
|
|
|
—
|
|
Investment
in undivided interest in real estate
|
|
|
1,222,534
|
|
|
|
1,226,963
|
|
Total
assets
|
|
$
|
4,220,134
|
|
|
$
|
2,893,014
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
$
|
1,232,194
|
|
|
$
|
1,233,653
|
|
Accounts payable to related
party
|
|
|
22,548
|
|
|
|
22,548
|
|
Notes payable - stockholder
|
|
|
95,800
|
|
|
|
95,800
|
|
Advances payable, stockholders
|
|
|
39,964
|
|
|
|
57,526
|
|
Convertible notes payable,
net of discounts
|
|
|
1,413,675
|
|
|
|
151,166
|
|
Current portion of notes
payable, net of deferred loan fees
|
|
|
44,987
|
|
|
|
29,270
|
|
Current portion of note
payable-undivided interest in real estate
|
|
|
20,401
|
|
|
|
19,660
|
|
Customer deposits
|
|
|
83,801
|
|
|
|
56,698
|
|
Officer salaries payable
|
|
|
206,985
|
|
|
|
188,942
|
|
Income taxes payable
|
|
|
23,998
|
|
|
|
23,998
|
|
Derivative liabilities
|
|
|
2,775,571
|
|
|
|
1,807,404
|
|
Operating
lease liabilities, current portion
|
|
|
345,106
|
|
|
|
—
|
|
Total
current liabilities
|
|
|
6,305,030
|
|
|
|
3,686,665
|
|
|
|
|
|
|
|
|
|
|
Long term portion of note
payable- undivided interest in real estate
|
|
|
954,407
|
|
|
|
964,847
|
|
Operating
lease liabilities, less current portion
|
|
|
945,242
|
|
|
|
—
|
|
Total
liabilities
|
|
|
8,204,679
|
|
|
|
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; 975,000,000 shares authorized; 220,613,389 (2019) and 120,425,344 (2018) shares issued and outstanding, respectively
|
|
|
22,061
|
|
|
|
12,042
|
|
Common stock to be issued,
$0.0001 par value, 3,066,912 (2019) and 6,373,848 (2018) shares, respectively
|
|
|
306
|
|
|
|
637
|
|
Additional paid-in capital
|
|
|
7,416,528
|
|
|
|
4,836,557
|
|
Deferred stock compensation
|
|
|
(70,903
|
)
|
|
|
(235,694
|
)
|
Accumulated
deficit
|
|
|
(11,352,625
|
)
|
|
|
(6,372,129
|
)
|
|
|
|
|
|
|
|
|
|
Total
stockholders' deficit
|
|
|
(3,984,543
|
)
|
|
|
(1,758,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,220,134
|
|
|
$
|
2,893,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
|
INNERSCOPE HEARING TECHNOLOGIES, INC.
|
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
250,781
|
|
|
$
|
44,724
|
|
|
$
|
641,983
|
|
|
$
|
98,696
|
|
Revenues,
related party
|
|
|
—
|
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
67,019
|
|
Total
revenues
|
|
|
250,781
|
|
|
|
59,724
|
|
|
|
656,983
|
|
|
|
165,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
103,010
|
|
|
|
25,714
|
|
|
|
284,837
|
|
|
|
74,972
|
|
Cost
of sales, related
|
|
|
—
|
|
|
|
3,371
|
|
|
|
—
|
|
|
|
24,779
|
|
Total
cost of sales
|
|
|
103,010
|
|
|
|
29,085
|
|
|
|
284,837
|
|
|
|
99,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
147,771
|
|
|
|
30,639
|
|
|
|
372,146
|
|
|
|
65,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
(including stock- based fees of $25,000 and $75,000 for the three and nine months ended September 30, 2019 and $772,600 for
the nine months ended September 30, 2018)
|
|
|
462,770
|
|
|
|
177,778
|
|
|
|
1,261,594
|
|
|
|
1,263,084
|
|
Professional fees (including
stock- based fees of $171,500 and $479,791 for three and nine months ended September 30, 2019 and $62,597 and $126,837 for
three and nine months ended September 30, 2018)
|
|
|
197,733
|
|
|
|
174,952
|
|
|
|
575,050
|
|
|
|
405,858
|
|
Advertising and promotion
|
|
|
92,966
|
|
|
|
46,408
|
|
|
|
404,550
|
|
|
|
137,736
|
|
Rent (including related
party of $36,000 for three months ended September 30, 2019 and 2018 and $108,000 for nine months ended September 30, 2019
and 2018
|
|
|
100,240
|
|
|
|
47,937
|
|
|
|
294,302
|
|
|
|
119,937
|
|
Investor relations
|
|
|
11,297
|
|
|
|
11,482
|
|
|
|
176,073
|
|
|
|
87,901
|
|
Other
general and administrative
|
|
|
137,979
|
|
|
|
24,148
|
|
|
|
407,105
|
|
|
|
71,464
|
|
Total
operating expenses
|
|
|
1,002,985
|
|
|
|
482,705
|
|
|
|
3,118,674
|
|
|
|
2,085,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(855,214
|
)
|
|
|
(452,066
|
)
|
|
|
(2,746,528
|
)
|
|
|
(2,020,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative income (expense)
|
|
|
501,977
|
|
|
|
(270,849
|
)
|
|
|
159,617
|
|
|
|
(940,819
|
)
|
Loss on investment in undivided
interest in real estate
|
|
|
(9,245
|
)
|
|
|
(2,132
|
)
|
|
|
(4,429
|
)
|
|
|
(1,390
|
)
|
Gain (loss) on debt extinguishment
|
|
|
—
|
|
|
|
33,775
|
|
|
|
(44,393
|
)
|
|
|
33,775
|
|
Gain on contract cancellations
|
|
|
—
|
|
|
|
1,297,223
|
|
|
|
—
|
|
|
|
1,297,223
|
|
Gain on collection of bad
debt
|
|
|
—
|
|
|
|
3,000
|
|
|
|
—
|
|
|
|
3,000
|
|
Interest
expense and finance charges
|
|
|
(1,109,565
|
)
|
|
|
(399,278
|
)
|
|
|
(2,344,763
|
)
|
|
|
(713,070
|
)
|
Total
other expense, net
|
|
|
(616,833
|
)
|
|
|
661,739
|
|
|
|
(2,233,968
|
)
|
|
|
(321,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,472,047
|
)
|
|
$
|
209,673
|
|
|
$
|
(4,980,496
|
)
|
|
$
|
(2,341,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted income (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding Basic and diluted
|
|
|
190,804,118
|
|
|
|
80,652,837
|
|
|
|
160,489,585
|
|
|
|
66,651,688
|
|
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
|
THREE AND NINE MONTHS ENDED SEPTEMBER 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 July 1, 2019
|
|
|
—
|
|
|
$
|
—
|
|
|
|
900,000
|
|
|
$
|
90
|
|
|
|
161,826,468
|
|
|
$
|
16,182
|
|
|
|
2,881,316
|
|
|
$
|
288
|
|
|
$
|
6,397,967
|
|
|
$
|
(242,402
|
)
|
|
$
|
(9,880,578
|
)
|
|
$
|
(3,708,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
654,241
|
|
|
|
65
|
|
|
|
24,935
|
|
|
|
171,499
|
|
|
|
—
|
|
|
|
196,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued from common stock to be issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
468,645
|
|
|
|
47
|
|
|
|
(468,645
|
)
|
|
|
(47
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for convertible notes and accrued interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
58,318,276
|
|
|
|
5,832
|
|
|
|
—
|
|
|
|
—
|
|
|
|
559,391
|
|
|
|
—
|
|
|
|
—
|
|
|
|
565,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of derivative liabilities upon
payment of convertible debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
434,234
|
|
|
|
—
|
|
|
|
—
|
|
|
|
434,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the three months ended September 30, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,472,047
|
)
|
|
|
(1,472,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances September 30, 2019
|
|
|
—
|
|
|
$
|
—
|
|
|
|
900,000
|
|
|
$
|
90
|
|
|
|
220,613,389
|
|
|
$
|
22,061
|
|
|
|
3,066,912
|
|
|
$
|
306
|
|
|
$
|
7,416,528
|
|
|
$
|
(70,903
|
)
|
|
$
|
(11,352,625
|
)
|
|
$
|
(3,984,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,119,774
|
|
|
|
612
|
|
|
|
654,241
|
|
|
|
65
|
|
|
|
389,324
|
|
|
|
(270,500
|
)
|
|
|
—
|
|
|
|
119,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
435,291
|
|
|
|
—
|
|
|
|
435,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued from common stock to be issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,961,177
|
|
|
|
396
|
|
|
|
(3,961,177
|
)
|
|
|
(396
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for settlement of accounts payable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
625,000
|
|
|
|
63
|
|
|
|
—
|
|
|
|
—
|
|
|
|
40,563
|
|
|
|
—
|
|
|
|
|
|
|
|
40,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for convertible notes and accrued interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
89,482,094
|
|
|
|
8,948
|
|
|
|
—
|
|
|
|
—
|
|
|
|
977,739
|
|
|
|
—
|
|
|
|
—
|
|
|
|
986,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of derivative liabilities upon
payment of convertible debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,172,346
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,172,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the nine months ended September 30, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,980,496
|
)
|
|
|
(4,980,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances September 30, 2019
|
|
|
—
|
|
|
$
|
—
|
|
|
|
900,000
|
|
|
$
|
90
|
|
|
|
220,613,389
|
|
|
$
|
22,061
|
|
|
|
3,066,912
|
|
|
$
|
306
|
|
|
$
|
7,416,528
|
|
|
$
|
(70,903
|
)
|
|
$
|
(11,352,625
|
)
|
|
$
|
(3,984,543
|
)
|
|
|
|
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 July 1, 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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,543,553
|
|
|
|
354
|
|
|
|
186,289
|
|
|
|
19
|
|
|
|
195,657
|
|
|
|
(175,000
|
)
|
|
|
—
|
|
|
|
21,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of Series A Preferred Stock
|
|
|
(9,510,000
|
)
|
|
|
(951
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
19,020,000
|
|
|
|
1,902
|
|
|
|
—
|
|
|
|
—
|
|
|
|
-951
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
29,167
|
|
|
|
—
|
|
|
|
29,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued from common stock to be issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(814,020
|
)
|
|
|
(81
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued or to be issued for convertible notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32,431,252
|
|
|
|
3,243
|
|
|
|
844,870
|
|
|
|
84
|
|
|
|
290,214
|
|
|
|
—
|
|
|
|
—
|
|
|
|
293,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for asset purchase
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
340,352
|
|
|
|
34
|
|
|
|
22,940
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of derivative liabilities upon
payment of convertible debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
543,616
|
|
|
|
—
|
|
|
|
—
|
|
|
|
543,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the three months ended September 30, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
209,673
|
|
|
|
209,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances September 30, 2018
|
|
|
—
|
|
|
$
|
—
|
|
|
|
900,000
|
|
|
$
|
90
|
|
|
|
103,951,750
|
|
|
$
|
10,395
|
|
|
|
1,371,511
|
|
|
$
|
137
|
|
|
$
|
2,552,604
|
|
|
$
|
(145,833
|
)
|
|
$
|
(4,128,308
|
)
|
|
$
|
(1,710,915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,767,625
|
|
|
|
377
|
|
|
|
186,289
|
|
|
|
19
|
|
|
|
227,937
|
|
|
|
(175,000
|
)
|
|
|
—
|
|
|
|
53,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
54,167
|
|
|
|
—
|
|
|
|
54,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued from common stock to be issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
102,564
|
|
|
|
10
|
|
|
|
(102,564
|
)
|
|
|
(10
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock to be issued for asset purchase
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
340,352
|
|
|
|
34
|
|
|
|
22,940
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series B preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
900,000
|
|
|
|
90
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
817,510
|
|
|
|
—
|
|
|
|
—
|
|
|
|
817,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued or to be issued for convertible notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
38,542,227
|
|
|
|
3,855
|
|
|
|
844,870
|
|
|
|
84
|
|
|
|
365,829
|
|
|
|
—
|
|
|
|
—
|
|
|
|
369,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of derivative liabilities upon
payment of convertible debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
787,161
|
|
|
|
—
|
|
|
|
—
|
|
|
|
787,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the nine months ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,341,296
|
)
|
|
|
(2,341,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances September 30, 2018
|
|
|
—
|
|
|
$
|
—
|
|
|
|
900,000
|
|
|
$
|
90
|
|
|
|
103,951,750
|
|
|
$
|
10,395
|
|
|
|
1,371,511
|
|
|
$
|
137
|
|
|
$
|
2,552,604
|
|
|
$
|
(145,833
|
)
|
|
$
|
(4,128,308
|
)
|
|
$
|
(1,710,915
|
)
|
INNERSCOPE HEARING TECHNOLOGIES, INC.
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(Unaudited)
|
|
|
|
|
|
|
|
For
the nine months ended
September
30,
|
|
|
2019
|
|
2018
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,980,496
|
)
|
|
$
|
(2,341,296
|
)
|
Adjustments to reconcile
net loss to net cash used in operations:
|
|
|
|
|
|
|
|
|
(Gain) loss on fair value
of derivatives
|
|
|
(159,617
|
)
|
|
|
940,819
|
|
Amortization of debt discounts
|
|
|
2,183,394
|
|
|
|
619,336
|
|
Depreciation and amortization
|
|
|
317,388
|
|
|
|
1,853
|
|
Stock compensation expense
|
|
|
554,791
|
|
|
|
899,437
|
|
Non cash interest expense
|
|
|
2,500
|
|
|
|
—
|
|
Loss on investment in undivided
interest in real estate
|
|
|
4,429
|
|
|
|
1,390
|
|
(Gain) loss on debt extinguishment
|
|
|
44,393
|
|
|
|
(33,775
|
)
|
Gain on collection of bad
debts
|
|
|
—
|
|
|
|
(3,000
|
)
|
Recognition of deferred
revenues per settlement
|
|
|
—
|
|
|
|
(847,223
|
)
|
Changes in operating assets
and liabilities:
|
|
|
|
|
|
|
|
|
Decrease (increase) in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(26,160
|
)
|
|
|
(7,663
|
)
|
Employee advances
|
|
|
(18,047
|
)
|
|
|
—
|
|
Inventory
|
|
|
(42,651
|
)
|
|
|
(29,847
|
)
|
Prepaid assets
|
|
|
49,167
|
|
|
|
12,297
|
|
Other receivables
|
|
|
—
|
|
|
|
(5,725
|
)
|
Accounts receivable, related
party
|
|
|
(142,249
|
)
|
|
|
(35,125
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
|
68,878
|
|
|
|
138,530
|
|
Officer salaries payable
|
|
|
18,044
|
|
|
|
75,510
|
|
Customer deposits
|
|
|
27,103
|
|
|
|
48,914
|
|
Due to related party
|
|
|
—
|
|
|
|
(62,794
|
)
|
Operating
lease liabilities
|
|
|
(182,902
|
)
|
|
|
—
|
|
Net
cash used in operating activities
|
|
|
(2,282,037
|
)
|
|
|
(628,362
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Payment of security deposits
|
|
|
(23,481
|
)
|
|
|
—
|
|
Purchases
of office and computer equipment
|
|
|
(49,614
|
)
|
|
|
—
|
|
Net
cash used in investing activities
|
|
|
(73,095
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of
note payable
|
|
|
89,100
|
|
|
|
32,600
|
|
Advances (payments) to stockholder,
net
|
|
|
(17,562
|
)
|
|
|
14,550
|
|
Proceeds from issuances
of convertible notes payable, net of debt issuance costs
|
|
|
2,308,775
|
|
|
|
772,500
|
|
Repayments of note payable
|
|
|
(102,530
|
)
|
|
|
(55,578
|
)
|
Repayments of advances,
shareholder
|
|
|
—
|
|
|
|
(6,000
|
)
|
Repayments
of principal of convertible note payable
|
|
|
—
|
|
|
|
(149,546
|
)
|
Net
cash provided by financing activities
|
|
|
2,277,783
|
|
|
|
608,526
|
|
|
|
|
|
|
|
|
|
|
Net decrease
in cash
|
|
|
(77,349
|
)
|
|
|
(19,836
|
)
|
|
|
|
|
|
|
|
|
|
Cash,
Beginning of period
|
|
|
87,826
|
|
|
|
84,720
|
|
|
|
|
|
|
|
|
|
|
Cash,
End of period
|
|
$
|
10,477
|
|
|
$
|
64,884
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
14,755
|
|
|
$
|
126,549
|
|
Cash
paid for income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Schedule
of non-cash Investing or Financing Activity:
|
|
|
|
|
|
|
|
|
Reclassification
of derivative liabilities upon principal repayments of convertible notes
|
|
$
|
1,172,346
|
|
|
$
|
787,162
|
|
Conversion
of notes payable and accrued interest in common stock
|
|
$
|
954,960
|
|
|
$
|
—
|
|
Common
stock issued for settlement of accounts payable
|
|
$
|
25,000
|
|
|
$
|
—
|
|
Operating
lease right-of-use assets and liabilities
|
|
$
|
1,473,250
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Assets
|
|
|
|
|
|
|
|
|
Issuance of common stock
as consideration for assets purchased
|
|
$
|
22,974
|
|
|
$
|
—
|
|
Assumed liabilities
|
|
|
33,047
|
|
|
|
—
|
|
Property and equipment
|
|
|
(38,400
|
)
|
|
|
—
|
|
Other Assets
|
|
|
(4,614
|
)
|
|
|
—
|
|
Customer base
|
|
|
(300
|
)
|
|
|
—
|
|
Non-
compete
|
|
|
(12,707
|
)
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
|
NOTE
1 - ORGANIZATION
Business
InnerScope
Hearing Technologies, Inc. (“Company”, “InnerScope”) is a Nevada Corporation incorporated on June 15,
2012, with its principal place of business in Roseville, California. The Company was originally named InnerScope Advertising Agency,
Inc. and was formed to provide advertising and marketing services to retail establishments in the hearing device industry. On
August 25, 2017, the Company changed its name to InnerScope Hearing Technologies, Inc. to better reflect the Company’s current
direction as a technology driven company with a scalable business 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 nine months
ended September 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 September 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 September 30, 2019, and
December 31, 2018, management’s evaluation required the establishment of an allowance for uncollectible receivables of $29,700
and $18,383, respectively.
Sales
Concentration and Credit Risk
Following
is a summary of customers who accounted for more than ten percent (10%) of the Company’s revenues for the three and nine
months ended September 30, 2018. No customer accounted for more than ten percent (10%) of the Company’s revenues for the
three and nine months ended September 30, 2019.
|
|
|
|
|
|
Accounts
|
|
|
September
30, 2018
|
|
Receivable
|
|
|
3
months
|
|
9
months
|
|
as
of
|
|
|
%
|
|
%
|
|
September
30, 2019
|
Customer
A, related
|
|
|
25.1
|
%
|
|
|
40.4
|
%
|
|
$
|
345,574
|
|
Customer
B
|
|
|
—
|
|
|
|
16.3
|
%
|
|
$
|
—
|
|
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 September 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 September 30, 2019, and December 31, 2018:
|
|
September
30,
2019
|
|
December
31,
2018
|
Computer
equipment
|
|
$
|
4,272
|
|
|
$
|
2,651
|
|
Machinery
and equipment
|
|
|
55,451
|
|
|
|
31,122
|
|
Furniture
and fixtures
|
|
|
21,840
|
|
|
|
2,160
|
|
Leasehold
improvements
|
|
|
16,206
|
|
|
|
12,222
|
|
Accumulated
depreciation
|
|
|
(17,806
|
)
|
|
|
(4,705
|
)
|
Balance
|
|
$
|
79,963
|
|
|
$
|
43,450
|
|
Depreciation
expense of $5,211 and $13,101 was recorded for the three and nine months ended September 30, 2019, respectively, and $869 and
$1,311, for the three and nine months ended September 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 nine months ended September 30, 2019 and 2018, the Company recognized a loss of $9,245 and $4,429, respectively.
As of September 30, 2019, and December 31, 2018, the carrying value of the Company’s investment in undivided interest in
real estate was $1,222,534 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
September 30, 2019 and December 31, 2018, for each fair value hierarchy level:
September
30, 2018
|
|
|
Derivative
Liabilities
|
|
|
|
Total
|
|
Level
I
|
|
$
|
—
|
|
|
$
|
—
|
|
Level
II
|
|
$
|
—
|
|
|
$
|
—
|
|
Level
III
|
|
$
|
2,775,571
|
|
|
$
|
2,775,571
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2019, the Company had received $83,801 of customer deposits, that will be recognized as revenue after September
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 nine months ended September 30, 2019, advertising
and marketing expenses were $92,966 and $404,550, respectively, and for the three and nine months ended September 30, 2018, advertising
and marketing expenses were $46,408 and $137,736, 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 September 30, 2019, and
2018, the Company’s outstanding convertible debt is convertible into approximately 393,621,118 and 16,998,883 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 $4,980,496 for the nine months ended September 30, 2019. At September 30, 2019,
the Company had a working capital deficit of $5,604,732, and an accumulated deficit of $11,352,625. 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 nine months ended September 30, 2019, the Company opened
6 more retail clinics. The Company currently owns 9 clinics and manages two additional clinics that are owned by a related party.
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 September 30, 2019, and December 31, 2018:
|
|
September
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
|
|
|
(107,046
|
)
|
|
|
(2,168
|
)
|
Balance
|
|
$
|
905,962
|
|
|
$
|
1,010,840
|
|
The
Company recognized $26,626 and $104,878 of amortization expense for the three and nine months ended September 30, 2019, respectively.
NOTE
6 – ADVANCES PAYABLE, STOCKHOLDER
Chief
Executive Officer
A
summary of the activity for the nine months ended September 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.
|
|
September
30,
2019
|
|
December
31,
2018
|
Beginning
Balance
|
|
$
|
57,526
|
|
|
$
|
138,637
|
|
Amounts
paid on Company’s behalf
|
|
|
517,188
|
|
|
|
589,524
|
|
Amount
applied to accrued officer salaries
|
|
|
53,943
|
|
|
|
—
|
|
Reimbursements
|
|
|
(588,693
|
)
|
|
|
(625,635
|
)
|
Cancelled
in exchange for Series B preferred stock
|
|
|
—
|
|
|
|
(45,000
|
)
|
Ending
Balance
|
|
$
|
39,964
|
|
|
$
|
57,526
|
|
The
ending balances as of September 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 nine months ended September 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:
|
|
September
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. The October BLA was paid in full on July 26, 2019. As of September 30, 2019, and
December 31, 2018, there was a balance of $-0- and $38,280, respectively, on the October BLA, with carrying value of $29,270 as
of December 31, 2018, net of an unamortized discount of $9,011.
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 carried a 16% interest
rate and was paid in full on July 26, 2019.
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 carried a 33% interest
rate and was paid in full on July 26, 2019.
On
July 11, 2019, the Company entered into a Business Loan Agreement (the “July 2019 BLA”) for $11,136 with a third-
party, whereby the Company received $9,600 on July 12, 2019. The July 2019 BLA requires the Company to make the first two monthly
payments of principal and interest of $2,128 per month, and then $1,720 for months three through six. The note carried a 47% interest
rate and was paid in full on July 26, 2019.
On
July 23, 2019, the Company entered into a Business Loan Agreement (the “2nd July 2019 BLA”) for $79,200
with a third- party, whereby the Company received $58,500 on July 26, 2019. The 2nd July 2019 BLA requires the Company
to make 39 weekly payments of $2,031. The note carries a 32% interest rate and matures April 23, 2020. During the nine months
ended September 30, 2019, the Company made payments of $18,277. As of September 30, 2019, the was a remaining balance of $60,923.
A
summary of the activity for the nine months ended September 30, 2019, and the year ended December 31, 2018, of notes payable is
as follows:
|
|
September
30,
2019
|
|
December
31,
2018
|
Beginning
loan balance
|
|
$
|
38,281
|
|
|
$
|
—
|
|
Amounts
loaned to the Company
|
|
|
115,473
|
|
|
|
101,593
|
|
Repaid
|
|
|
(92,831
|
)
|
|
|
(63,312
|
)
|
Principal
balance
|
|
|
60,923
|
|
|
|
38,281
|
|
Unamortized
discounts
|
|
|
(15,936
|
)
|
|
|
(9,011
|
)
|
Ending
Balance
|
|
$
|
44,987
|
|
|
$
|
29,270
|
|
NOTE
9 – RELATED PARTY TRANSACTIONS
During
the nine months ended September 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 September 30, 2019, and December 31, 2018, the Company owed the CEO $39,964
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 September 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 nine months ended September 30, 2019, and 2018, the Company recorded
expenses to its officers in the following amounts:
|
|
Three
months ended
September
30,
|
|
Nine
months ended
September
30,
|
|
Description
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
CEO
|
|
|
$
|
56,250
|
|
|
$
|
59,134
|
|
|
$
|
168,750
|
|
|
$
|
171,634
|
|
|
CFO
|
|
|
|
31,250
|
|
|
|
30,449
|
|
|
|
93,450
|
|
|
|
91,989
|
|
|
Total
|
|
|
$
|
87,500
|
|
|
$
|
89,583
|
|
|
$
|
262,200
|
|
|
$
|
263,623
|
|
As
of September 30, 2019, and December 31, 2018, the Company in the aggregate owes the CEO and CFO $206,985 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 nine months ended September 30, 2019, and $15,000 and $45,000 for the three and nine
months ended September 30, 2018, respectively. Additionally, for the nine months ended September 30, 2018, the Company invoiced
LLC1 $20,745 for the Company’s production, printing and mailing services and $1,275 for the nine months ended September
30, 2018, for sale of products. As of September 30, 2019, and December 31, 2018, LLC1 owes the Company $345,574 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 nine months ended September 30, 2019, and 2018, the Company expensed $36,000 and $108,000, respectively,
related to this lease and is included in Rent, on the condensed consolidated statement of operations, included herein. As of September
30, 2019, and December 31, 2018, the Company owed LLC1 $71,700 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 nine months ended September 30, 2019, a loss
of $9,245 and $4,429, respectively, and a net loss of $2,132 and $1,390, for the three and nine months ended September 30, 2018,
respectively, is included in “Other income (expense), net”. As of September 30, 2019, and December 31, 2018, the carrying
value of the Company’s investment in undivided interest in real estate was $1,222,534 and $1,226,963, respectively.
The
unaudited condensed balance sheets as of September 30, 2019, and December 31, 2018, and the statement of operations for the nine
months ended September 30, 2019, and 2018, for the real property is as follows:
|
|
(Unaudited)
|
|
(Unaudited)
|
Current
assets:
|
|
September
30,
2019
|
|
December
31,
2018
|
Cash
|
|
$
|
178
|
|
|
$
|
2,257
|
|
Due from
InnerScope
|
|
|
72,600
|
|
|
|
30,500
|
|
Prepaid
expenses and other current assets
|
|
|
58,761
|
|
|
|
72,931
|
|
Total
current assets
|
|
|
131,539
|
|
|
|
105,958
|
|
Land
and Building, net
|
|
|
2,321,612
|
|
|
|
2,354,282
|
|
Other
Assets, net
|
|
|
47,788
|
|
|
|
53,323
|
|
Total
assets
|
|
$
|
2,500,937
|
|
|
$
|
2,513,563
|
|
|
|
|
|
|
|
|
|
|
Current
portion of mortgage payable
|
|
$
|
41,635
|
|
|
$
|
40,122
|
|
Other
current liabilities
|
|
|
64,758
|
|
|
|
48,551
|
|
Total
current liabilities
|
|
|
106,393
|
|
|
|
88,673
|
|
Mortgage
payable, long-term
|
|
|
1,947,769
|
|
|
|
1,969,076
|
|
Security
deposits
|
|
|
13,064
|
|
|
|
13,064
|
|
Total
liabilities
|
|
|
2,067,226
|
|
|
|
2,070,813
|
|
Total
equity
|
|
|
433,711
|
|
|
|
442,750
|
|
Total
liabilities and equity
|
|
$
|
2,500,937
|
|
|
$
|
2,513,563
|
|
|
|
2019
|
|
2018
|
Rental
income
|
|
$
|
221,870
|
|
|
$
|
210,696
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Property
taxes
|
|
|
6,645
|
|
|
|
10,938
|
|
Depreciation
and amortization
|
|
|
38,205
|
|
|
|
32,675
|
|
Insurance
|
|
|
16,457
|
|
|
|
2,033
|
|
Repairs
and maintenance
|
|
|
18,214
|
|
|
|
20,860
|
|
Utilities
and other
|
|
|
35,049
|
|
|
|
24,707
|
|
Interest
expense
|
|
|
116,339
|
|
|
|
103,319
|
|
Total
expenses
|
|
|
230,909
|
|
|
|
213,532
|
|
Net
loss
|
|
$
|
(9,039
|
)
|
|
$
|
(2,836
|
)
|
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 September 30, 2019, the current and long-term portion of the SBA Note is $20,401
and $954,407, respectively. Future principal payments for the Company’s portion are:
|
Twelve
months ending September 30,
|
|
Amount
|
|
2020
|
|
|
$
|
20,401
|
|
|
2021
|
|
|
|
21,821
|
|
|
2022
|
|
|
|
23,168
|
|
|
2023
|
|
|
|
24,597
|
|
|
2024
|
|
|
|
25,967
|
|
|
Thereafter
|
|
|
|
858,854
|
|
|
Total
|
|
|
$
|
974,808
|
|
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 nine months ended September 30, 2019, amortization of the debt discount of $2,233 was
charged to interest expense. During the nine months ended September 30, 2019, the investor converted $50,000 of principal and
$2,514 of interest into 2,236,291 shares of common stock. As of September 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 were due and payable March 27, 2019,
and the Note is convertible into shares of the Company’s common stock at any time after one hundred eighty (180) days, at
a conversion price (the “Conversion Price”) equal to seventy-five percent (75%) of the average closing price of the
Company’s common stock for the ten (10) days immediately preceding the conversion, representing a twenty-five percent (25%)
discount. The embedded conversion feature included in the note resulted in an initial debt discount of $6,736, and an initial
derivative liability of $6,736. For the nine months ended September 30, 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 September 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 nine months ended September 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
nine months ended September 30, 2019. During the nine months ended September 30, 2019, the investor converted $50,000 of principal
and $3,564 of interest into 5,539,273 shares of common stock. As of September 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 nine months ended September 30, 2019, amortization of the debt discount of $11,292 was charged to interest
expense. The Company also recorded a debt issue discounts of $4,500 and amortized $1,377 to interest expense for the nine months
ended September 30, 2019. During the nine months ended September 30, 2019, the investor converted $51,275 of principal and $9,838
of interest into 7,909,037 shares of common stock. As of September 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 nine months ended September 30, 2019, amortization of the debt
discount of $37,986 was charged to interest expense. During the nine months ended September 30, 2019, the investor converted $50,000
of principal and $2,397 of interest into 2,495,107 shares of common stock. As of September 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 nine months ended September 30, 2019,
amortization of the debt discount of $208,333 was charged to interest expense. The Company also recorded debt issue discounts
of $55,500 and amortized $46,320 to interest expense for the nine months ended September 30, 2019. During the nine months ended
September 30, 2019, the investor converted $280,500 of principal and $14,001 of interest into 23,705,749 shares of common stock.
As of September 30, 2019, and December 31, 2018, the first note balance is $-0- and $280,500, respectively, with a December 31,
2018, carrying value of $46,750, net of unamortized discounts of $233,750. 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 nine months ended September 30, 2019, amortization of the debt discount of $146,704 was charged to interest expense. The
Company also recorded debt issue discounts of $37,000 and amortized $30,398 to interest expense for the nine months ended September
30, 2019. As of September 30, 2019, and December 31, 2018, the partial back-end note balance is $187,000, with carrying values
of $163,633 and $2,926, respectively, net of unamortized discounts of $23,367 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 nine months ended September 30, 2019, amortization of the debt discount of $65,884 was charged
to interest expense. The Company also recorded debt issue discounts of $18,500 and amortized $14,486 to interest expense for the
nine months ended September 30, 2019. As of September 30, 2019, the second partial back-end note balance is $93,500, with carrying
values of $80,371, net of unamortized discounts of $13,129.
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 nine months ended September 30, 2019, amortization of the debt discount of $103,125 was charged to interest
expense. The Company also recorded debt issue discounts of $35,083 and amortized $26,313 to interest expense for the nine months
ended September 30, 2019. During the nine months ended September 30, 2019, the investor converted $125,000 of principal and $7,550
of interest into 16,267,528 shares of common stock. As of September 30, 2019, and December 31, 2018, the note balance is $33,333
and $158,333, respectively, with carrying values of $4,450 and $13,194, respectively, net of unamortized discounts of $28,883
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 nine months ended
September 30, 2019, amortization of the debt discount of $192,500 was charged to interest expense. The Company also recorded debt
issue discounts of $41,800 and amortized $38,498 to interest expense for the nine months ended September 30, 2019. During the
nine months ended September 30, 2019, the investor converted $230,000 of principal and $9,500 of interest into 23,862,502 shares
of common stock. As of September 30, 2019, and December 31, 2018, the initial note balance is $-0- and $230,000, respectively,
with a December 31, 218, carrying value of $19,167, net of unamortized discounts of $210,833. 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 nine months ended
September 30, 2019, amortization of the debt discount of $58,813 was charged to interest expense. The Company also recorded debt
issue discounts of $20,900 and amortized $13,063 to interest expense for the nine months ended September30, 2019. During the nine
months ended September 30, 2019, the investor converted $40,000 of principal and $2,560 of interest into 6,019,802 shares of common
stock As of September 30, 2019, the first back-end note balance is $75,000, with a carrying value of $31,875 net of unamortized
discounts of $43,125. 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 nine months ended September 30, 2019, amortization of the debt discount
of $57,596 was charged to interest expense. The Company also recorded debt issue discounts of $16,825 and amortized $9,949 to
interest expense for the nine months ended September 30, 2019. As of September 30, 2019, the second back-end note balance is $115,000,
with carrying values of $67,444, net of unamortized discounts of $47,556.
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 nine
months ended September 30, 2019, amortization of the debt discount of $132,750 was charged to interest expense. The Company also
recorded debt issue discounts of $35,000 and amortized $26,250 to interest expense for the nine months ended September 30, 2019.
As of September 30, 2019, and December 31, 2018, the initial note balance is $195,000, with carrying values of $144,931 and $2,600,
respectively, net of unamortized discounts of $50,069 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 nine months ended
September 30, 2019, amortization of the debt discount of $13,500 was charged to interest expense. The Company also recorded debt
issue discounts of $45,000 and amortized $30,938 to interest expense for the nine months ended September 30, 2019. As of September
30, 2019, the initial note balance is $245,000, with a carrying value of $168,438, net of unamortized discounts of $76,562. On
July 18, 2019, the investor funded the first back-end note, 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 funding of the first
back-end note resulted in an initial debt discount of $100,000, an initial derivative expense of $19,852 and an initial derivative
liability of $19,852. For the nine months ended September 30, 2019, amortization of the debt discount of $20,776 was charged to
interest expense. The Company also recorded debt issue discounts of $22,500 and amortized $4,680 to interest expense for the nine
months ended September 30, 2019. As of September 30, 2019, the first back-end note balance is $122,500, with a carrying value
of $25,457, net of unamortized discounts of $97,043.
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 nine months ended September 30, 2019, amortization of the debt discount of $54,375 was charged
to interest expense. The Company also recorded debt issue discounts of $24,467, and amortized $14,458 to interest expense for
the nine months ended September 30, 2019. As of September 30, 2019, the note balance is $116,667, with a carrying value of $71,032,
net of unamortized discounts of $45,635.
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 March 8, 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 nine months ended September 30, 2019, amortization of the debt discount of $59,574 was charged to interest
expense. The Company also recorded debt issue discounts of $29,333, and amortized $16,928 to interest expense for the nine months
ended September 30, 2019. As of September 30, 2019, the note balance is $133,333, with a carrying value of $74,303, net of unamortized
discounts of $59,030.
On
March 20, 2019, the Company issued to a third-party investor a convertible redeemable note (the “Note”) with a face
value of $89,085 and a back-end convertible redeemable note for $89,085. 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 nine months ended September 30, 2019, amortization
of the debt discount of $39,454 was charged to interest expense. The Company also recorded debt issue discounts of $14,085, and
amortized $7,404 to interest expense for the nine months ended September 30, 2019. As of September 30, 2019, the initial note
balance is $89,075, with a carrying value of $46,859, net of unamortized discounts of $42,226. On August 20, 2019, the investor
funded the first 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 funding of the first back-end note resulted in an initial
debt discount of $75,000, an initial derivative expense of $84,293 and an initial derivative liability of $9,293. For the nine
months ended September 30, 2019, amortization of the debt discount of $8,103 was charged to interest expense. The Company also
recorded debt issue discounts of $14,085 and amortized $1,523 to interest expense for the nine months ended September 30, 2019.
As of September 30, 2019, the first back-end note balance is $89,085, with a carrying value of $9,626, net of unamortized discounts
of $79,459.
Also,
on March 20, 2019, the Company issued to a third-party investor a convertible redeemable note (the “Note”) with a
face value of $89,085 and a back-end convertible redeemable note for $89,085. 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 nine months ended September
30, 2019, amortization of the debt discount of $39,454 was charged to interest expense. The Company also recorded debt issue discounts
of $14,085, and amortized $7,404 to interest expense for the nine months ended September 30, 2019. As of September 30, 2019, the
initial note balance is $89,075, with carrying values of $46,859, net of unamortized discounts of $42,226. On September 5, 2019,
the investor funded the first 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 funding of the first back-end note resulted
in an initial debt discount derivative liability of $74,664. For the nine months ended September 30, 2019, amortization of the
debt discount of $6,205 was charged to interest expense. The Company also recorded debt issue discounts of $14,085 and amortized
$1,171 to interest expense for the nine months ended September 30, 2019. As of September 30, 2019, the first back-end note balance
is $89,085, with a carrying value of $7,713, net of unamortized discounts of $81,372.
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 nine months ended September 30, 2019, amortization of the debt discount of $79,989 was charged to interest
expense. The Company also recorded a debt issue discount of $33,000, and amortized $15,098 to interest expense for the nine months
ended September 30, 2019. As of September 30, 2019, the note balance is $208,000, with a carrying value of $95,087, net of unamortized
discounts of $12,913.
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 nine months ended September 30, 2019, amortization of the debt discount of $79,989
was charged to interest expense. The Company also recorded a debt issue discount of $33,000, and amortized $15,098 to interest
expense for the nine months ended September 30, 2019. As of September 30, 2019, the note balance is $208,000, with a carrying
value of $95,087, net of unamortized discounts of $12,913.
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 nine months ended September 30, 2019, amortization of the debt discount of $65,446 was charged to interest
expense. The Company also recorded a debt issue discount of $33,000, and amortized $12,353 to interest expense for the nine months
ended September 30, 2019. As of September 30, 2019, the note balance is $208,000, with a carrying value of $77,799, net of unamortized
discounts of $130,201.
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 nine months ended September 30, 2019, amortization of the debt discount of $52,450 was charged to interest
expense. The Company also recorded a debt issue discount of $27,102, and amortized $10,145 to interest expense for the nine months
ended September 30, 2019. As of September 30, 2019, the note balance is $167,352, with a carrying value of $62,596, net of unamortized
discounts of $104,756.
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 nine months ended September 30, 2019, amortization of the debt discount of $29,087 was charged to interest
expense. The Company also recorded a debt issue discount of $19,000, and amortized $5,532 to interest expense for the nine months
ended September 30, 2019. As of September 30, 2019, the note balance is $119,000, with a carrying value of $34,619, net of unamortized
discounts of $84,381.
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 nine months ended September 30, 2019, amortization of the debt discount of $29,087 was charged to interest
expense. The Company also recorded a debt issue discount of $19,000, and amortized $5,532 to interest expense for the nine months
ended September 30, 2019. As of September 30, 2019, the note balance is $119,000, with a carrying value of $34,619, net of unamortized
discounts of $84,381.
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. The embedded conversion feature included in the
note resulted in an initial debt discount of $150,000, an initial derivative expense of $65,783 and an initial derivative liability
of $215,783. For the nine months ended September 30, 2019, amortization of the debt discount of $37.398 was charged to interest
expense. The Company also recorded debt issue discounts of $33,975, and amortized $8,478 to interest expense for the nine months
ended September 30, 2019. As of September 30, 2019, the note balance is $183,975, with a carrying value of $45,875, net of unamortized
discounts of $138,100.
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. The embedded conversion feature included in the
note resulted in an initial debt discount of $100,000, an initial derivative expense of $18,522 and an initial derivative liability
of $118,522. For the nine months ended September 30, 2019, amortization of the debt discount of $13,879 was charged to interest
expense. The Company also recorded debt issue discounts of $22,650, and amortized $3,146 to interest expense for the nine months
ended September 30, 2019. As of September 30, 2019, the note balance is $122,650, with a carrying value of $17,025, net of unamortized
discounts of $105,625.
On
September 12, 2019, the Company issued to a third-party investor a convertible redeemable note (the “Note”) with a
face value of $160,000. The note matures on September 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 September 12, 2019, when the Company received proceeds
of $130,050, 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 $130,050, an initial derivative expense of $25,433 and an initial
derivative liability of $155,483. For the nine months ended September 30, 2019, amortization of the debt discount of $6,485 was
charged to interest expense. The Company also recorded debt issue discounts of $29,950, and amortized $1,495 to interest expense
for the nine months ended September 30, 2019. As of September 30, 2019, the note balance is $160,000, with a carrying value of
$7,979, net of unamortized discounts of $152,021.
A
summary of the convertible note balances as of September 30, 2019, and December 31, 2018, is as follows:
|
|
September
30,
2019
|
|
December
31,
2018
|
Principal
balance
|
|
$
|
3,168,650
|
|
|
$
|
1,277,108
|
|
Unamortized
discounts
|
|
|
(1,754,975
|
)
|
|
|
(1,125,942
|
)
|
Ending
balance, net
|
|
$
|
1,413,675
|
|
|
$
|
151,166
|
|
The
following is a summary of the Company’s convertible notes and related discounts as of September 30, 2019:
|
|
Principal
Balance
|
|
Debt
Discounts
|
|
Total
|
Balance
at January 1, 2019
|
|
$
|
1,277,108
|
|
|
$
|
(1,125,942
|
)
|
|
$
|
151,166
|
|
New
issuances
|
|
|
2,793,317
|
|
|
|
(2,792,981
|
)
|
|
|
336
|
|
Conversions
|
|
|
(901,775
|
)
|
|
|
—
|
|
|
|
(901,775
|
)
|
Amortization
|
|
|
—
|
|
|
|
2,163,948
|
|
|
|
2,163,948
|
|
Balance
at September 30, 2019
|
|
$
|
3,168,650
|
|
|
$
|
(1,754,975
|
)
|
|
$
|
1,413,675
|
|
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 nine months
ended September 30, 2019, risk-free interest rates from 1.78% to 2.59% and volatility of 172% to 387%, as of September 30, 2019,
risk-free interest rates from 1.76% to 1.83% and volatility from 162% to 230%, 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 nine months ended September 30, 2019, is as follows:
|
|
September
30,
2019
|
Beginning
Balance
|
|
$
|
1,807,404
|
|
Initial
Derivative Liability
|
|
|
3,486,443
|
|
Fair
Value Change
|
|
|
(1,337,621
|
)
|
Reclassification
for conversions
|
|
|
(1,180,655
|
)
|
Ending
Balance
|
|
$
|
2,775,571
|
|
The
credit for derivative liability expense of $159,617 for the nine months ended September 30, 2019, consisted of the initial derivative
expense of $1,178,004 offset by the above decrease in the fair value of $1,337,621.
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 nine months ended September 30, 2019, the Company recorded $100,240 and $294,302, respectively,
and $47,937 and $119,937 for the three and nine months ended September 30, 2018, respectively, as operating lease expense which
is included in rent expense on the statements of operations and includes $36,000 and $108,000 of rent to a related party during
the three and nine months ended September 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.
On
July 1, 2019, the Company entered into a lease to operate a retail hearing aid clinic in Sacramento, California expiring June
30, 2022. Initial lease payments of $1,450 begin on July 1, 2019, and increases by approximately 5.0% 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 nine months ended September 30, 2019, upon adoption of ASC Topic 842, the Company recorded right-of-use
assets and lease liabilities of $1,473,250.
Right-of-
use assets are summarized below:
|
|
September
30,
2019
|
Office
and retail leases
|
|
$
|
1,473,250
|
|
Less
accumulated amortization
|
|
|
(199,409
|
)
|
Right-of-us
assets, net
|
|
$
|
1,273,841
|
|
Operating
lease liabilities are summarized as follows:
|
|
September
30,
2019
|
Lease
liability
|
|
$
|
1,290,348
|
|
Less
current portion
|
|
|
(345,106
|
)
|
Long
term portion
|
|
$
|
945,242
|
|
Maturity
of lease liabilities are as follows:
|
|
Amount
|
For
the three months ending December 31, 2019
|
|
$
|
107,162
|
|
For
the year ending December 31, 2020
|
|
|
432,415
|
|
For
the year ending December 31, 2021
|
|
|
396,545
|
|
For
the year ending December 31, 2022
|
|
|
317,785
|
|
For
the year ending December 31, 2023
|
|
|
184,327
|
|
Thereafter
|
|
|
44,392
|
|
Total
|
|
$
|
1,482,626
|
|
Less:
present value discount
|
|
|
(192,278
|
)
|
Lease
liability
|
|
$
|
1,290,348
|
|
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 nine months ended September 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 nine months ended September 30, 2019, the Company
has paid $280,800 towards the Technology Access Fee and as of September 30, 2019, and December 31, 2018, approximately $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 nine months ended September 30, 2019, the Company amortized
$5,000 and $18,333, respectively, as stock-based compensation. As of September 30, 2019, there remains $41,667, 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 $93,750 for the three and nine months ended
September 30, 2019, respectively, and is included in Professional fees on the condensed consolidated Statement of operations.
As of September 30, 2019, there remains $23,611 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 and $128,000, respectively
for the three and nine months ended September 30, 2019, and is included in Professional fees on the condensed consolidated Statement
of operations..
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
and $75,000, respectively, for the three and nine months ended September 30, 2019, and is included in Professional fees on the
condensed consolidated Statement of operations.
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 $33,750 and $61,875, respectively, for the three and nine months ended September 30, 2019, and is included in Professional
fees on the condensed consolidated Statement of operations. As of September 30, 2019, there remains $5,625 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 September 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 September
30, 2019, and December 31, 2018, there were 900,000 shares of Series B Preferred Stock issued and outstanding.
Common
Stock
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
Company has 975,000,000 authorized shares of $0.0001 common stock. As of September 30, 2019, and December 31, 2018, there are
220,613,389 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 nine months ended September 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 nine months ended September 30, 2019, the Company issued 75,528 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 $2,500 and $5,000 for the three and nine months ended September 30, 2019, included in Compensation
and benefits in the condensed consolidated statement of operations, included herein.
During
the nine months ended September 30, 2019, the Company issued 208,332 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 $5,000 and $10,000 for the three and nine months ended September 30, 2019, included in
Compensation and benefits in the condensed consolidated statement of operations, included herein.
During
the nine months ended September 30, 2019, the Company issued 168,540 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 and $5,000 for the three and nine months ended September 30, 2019, included in Compensation and benefits in the condensed
consolidated statement of operations, included herein.
During
the nine months ended September 30, 2019, the Company issued 128,808 shares of common stock to an employee as part of their compensation.
The Company agreed to issue $20,000 of stock over a six- 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 $5,000 and $10,000 for the three and nine months ended September 30, 2019, included in Compensation
and benefits in the condensed consolidated statement of operations, included herein.
During
the nine months ended September 30, 2019, the Company issued 128,808 shares of common stock to an employee as part of their compensation.
The Company agreed to issue $20,000 of stock over a six- 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. This employee was terminated
in July 2019. The Company recorded stock-based compensation of $5,000 and $10,000 for the three and nine months ended September
30, 2019, included in Compensation and benefits in the condensed consolidated statement of operations, included herein.
During
the nine months ended September 30, 2019, the Company issued 227,274 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 $5,000 and $10,000 for the three and nine months ended September 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 nine months ended September 30, 2019.
During
the nine months ended September 30, 2019, the Company issued 88,751,413 shares of common stock for conversion of $901,775 of principal
and $55,685 of accrued interest and fees, for a total of $957,460.
Common
Stock to be issued
During
the nine months ended September 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 nine months ended September 30, 2019, the Company recorded 654,240 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 nine months ended September 30, 2019, for the
common stock to be issued (issued on October 9, 2019).
As
of September 30, 2019, there were 3,066,912 shares of common stock to be issued.
NOTE
17 – SUBSEQUENT EVENTS
From
August 1, 2019, through November 11, 2019, the Company received conversion notices for the issuances of 26,886,621 shares of common
stock for conversion of $83,333 of principal and $5,679 of accrued interest on convertible notes.
On
October 3, 2019, the Company issued an 8% convertible promissory note (the “Master Note”) in the aggregate principal
amount of up to $150,000 in exchange for an aggregate purchase price of up to $135,000 with an original issue discount of $15,000
to cover the Investor’s accounting fees, due diligence fees, monitoring and other transactional costs incurred in connection
with the purchase and sale of the Master Note, which is included in the principal balance of the Note. On October 3, 2019, the
Investor funded the first tranche under the Master Note, and the Company received $65,000 (after payment of $2,000 of the Investor’s
legal fees) for this first tranche of $75,000 under the Master Note and on the same date, the Company issued the Note to the Investor.
The Note is convertible into shares of the Company’s common stock, at a conversion price equal to the lesser of (1) 70%
of the lowest trading price or lowest closing bid price during the previous 15 trading day period ending on the last completed
trading date prior to the issuance of the Master Note and (2) 70% multiplied by the lower of the lowest trading price or lowest
closing bid price of the Company’s common stock during the 15 day trading period ending on the latest completed trading
day of the common stock prior to the date of conversion of the Master Note.
On
October 9, 2019, the Company issued 654,240 shares of restricted common stock to employees (see note 16).
On
October 18, 2019, the Company issued to a third-party investor a convertible redeemable note (the “Note”) with a face
value of $100,000, with an original issue discount of $10,000, The note matures on October 18, 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 October
18, 2019, when the Company received proceeds of $85,500, after disbursements for the lender’s transaction costs, fees and
expenses.
On
November 1, 2019, the Company issued to a third-party investor a convertible redeemable note (the “Note”) with a face
value of $57,750, with an original issue discount of $5,250, The note matures on November 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 November
1, 2019, when the Company received proceeds of $50,000, after disbursements for the lender’s transaction costs, fees and
expenses.
On
November 1, 2019, the Company entered into a Payment Rights Purchase and Sale Agreement for $87,000 with a third- party, whereby
the Company received $58,260, after disbursements for the lender’s transaction costs, fees and expenses on November 1, 2019.
The agreement requires the Company to make daily payments of $791 over the 5 month term of the agreement.
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.