Quarterly Report (10-q)

Date : 08/30/2019 @ 8:33PM
Source : Edgar (US Regulatory)
Stock : Innerscope Hearing Technologies, Inc. (QB) (INND)
Quote : 0.0029  0.0001 (3.57%) @ 9:02PM

Quarterly Report (10-q)

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: June 30, 2019

 

OR

 

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the transition period from ________________ to __________________

 

Commission File Number 333-209341

 

INNERSCOPE HEARING TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

Nevada 46-3096516
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)

 

2151 Professional Drive, Second Floor, Roseville, CA 95661

(Address of principal executive offices)

 

(916) 218-4100

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   ☑ Yes    ☐ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ☑ Yes    ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes    ☑ No

  

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
None   N/A   N/A

 

The number of shares outstanding of the Registrant's $0.0001 par value Common Stock as of August 28, 2019, was 197,577,017 shares.

 

 
 

 

INNERSCOPE HEARING TECHNOLOGIES, INC.

FORM 10-Q

Quarterly Period Ended June 30, 2019

 

INDEX

 

FORWARD-LOOKING STATEMENTS Page
PART I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements  
  Condensed Consolidated Balance Sheets at June 30, 2019, and December 31, 2018 (Unaudited) 2
  Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018 (Unaudited)

3

  Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the six months ended June 30, 2019 and 2018 (Unaudited)

4

  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 (Unaudited)  

5

  Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations                                                                                                    

30

Item 3. Quantitative and Qualitative Disclosures about Market Risks 36
Item 4. Controls and Procedures 36
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 37
Item 1A. Risk Factors 37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
Item 3. Defaults Upon Senior Securities 38
Item 4. Mine Safety Disclosures 38
Item 5. Other Information 38
Item 6. Exhibits 38
     
SIGNATURES

 

 
 

 

 

INNERSCOPE HEARING TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
    June 30,   December 31,
    2019   2018
ASSETS                
                 
Current Assets:                
Cash   $ 5,017     $ 87,826  
Accounts receivable, allowance for doubtful accounts $18,383     22,568       6,112  
Accounts receivable from related party     283,064       203,325  
Employee advances     59,721       40,942  
Prepaid expenses     107,503       167,992  
Inventory     118,331       91,510  
Total current assets     596,204       597,707  
                 
Security deposits     34,537       11,056  
Domain name   $ 3,000     $ 3,000  
Intangible assets, net of accumulated amortization of $80,420 (2019) and $2,168 (2018)     932,588       1,010,840  
Property and equipment, net of accumulated depreciation of $12,587 (2019) and $4,705 (2018)     81,833       43,450  
Operating leases right-of-use assets, net     1,302,184       —    
Investment in undivided interest in real estate     1,231,779       1,226,963  
Total assets   $ 4,182,125     $ 2,893,014  
                 
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT                
                 
Current Liabilities:                
Accounts payable and accrued expenses   $ 1,092,778     $ 1,233,653  
Accounts payable to related party     22,548       22,548  
Notes payable - stockholder     95,800       95,800  
Advances payable, stockholders     63,642       57,526  
Convertible notes payable, net of discounts     958,827       151,166  
Current portion of notes payable, net of deferred loan fees     28,721       29,270  
Current portion of note payable-undivided interest in real estate     20,096       19,660  
Customer deposits     71,409       56,698  
Officer salaries payable     156,201       188,942  
Income taxes payable     23,998       23,998  
Derivative liabilities     3,082,068       1,807,404  
Operating lease liabilities, current portion     323,209       —    
Total current liabilities     5,939,297       3,686,665  
                 
Long term portion of note payable- undivided interest in real estate     956,542       964,847  
Operating lease liabilities, less current portion     994,739       —    
Total liabilities     7,890,578       4,651,512  
                 
Commitments and contingencies                
                 
Stockholders' Deficit:                
Preferred stock, $0.0001 par value; 25,000,000 shares authorized;                
Series A preferred stock, par value $0.0001, 9,510,000 shares authorized and -0- issued and outstanding     —         —    
Series B preferred stock, par value $0.0001, 900,000 shares authorized and issued and outstanding     90       90  
Common stock, $0.0001 par value; 490,000,000 shares authorized; 161,826,468 (2019) and 120,425,344 (2018) shares issued and outstanding, respectively     16,182       12,042  
Common stock to be issued, $0.0001 par value, 2,881,316 (2019) and 6,373,848 (2018) shares, respectively     288       637  
Additional paid-in capital     6,397,967       4,836,557  
Deferred stock compensation     (242,402 )     (235,694 )
Accumulated deficit     (9,880,578 )     (6,372,129 )
                 
Total stockholders' deficit     (3,708,453 )     (1,758,498 )
                 
    $ 4,182,125     $ 2,893,014  
                 
                 
See notes to condensed consolidated financial statements.

 

  2  

 

INNERSCOPE HEARING TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
                 
    Three months ended June 30,   Six months ended June 30,
    2019   2018   2019   2018
Revenues:                                
Revenues   $ 219,673     $ 26,691     $ 391,202     $ 53,972  
Revenues, related party     —         23,323       15,000       52,019  
Total revenues     219,673       50,014       406,202       105,991  
                                 
Cost of sales                                
Cost of sales     99,463       24,477       181,827       49,258  
Cost of sales, related     —         7,325       —         21,408  
Total cost of sales     99,463       31,802       181,827       70,666  
                                 
Gross profit     120,210       18,212       224,375       35,325  
                                 
Operating Expenses:                                
Compensation and benefits (including stock- based fees of $35,917 and $50,000 for the three and six months ended June 30, 2019 and $772,600 for the three and six months ended June 30, 2018)     435,086       925,767       798,823       1,085,306  
Advertising and promotion     143,800       66,007       311,584       91,328  
Professional fees (including stock- based fees of $197,876 and $308,292 for three and six months ended June 30, 2019 and $21,327 and $64,240 for three and six months ended June 30, 2018)     239,923       115,419       377,317       230,906  
Rent (including related party of $36,000 for three months ended June 30, 2019 and 2018 and $72,000 for six months ended June 30, 2019 and 2018     98,133       36,000       194,062       72,000  
Investor relations     89,528       23,778       164,776       76,419  
Other general and administrative     132,487       6,073       269,126       47,316  
Total operating expenses     1,138,958       1,173,044       2,115,689       1,603,274  
                                 
Loss from operations     (1,018,748 )     (1,154,832 )     (1,891,314 )     (1,567,949 )
                                 
Other Expense:                                
Derivative (income) expense     235,478       (518,711 )     (342,360 )     (669,970 )
Gain on investment in undivided interest in real estate     5,856       3,046       4,816       741  
Gain (loss) on debt extinguishment     459       —         (44,393 )     —    
Interest expense and finance charges     (728,456 )     (182,528 )     (1,235,198 )     (313,792 )
Total other expense, net     (486,664 )     (698,193 )     (1,617,135 )     (983,020 )
                                 
Net loss   $ (1,505,411 )   $ (1,853,025 )   $ (3,508,449 )   $ (2,550,969 )
                                 
Basic and diluted loss per share   $ (0.01 )   $ (0.03 )   $ (0.02 )   $ (0.04 )
                                 
Weighted average number of common shares outstanding Basic and diluted     155,732,524       57,711,814       145,156,477       59,761,633  

  3  

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
SIX MONTHS ENDED JUNE 30, 2019 and 2018
(Unaudited)
                                                                 
      Series A Preferred Stock       Series B Preferred Stock       Common Stock       Common Stock To Be Issued       Additional Paid-in       Deferred Stock       Retained       Total Stockholders’  
      Shares       Amount       Shares       Amount       Shares       Amount       Shares       Amount       Capital       Compensation       Deficit       Deficit  
Balances January 1, 2019     —       $ —         900,000     $ 90       120,425,344     $ 12,042       6,373,848     $ 637     $ 4,836,556     $ (235,694 )   $ (6,372,129 )   $ (1,758,498 )
                                                                                                 
Stock based compensation     —         —         —         —         870,826       87       113,637       11       26,485       97,917       —         124,499  
                                                                                                 
Stock issued from common stock to be issued     —         —         —         —         3,550,893       355       (3,550,893 )     (355 )     —         —         —         —    
                                                                                                 
Common stock issued for convertible notes and accrued interest     —         —         —         —         24,741,320       2,474       —         —         282,792       —         —         285,266  
                                                                                                 
Common stock to be issued for settlement of accounts payable     —         —         —         —         —         —         625,000       63       40,563       —         —         40,624  
                                                                                                 
Reclassification of derivative liabilities upon payment of convertible debt     —         —         —         —         —         —         —         —         580,908       —         —         580,908  
                                                                                                 
Net loss for the three months ended March 31, 2019     —         —         —         —         —         —         —         —         —         —         (2,003,038 )     (2,003,038 )
                                                                                                 
Balances March 31, 2019     —         —         900,000       90       149,588,383       14,958       3,561,592       356       5,767,304       (137,777 )     (8,375,167 )     (2,730,236 )
                                                                                                 
Stock based compensation     —         —         —         —         4,780,303       478       355,008       36       337,902       (270,500 )     —         67,915  
                                                                                                 
Amortization of deferred stock compensation     —         —         —         —         —         —         —         —         —         165,875       —         165,875  
                                                                                                 
Stock issued from common stock to be issued     —         —         —         —         410,284       41       (410,284 )     (41 )     —         —         —         —    
                                                                                                 
Common stock issued for settlement of accounts payable     —         —         —         —         625,000       63       (625,000 )     (63 )     —         —         —         —    
                                                                                                 
Common stock issued for convertible notes and accrued interest     —         —         —         —         6,422,498       642       —         —         135,557       —         —         136,199  
                                                                                                 
Reclassification of derivative liabilities upon payment of convertible debt     —         —         —         —         —         —         —         —         157,204       —         —         157,204  
                                                                                                 
Net loss for the three months ended June 30, 2019     —         —         —         —         —         —         —         —         —         —         (1,505,411 )     (1,505,411 )
                                                                                                 
Balances June 30, 2019     —       $ —         900,000     $ 90       161,826,468     $ 16,182       2,881,316     $ 288     $ 6,397,967     $ (242,402 )   $ (9,880,578 )   $ (3,708,453 )

  4  

 

      Series A Preferred Stock       Series B Preferred Stock       Common Stock       Common Stock To Be Issued       Additional Paid-in       Deferred Stock       Retained       Total Stockholders’  
      Shares       Amount       Shares       Amount       Shares       Amount       Shares       Amount       Capital       Compensation       Deficit       Deficit  
Balances January 1, 2018     —       $ —         —       $ —         61,539,334     $ 6,153       102,564     $ 10     $ 331,227     $ (25,000 )   $ (1,787,012 )   $ (1,474,623 )
                                                                                                 
Stock based compensation     —         —         —         —         224,072       23       266,401       27       25,640       25,000       —         50,690  
                                                                                                 
Stock issued from common stock to be issued     —         —         —         —         —         —         (102,564 )     (10 )     10       —         —         —    
                                                                                                 
Reclassification of derivative liabilities upon payment of convertible debt     —         —         —         —         —         —         —         —         61,044       —         —         61,044  
                                                                                                 
Net loss for the three months ended March 31, 2018     —         —         —         —         —         —         —         —         —         —         (697,945 )     (697,945 )
                                                                                                 
Balances March 31, 2018     —         —         —         —         61,763,406       6,176       266,401       27       417,921       —         (2,484,957 )     (2,060,834 )
                                                                                                 
Stock based compensation     —         —         —         —         —         —         547,619       55       13,495       —                 13,550  
                                                                                                 
Issuance of Series B preferred stock     —         —         900,000       90       —         —         —         —         817,510       —         —         817,600  
                                                                                                 
Common stock issued or to be issued for convertible notes     —         —         —         —         6,213,539       621       —         —         68,749       —         —         69,370  
                                                                                                 
Common stock shares cancelled in exchange for Series A preferred stock     9,510,000       951       —         —         (19,020,000 )     (1,902 )     —         —         951       —         —         —    
                                                                                                 
Reclassification of derivative liabilities upon payment of convertible debt     —         —         —         —         —         —         —         —         182,502       —         —         182,502  
                                                                                                 
Net loss for the three months ended June 30, 2018                     —         —         —         —         —         —         —         —         (1,853,025 )     (1,853,025 )
                                                                                                 
Balances June 30, 2018     9,510,000     $ 951       900,000     $ 90       48,956,945     $ 4,896       814,020     $ 81     $ 1,501,129     $ —       $ (4,337,982 )   $ (2,830,837 )

  5  

 

 

INNERSCOPE HEARING TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
         
    2019   2018
Cash flows from operating activities:                
Net loss   $ (3,508,449 )   $ (2,550,969 )
Adjustments to reconcile net loss to net cash used in operations:                
Loss on fair value of derivatives     342,360       669,970  
Amortization of debt discounts     1,181,202       273,705  
Depreciation and amortization     212,492       442  
Stock compensation expense     358,292       836,840  
Non cash interest expense     2,500       —    
Gain on investment in undivided interest in real estate     (4,816 )     (741 )
Loss on debt extinguishment     44,393       —    
Changes in operating assets and liabilities:                
Decrease (increase) in:                
Accounts receivable     (16,456 )     (2,699 )
Employee advances     (18,779 )     —    
Inventory     (26,821 )     (18,651 )
Prepaid assets     60,489       28,878  
Accounts receivable, related party     (79,739 )     (15,076 )
Increase (decrease) in:                
Accounts payable and accrued expenses     (100,162 )     109,181  
Officer salaries payable     (32,741 )     135,445  
Customer deposits     14,711       —    
Due to related party     —         (38,946 )
Operating lease liabilities     (110,586 )     —    
Net cash used in operating activities     (1,682,111 )     (572,621 )
                 
Cash flows from investing activities:                
Payment of security deposits     (23,481 )     —    
Purchases of office and computer equipment     (46,274 )     —    
Net cash used in investing activities     (69,755 )     —    
                 
Cash flows from financing activities:                
Proceeds from issuance of note payable     21,000       32,600  
Advances to stockholder, net     6,116       31,200  
Proceeds from issuances of convertible notes payable, net of debt issuance costs     1,678,725       592,250  
Repayments of note payable     (36,784 )     (20,671 )
Repayments of advances, shareholder     —         (6,000 )
Repayments of principal of convertible note payable     —         (94,725 )
Net cash provided by financing activities     1,669,057       534,654  
                 
Net decrease in cash     (82,809 )     (37,967 )
                 
Cash, Beginning of period     87,826       84,720  
                 
Cash, End of period   $ 5,017     $ 46,753  
                 
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 11,256     $ 16,284  
Cash paid for income taxes   $ —       $ —    
                 
Schedule of non-cash Investing or Financing Activity:                
Reclassification of derivative liabilities upon principal repayments of convertible notes   $ 738,112     $ 243,546  
Intangible assets in accounts payable   $ 536,000       —    
Conversion of notes payable and accrued interest in common stock   $ 389,738     $ —    
Common stock issued for settlement of accounts payable   $ 25,000       —    
Operating lease right-of-use assets and liabilities   $ 1,428,534     $ —    
                 
                 
See notes to condensed consolidated financial statements.

 

  6  

 

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.

 

 

  7  

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

 

Basis of Presentation and Principles of Consolidation

 

The accompanying condensed consolidated financial statements in this report have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to present the financial position, results of operations and cash flows for the stated periods have been made. Except as described below, these adjustments consist only of normal and recurring adjustments. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated unaudited financial statements should be read in conjunction with a reading of the Company’s financial statements and notes thereto included in the Annual Report for the year ended December 31, 2018, filed with the United States Securities and Exchange Commission (the “SEC”) on April 16, 2019. Interim results of operations for the three and six months ended June 30, 2019, and 2018, are not necessarily indicative of future results for the full year. Certain amounts from the 2018 period have been reclassified to conform to the presentation used in the current period.

 

Emerging Growth Companies

 

The Company qualifies as an “emerging growth company” under the 2012 JOBS Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to take advantage of the benefits of this extended transition period for certain accounting standards.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates.

 

Cash

 

The Company considers all highly liquid investments with an original term of three months or less to be cash equivalents. These investments are carried at cost, which approximates fair value. We held no cash equivalents as of June 30, 2019, and December 31, 2018. Cash balances may, at certain times, exceed federally insured limits. If the amount of a deposit at any time exceeds the federally insured amount at a bank, the uninsured portion of the deposit could be lost, in whole or in part, if the bank were to fail.

 

Accounts receivable

 

The Company records accounts receivable at the time products and services are delivered. An allowance for losses is established through a provision for losses charged to expense. Receivables are charged against the allowance for losses when management believes collectability is unlikely. The allowance (if any) is an amount that management believes will be adequate to absorb estimated losses on existing receivables, based on evaluation of the collectability of the accounts and prior loss experience. As of June 30, 2019, and December 31, 2018, management’s evaluation required the establishment of an allowance for uncollectible receivables of $18,383.

 

Sales Concentration and Credit Risk

 

Following is a summary of customers who accounted for more than ten percent (10%) of the Company’s revenues for the three and six months ended June 30, 2018. No customer accounted for more than ten percent (10%) of the Company’s revenues for the three and months ended June 30, 2019.

  8  

 

 

            Accounts Receivable
    June 30, 2018   as of
    3 months   6 months   June 30,
    %   %   2019
Customer A, related     46.6 %     49.1 %   $ 283,064  
Customer B     27.0 %     25.6 %   $ —    

 

Inventory

 

Inventory is valued at the lower of cost or net realizable value. Cost is determined using the first in first out (FIFO) method. Provision for potentially obsolete or slow-moving inventory is made based on management analysis or inventory levels and future sales forecasts. As of June 30, 2019, and December 31, 2018, management’s analysis did not require any provisions to be recognized.

 

Intangible Assets

 

Costs for intangible assets are accounted for through the capitalization of those costs incurred in connection with developing or obtaining such assets. Capitalized costs are included in intangible assets in the consolidated balance sheets. On October 3, 2018, the Company entered into a Manufacturing Design and Marketing Agreement (the “Agreement”) with Zounds Hearing, Inc., a Delaware corporation (“Zounds”), whereby, Zounds as the Subcontractor will provide design, technology, manufacturing and supply chain services to the Company (see Note 15) for a period of ten years. The Company will pay Zounds One Million ($1,000,000) for the right to use proprietary technology (the “Technology Access Fee”). As of December 31, 2018, the Company has capitalized the $1,000,000 Technology Access Fee as an intangible asset on the condensed consolidated balance sheets. The Technology Access Fee will be amortized over the term of the Agreement. The Company also acquired intangible assets from an asset purchase agreement (see Note 2).

 

Property and Equipment

 

Property and equipment are stated at cost, and depreciation is provided by use of a straight-line method over the estimated useful lives of the assets. The Company reviews property and equipment for potential impairment whenever events or changes in circumstances indicate that the carrying amounts of assets may not be recoverable. The estimated useful lives of property and equipment are as follows:

 

Computer equipment

3 years
Machinery and equipment 5 years
Furniture and fixtures 5 years

 

The Company's property and equipment consisted of the following at June 30, 2019, and December 31, 2018:

 

    June 30,
2019
  December 31,
2018
Computer equipment   $ 4,272     $ 2,651  
Machinery and equipment     52,102       31,122  
Furniture and fixtures     21,840       2,160  
Leasehold improvements     16,206       12,222  
Accumulated depreciation     (12,587 )     (4,705 )
Balance   $ 81,833     $ 43,450  

 

Depreciation expense of $5,032 and $7,882 was recorded for the three and six months ended June 30, 2019, respectively, and $221 and $442, for the three and six months ended June 30, 2018, respectively.

 

  9  

 

Investment in Undivided Interest in Real Estate

 

The Company accounts for its’ investment in undivided interest in real estate using the equity method, as the Company is severally liable only for the indebtedness incurred with its interest in the property. The Company includes its allocated portion of net income or loss in Other income (expense) in its Statement of Operations, with the offset to the equity investment account on the balance sheet. For the six months ended June 30, 2019 and 2018, the Company recognized a gain of $4,816 and $741, respectively. As of June 30, 2019, and December 31, 2018, the carrying value of the Company’s investment in undivided interest in real estate was $1,231,779 and $1,226,963 respectively (see Note 11).

 

Fair Value of Financial Instruments

 

The Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. 

 

The following are the hierarchical levels of inputs to measure fair value: 

 

  · Level 1 - Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.
  · Level 2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
  · Level 3 - Unobservable inputs reflecting the Company's assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

 

The carrying amounts of the Company's financial assets and liabilities, such as cash, prepaid expenses, accounts receivable, accounts payable and accrued expenses, certain notes payable and notes payable - related party, approximate their fair values because of the short maturity of these instruments. 

 

The following table represents the Company’s financial instruments that are measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018, for each fair value hierarchy level:

 

June 30, 2019     Derivative Liabilities       Total  
Level I   $ —       $ —    
Level II   $ —       $ —    
Level III   $ 3,082,068     $ 3,082,068  
                 
December 31, 2018                
Level I   $ —       $ —    
Level II   $ —       $ —    
Level III   $ 1,807,404     $ 1,807,404  

  

  10  

 

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.

 

  11  

 

As of June 30, 2019, the Company had received $71,409 of customer deposits, that will be recognized as revenue after June 30, 2019, when the hearing aids are delivered to the customer.

 

Income Taxes

 

The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes. Deferred tax assets and liabilities are recognized to reflect the estimated future tax effects, calculated at the tax rate expected to be in effect at the time of realization. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.

 

ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. Interest and penalties are classified as a component of interest and other expenses. To date, the Company has not been assessed, nor paid, any interest or penalties.

 

Uncertain tax positions are measured and recorded by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized.

 

Advertising and Marketing Expenses

 

The Company expenses advertising and marketing costs as incurred. For the three and six months ended June 30, 2019, advertising and marketing expenses were $143,800 and $311,584, respectively, and for the three and six months ended June 30, 2018, advertising and marketing expenses were $66,007 and $91,328, respectively.

 

Leases

 

Effective January 1, 2019, the Company began accounting for leases under ASU 2016-02 (see Note 14). Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities on the condensed consolidated balance sheets. The Company leases an office space and several retail locations used to conduct our business. On January 1, 2019, the Company adopted ASU No. 2016-02, applying the package of practical expedients to leases that commenced before the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. For contracts entered into on or after the effective date, at the inception of a contract the Company assess whether the contract is, or contains, a lease. Our assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether we have the right to direct the use of the asset. We allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. Leases entered into prior to January 1, 2019, are accounted for under ASC 840 and were not reassessed. We have elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a term of 12 months or less.

 

Operating lease ROU assets represent the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company use an incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Operating lease expense is recognized on a straight-line basis over the lease term and is included in rent in the condensed consolidated statements of operations.

 

Earnings (Loss) Per Share

 

The Company reports earnings (loss) per share in accordance with ASC 260, "Earnings per Share." Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net loss by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding during the period. As of June 30, 2019, and 2018, the Company’s outstanding convertible debt is convertible into approximately 155,394,444 and 90,570,304 shares of common stock, subject to adjustment based on changes in the Company’s stock price, respectively. This amount is not included in the computation of dilutive loss per share because their impact is antidilutive.

 

  12  

 

Recent Accounting Pronouncements

   

In July 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-11 “Earnings Per Share (Topic 260)”. The amendments in the update change the classification of certain equity-linked financial instruments (or embedded features) with down round features. The amendments also clarify existing disclosure requirements for equity-classified instruments. For freestanding equity-classified financial instruments, the amendments require entities that present earnings per share (“EPS”) in accordance with Topic 260, Earnings Per Share, to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features would be subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). For public business entities, the amendments in Part I of this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 with early adoption permitted. The Company adopted this pronouncement as of fiscal 2017.

 

In June 2018, the FASB issued ASU No. 2018-07 “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” These amendments expand the scope of Topic 718, Compensation - Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. The guidance is effective for public companies for fiscal years, and interim fiscal periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company does not anticipate this ASU having a material impact on the Company’s financial statements.

 

In August 2018, the FASB issued ASU 2018-13, “Changes to Disclosure Requirements for Fair Value Measurements”, which will improve the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements, and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company will be evaluating the impact this standard will have on the Company’s consolidated financial statements.

 

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.

 

 

NOTE 4 – GOING CONCERN AND MANAGEMENT’S PLANS

 

The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. which assumes the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The Company experienced a net loss of $3,508,499 for the six months ended June 30, 2019. At June 30, 2019, the Company had a working capital deficit of $5,343,093, and an accumulated deficit of $9,880,578. These factors raise substantial doubt about the Company’s ability to continue as a going concern and to operate in the normal course of business. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from this uncertainty. 

 

Management’s Plans

 

The Company continues to implement an industry encompassing revenue strategy, including the current revenue model to other major sectors of the global hearing industry. On September 10, 2018, the Company acquired all of the assets and assumed certain liabilities of Amos Audiology (see Note 2). This transaction is part of management’s plans to expand the Company’s retail clinic business by opening multiple clinics in the next 12 months. During the six months ended June 30, 2019, the Company opened 5 more retail clinics, and opened another clinic in July 2019. The Company currently owns and operates 9 clinics.

 

 

  13  

 

NOTE 5 – INTANGIBLE ASSETS, NET (OTHER THAN GOODWILL)

 

The Company’s intangible assets consist of a customer list and non-compete acquired from Amos Audiology (see Note 2) and a Technology Access Fee required to be paid by the Company in connection with a manufacturing design and marketing agreement executed with a supplier (see Note 13). The estimated useful lives of these intangible assets are as follows:

 

Customer list

2 years
Non-compete 2 years
Technology access fee 10 years

 

The Company's intangible assets consisted of the following at June 30, 2019, and December 31, 2018:

 

    June 30,
2019
  December 31,
2018
Customer list   $ 300     $ 300  
Non-compete     12,708       12,708  
Technology access fee     1,000,000       1,000,000  
Amortization     (80,420 )     (2,168 )
Balance   $ 932,588     $ 1,010,840  

 

The Company recognized $26,626 and $78,252 of amortization expense for the three and six months ended June 30, 2019, respectively. 

 

 

NOTE 6 – ADVANCES PAYABLE, STOCKHOLDER

 

Chief Executive Officer

 

A summary of the activity for the six months ended June 30, 2019, and the year ended December 31, 2018, representing amounts paid by the Company’s CEO (stockholder) on behalf of the Company and amounts reimbursed is as follows.

 

    June 30, 2019   December 31, 2018
Beginning Balance   $ 57,526     $ 138,637  
Amounts paid on Company’s behalf     367,831       589,524  
Amount applied to accrued officer salaries     17,228       —    
Reimbursements     (378,943 )     (625,635 )
Cancelled in exchange for Series B preferred stock     —         (45,000 )
Ending Balance   $ 63,642     $ 57,526  

 

The ending balances as of June 30, 2019, and December 31, 2018, are included in Advances payable, stockholder on the condensed consolidated balance sheets included herein.

 

 

NOTE 7 – NOTE PAYABLE, STOCKHOLDER

 

A summary of the activity for the three months ended June 30, 2019, and the year ended December 31, 2018, of amounts the Company’s CEO (stockholder) loaned the Company and amounts repaid is as follows:

 

    June 30,
2019
  December 31,
2018
Beginning Balance   $ 95,800     $ 65,000  
Amounts loaned to the Company     —         36,800  
Repaid     —         —    
Ending Balance   $ 95,800     $ 95,800  

 

The ending balance amount is due on demand, carries interest at 8% per annum and is included Notes payable, stockholder on the consolidated balance sheets included herein.

  14  

 

 

NOTE 8 – NOTE PAYABLE

 

On October 8, 2018, the Company entered into a Business Loan Agreement (the “October BLA”) for $47,215 with a third- party, whereby the Company received $35,500 on October 10, 2018. The October BLA requires the Company to make the first six monthly payments of principal and interest of $4,467 per month, and then $3,402 for months seven through twelve. The note carries a 33% interest rate and matures on October 28, 2019. As of June 30, 2019, and December 31, 2018, there was a balance of $17,010 and $38,280, respectively, on the October BLA, with carrying values of $13,641 and $29,270, respectively, net of unamortized discounts of $3,379 and $9,011, respectively.

 

On February 4, 2019, the Company entered into a Business Loan Agreement (the “Feb 2019 BLA”) for $8,584 with a third- party, whereby the Company received $7,400 on February 5, 2019. The Feb 2019 BLA requires the Company to make the first two monthly payments of principal and interest of $1,640 per month, and then $1,326 for months three through six. The note carries a 16% interest rate and matures on August 4, 2019. As of June 30, 2019, there was a balance of $2,653, with a carrying value of $2,455, net of unamortized discounts of $198.

 

On May 7, 2019, the Company entered into a Business Loan Agreement (the “May 2019 BLA”) for $18,088 with a third- party, whereby the Company received $13,600 on May 7, 2019. The May 2019 BLA requires the Company to make the first six monthly payments of principal and interest of $1,711 per month, and then $1,303 for months seven through twelve. The note carries a 33% interest rate and matures on May 7, 2020. As of June 30, 2019, there was a balance of $16,377, with a carrying value of $12,625, net of unamortized discounts of $3,752.

 

 

NOTE 9 – RELATED PARTY TRANSACTIONS

 

During the six months ended June 30, 2019, and the year ended December 31, 2018, our CEO (stockholder) paid expenses and accounts payable on behalf of the Company (see Note 6). As of June 30, 2019, and December 31, 2018, the Company owed the CEO $63,642 and $57,526, respectively, which is included in Advances payable, stockholder on the condensed consolidated balance sheets included herein.

 

Pursuant to a Marketing Agreement (cancelled August 5, 2016), the Company provided marketing programs to promote and sell hearing aid instruments and related devices to Moore Family Hearing Company (“MFHC”). MFHC owned and operated retail hearing aid stores. Based on common control of MFHC and the Company, all transactions with MFHC are classified as related party transactions. The Company has offset the accounts receivable owed from MFHC for these services with expenses of the Company that have been paid by MFHC. As a result of these payments, in addition to MFHC’s payments to the Company through December 31, 2016, the balance due to MFHC as of June 30, 2019, and December 31, 2018, was $22,548, which is included in Accounts payable, related party, on the condensed consolidated balance sheets included herein.

 

Effective August 1, 2016, the Company agreed to compensation of $225,000 and $125,000 per year for the Company’s CEO and CFO, respectively. On November 15, 2016, the Company entered into employment agreements with its CEO and CFO, which includes their annual base salaries of $225,000 and $125,000, respectively. For the three and six months ended June 30, 2019, and 2018, the Company recorded expenses to its officers in the following amounts:

 

    Three months ended June 30,   Six months ended June 30,
  Description   2019   2018   2019   2018
  CEO     $ 56,250     $ 56,250     $ 112,500     $ 112,500  
  CFO       31,250       31,251       62,500       61,540  
  Total     $ 87,500     $ 87,501     $ 175,000     $ 174,040  

 

As of June 30, 2019, and December 31, 2018, the Company in the aggregate owes the CEO and CFO $156,201 and $188,942, respectively, for accrued and unpaid wages. These amounts are included in Officer salaries payable on the balance sheets included herein.

 

  15  

 

In September 2016, the officers and directors of the Company formed a California Limited Liability Company (“LLC1”), for the purpose of acquiring commercial real estate and other business activities. On December 24, 2016, LLC1 acquired two retail stores from the buyer of the MFHC stores. On March 1, 2017, the Company entered into a twelve-month Marketing Agreement with each of the stores to provide telemarketing and design and marketing services for $2,500 per month per store, resulting in related party revenues of $15,000 for the three months ended June 30, 2019, and $15,000 and $30,000 for the three and six months ended June 30, 2018, respectively. Additionally, for the three and six months ended June 30, 2018, the Company invoiced LLC1 $8,323 and $50,744, respectively, for the Company’s production, printing and mailing services and $1,275 for the six months ended June 30, 2018, for sale of products. As of June 30, 2019, and December 31, 2018, LLC1 owes the Company $283,064 and $203,325, respectively, for the consulting fees and mailing services as well as expenses of LLC1 paid by the Company.

 

On June 14, 2017, the Company entered into a five-year lease with LLC1 for approximately 6,944 square feet and a monthly rent of $12,000. For the three and six months ended June 30, 2019, and 2018, the Company expensed $36,000 and $72,000, respectively, related to this lease and is included in Rent, on the condensed consolidated statement of operations, included herein. As of June 30, 2019, and December 31, 2018, the Company owed LLC1 $50,300 and $30,500, respectively, for unpaid rent.

  

On May 9, 2017, the Company and LLC1 purchased certain real property from an unaffiliated party. The Company and LLC1 have agreed that the Company purchased and owns 49% of the building and LLC1 purchased and owns 51% of the building. The contracted purchase price for the building was $2,420,000 and the total amount paid at closing was $2,501,783 including, fees, insurance, interest and real estate taxes. The Company paid for their building interest by delivering cash at closing of $209,971 and being a co-borrower on a note in the amount of $2,057,000, of which the Company has agreed with LLC1 to pay $1,007,930 (see Note 10).

 

 

NOTE 10– INVESTMENT IN UNDIVIDED INTEREST IN REAL ESTATE

 

On May 9, 2017, the Company and LLC1 purchased certain real property from an unaffiliated party. The Company and LLC1 have agreed that the Company purchased and owns 49% of the building and LLC1 purchased and owns 51% of the building. The contracted purchase price for the building was $2,420,000 and the total amount paid at closing was $2,501,783 including, fees, insurance, interest and real estate taxes. The Company paid for their building interest by delivering cash at closing of $209,971 and being a co-borrower on a note in the amount of $2,057,000, of which the Company has agreed with LLC1 to pay $1,007,930.

 

The allocated portion of the results in an equity method investment in a privately-held, related party, company are included in the Company’s condensed consolidated statements of operations. For the three and six months ended June 30, 2019, a gain of $5,856 and $4,816, respectively, and a net gain of $3,046 and $741, for the three and six months ended June 30, 2018, respectively, is included in “Other income (expense), net”. As of June 30, 2019, and December 31, 2018, the carrying value of the Company’s investment in undivided interest in real estate was $1,231,779 and $1,226,963, respectively.

 

The unaudited condensed balance sheets as of June 30, 2019, and December 31, 2018, and the statement of operations for the six months ended June 30, 2019, and 2018, for the real property is as follows:

 

  16  

 

    (Unaudited)   (Unaudited)
Current assets:  

June 30,

2019

 

December 31,

2018

Cash   $ 380     $ 2,257  
Due from InnerScope     50,300       30,500  
Prepaid expenses and other current assets     63,530       72,931  
Total current assets     114,210       105,958  
 Land and Building, net     2,332,502       2,354,282  
Other Assets, net     49,634       53,323  
Total assets   $ 2,496,345     $ 2,513,563  
                 
Current portion of mortgage payable   $ 41,022     $ 40,122  
Other current liabilities     47,894       48,551  
Total current liabilities     88,916       88,673  
Mortgage payable, long-term     1,941,786       1,969,076  
Security deposits     13,064       13,064  
Total liabilities     2,043,766       2,070,813  
Total equity     452,579       442,750  
Total liabilities and equity   $ 2,496,345     $ 2,513,563  

 

    2019   2018
Rental income   $ 149,029     $ 63,211  
Expenses:                
Property taxes     4,430       6,646  
Depreciation and amortization     21,780       11,446  
Insurance     14,130       2,033  
Repairs and maintenance     13,916       3,549  
Utilities and other     20,703       10,087  
Interest expense     64,242       32,355  
Total expenses     139,201       67,916  
Net income (loss)   $ 9,828     $ (4,705 )

 

 

NOTE 11– NOTE PAYABLE - UNDIVIDED INTEREST IN REAL ESTATE

 

On May 9, 2017, the Company and LLC1 purchased certain real property from an unaffiliated party. The Company and LLC1 have agreed that the Company purchased and owns 49% of the building and LLC1 purchased and owns 51% of the building. The contracted purchase price for the building was $2,420,000 and the total amount paid at closing was $2,501,783 including, fees, insurance, interest and real estate taxes. The Company is a co-borrower on a $2,057,000 Small Business Administration Note (the “SBA Note”). The SBA Note carries a 25-year term, with an initial interest rate of 6% per annum, adjustable to the Prime interest rate plus 2%, and is secured by a first position Deed of Trust and business assets located at the property. The Company initially recorded a liability of $1,007,930 for its portion of the SBA Note, with the offset being to Investment in undivided interest in real estate on the balance sheet presented herein. As of June 30, 2019, the current and long-term portion of the SBA Note is $20,096 and $956,542, respectively. Future principal payments for the Company’s portion are:

 

  Twelve months ending June 30,   Amount
  2020     $ 20,096  
  2021       21,495  
  2022       22,870  
  2023       24,228  
  2024       25,579  
  Thereafter       862,370  
  Total     $ 976,638  

 

 

  17  

 

NOTE 12– CONVERTIBLE NOTES PAYABLE

 

On March 2, 2018, the Company completed the closing of a private placement financing transaction (the “Transaction”) when a third-party investor purchased a convertible note (the “Convertible Note”). The Convertible Note carries a 10% annual interest rate and is in the principal amount of $50,000. Principal and interest was due and payable March 2, 2019, and the Note is convertible into shares of the Company’s common stock at any time after one hundred eighty (180) days, at a conversion price (the “Conversion Price”) equal to seventy-five percent (75%) of the average closing price of the Company’s common stock for the ten (10) days immediately preceding the conversion, representing a twenty-five percent (25%) discount. The embedded conversion feature included in the note resulted in an initial debt discount of $13,399, and an initial derivative liability of $13,399. For the six months ended June 30, 2019, amortization of the debt discount of $2,233 was charged to interest expense. During the six months ended June 30, 2019, the investor converted $50,000 of principal and $2,514 of interest into 2,236,291 shares of common stock. As of June 30, 2019, and December 31, 2018, the note balance was $-0- and $50,000, respectively, with a carrying value of $47,767 at December 31, 2018, net of unamortized discounts of $2,333.

 

On March 27, 2018, the Company completed the closing of a private placement financing transaction (the “Transaction”) when a third-party investor purchased a convertible note (the “Convertible Note”). The Convertible Note carries a 10% annual interest rate and is in the principal amount of $25,000. Principal and interest was due and payable March 27, 2019, and the Note is convertible into shares of the Company’s common stock at any time after one hundred eighty (180) days, at a conversion price (the “Conversion Price”) equal to seventy-five percent (75%) of the average closing price of the Company’s common stock for the ten (10) days immediately preceding the conversion, representing a twenty-five percent (25%) discount. The embedded conversion feature included in the note resulted in an initial debt discount of $6,736, and an initial derivative liability of $6,736. For the six months ended June 30, 2019, amortization of the debt discount of $1,628 was charged to interest expense. On April 29, 2019 the Note was sold to a third party investor (see below). As of June 30 2019, and December 31, 2018, the note balance is $-0- and $25,000, respectively, with a carrying value of $23,372, net of unamortized discount of $1,628 as of December 31, 2018.

 

On May 11, 2018, the Company issued a convertible promissory note (the “Note”), with a face value of $100,000, maturing on May 11, 2019, and stated interest of 10% to a third-party investor. The note is convertible at any time after the funding of the note into a variable number of the Company's common stock, based on a conversion ratio of 62% of the lowest trading price for the 20 days prior to conversion. The note was funded on May 16, 2018, when the Company received proceeds of $75,825, after disbursements to vendors and for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $95,000, an initial derivative expense of $60,635 and an initial derivative liability of $155,635. For the six months ended June 30, 2019, amortization of the debt discount of $17,020 was charged to interest expense. The Company also recorded a debt issue discount of $5,000 and amortized $895 to interest expense for the six months ended June 30, 2019. During the six months ended June 30, 2019, the investor converted $50,000 of principal and $3,564 of interest into 5,539,273 shares of common stock. As of June 30, 2019, and December 31, 2018, the note balance is $-0- and $50,000, respectively, with a December 31, 2018, carrying value of $32,085, net of unamortized discounts of $17,915.

 

On May 23, 2018, the Company issued a convertible promissory note (the “Note”), with a face value of $60,000, with a maturity date of February 22, 2019, and stated interest of 12% to a third-party investor. The note is convertible at any time after the funding of the note into a variable number of the Company's common stock, based on a conversion ratio of 65% of the lowest trading price for the 20 days prior to conversion. The note was funded on May 30, 2018, when the Company received proceeds of $57,000, after the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $57,000, an initial derivative expense of $48,033 and an initial derivative liability of $105,033. For the three months ended June 30, 2019, amortization of the debt discount of $11,292 was charged to interest expense. The Company also recorded a debt issue discount of $3,000 and amortized $594 to interest expense for the six months ended June 30, 2019. During the six months ended June 30, 2019, the investor converted $51,275 of principal and $9,838 of interest into 7,909,037 shares of common stock. As of June 30, 2019, and December 31, 2018, the note balance was $-0- and $51,275, respectively, with a carrying value of $39,389, net of unamortized discounts of $11,886 at December 31, 2018.

 

  18  

 

On October 23, 2018, an investor funded the $50,000 remaining of a convertible promissory note (the “Note”) issued on June 26, 2018, with an original face value of $92,000, maturing on September 26, 2019, and stated interest of 10% to a third-party investor. The note is convertible at any time after ninety (90) days of the funding of the note into a variable number of the Company's common stock, based on a conversion ratio of 65% of the lowest trading price for the 20 days prior to conversion. On October 23, 2018, the Company recorded a note balance of $50,000 when the Company received proceeds of $50,000. The embedded conversion feature included in the funding of October 23, 2018, resulted in an initial debt discount of $50,000, an initial derivative expense of $45,291 and an initial derivative liability of $95,291. For the six months ended June 30, 2019, amortization of the debt discount of $25,230 was charged to interest expense. During the six months ended June 30, 2019, the investor converted $50,000 of principal and $2,397 of interest into 2,495,107 shares of common stock. As of June 30, 2019, and December 31, 2018, the note balance is $-0- and $50,000, respectively, with a carrying value of $12,014, net of unamortized discounts of $37,986, at December 31, 2018.

 

On November 2, 2018, the Company issued a convertible redeemable note with a face value of $280,500 and a back-end convertible redeemable note for $280,500 (the “Notes”), maturing on November 2, 2019, and a stated interest of 8% to a third-party investor. The notes are convertible at any time after funding of the note into a variable number of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The first note was funded on November 2, 2018, when the Company received proceeds of $255,000, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the first note resulted in an initial debt discount of $250,000, an initial derivative expense of $148,544 and an initial derivative liability of $398,544. For the six months ended June 30, 2019, amortization of the debt discount of $125,000 was charged to interest expense. The Company also recorded a debt issue discount of $30,500 and amortized $15,250 to interest expense for the six months ended June 30, 2019. During the six months ended June 30, 2019, the investor converted $87,400 of principal and $2,822 of interest into 7,837,442 shares of common stock. As of June 30, 2019, and December 31, 2018, the first note balance is $193,100 and $280,500, respectively, with a carrying value of $99,600 and $46,750, respectively, net of unamortized discounts of $93,500 and $233,750, respectively. On December 26, 2018, the investor partially funded $187,000 of the back-end note, when the Company received proceeds of $166,667, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the partial funding of the back-end note resulted in an initial debt discount of $166,667, an initial derivative expense of $100,081 and an initial derivative liability of $266,748. For the six months ended June 30, 2019, amortization of the debt discount of $97,803 was charged to interest expense. The Company also recorded a debt issue discount of $20,333 and amortized $11,932 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, and December 31, 2018, the partial back-end note balance is $187,000, with carrying values of $112,661 and $2,926, respectively, net of unamortized discounts of $74,339 and $184,074, respectively. On January 29, 2019, the investor funded $93,500, of and completing the back-end note, when the Company received proceeds of $75,000, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the partial funding of the back-end note resulted in an initial debt discount of $75,000, an initial derivative expense of $63,924 and an initial derivative liability of $138,924. For the six months ended June 30, 2019, amortization of the debt discount of $41,178 was charged to interest expense. The Company also recorded a debt issue discount of $10,167 and amortized $5,582 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the second partial back-end note balance is $93,500, with carrying values of $55,093, net of unamortized discounts of $38,407.

 

On December 4, 2018, the Company issued a convertible redeemable note (the “Note”) with a face value of $158,333 maturing on December 4, 2019, and a stated interest of 8% to a third-party investor. The note is convertible at any time after funding of the note into a variable number of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The note was funded on December 4, 2018, when the Company received proceeds of $137,250, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $137,500, an initial derivative expense of $87,293 and an initial derivative liability of $224,793. For the six months ended June 30, 2019, amortization of the debt discount of $68,750 was charged to interest expense. The Company also recorded a debt issue discount of $20,833 and amortized $10,417 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, and December 31, 2018, the note balance is $158,333, with carrying values of $92,361 and $13,194, respectively, net of unamortized discounts of $65,972 and $145,139, respectively.

 

  19  

 

On December 4, 2018, the Company issued to a third-party investor a convertible redeemable note (the “Note”) with a face value of $230,000 and two back-end convertible redeemable notes for $115,000 each. The notes mature on December 4, 2019, have a stated interest of 8% and each note is convertible at any time following the funding of such note into a variable number of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The initial note was funded on December 4, 2018, when the Company received proceeds of $210,000, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $210,000, an initial derivative expense of $108,922 and an initial derivative liability of $318,292. For the six months ended June 30, 2019, amortization of the debt discount of $105,000 was charged to interest expense. The Company also recorded a debt issue discount of $20,000 and amortized $10,000 to interest expense for the six months ended June 30, 2019. During the six months ended JUne 30, 2019, the investor converted $52,500 of principal and $1,167 of interest into 3,699,862 shares of common stock. As of June 30, 2019, and December 31, 2018, the initial note balance is $177,500 and $230,000, respectively, with carrying values of $81,667 and $19,167, respectively, net of unamortized discounts of $95,833 and $210,833, respectively. On February 12, 2019, the investor funded the first back-end note, when the Company received proceeds of $94,100, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the first back-end note resulted in an initial debt discount of $94,100, an initial derivative expense of $64,364 and an initial derivative liability of $158,464. For the six months ended June 30, 2019, amortization of the debt discount of $35,288 was charged to interest expense. The Company also recorded a debt issue discount of $10,000 and amortized $3,750 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the first back-end note balance is $115,000, with a carrying value of $49,937 net of unamortized discounts of $65,063. On March 1, 2019, the investor funded the second back-end note, when the Company received proceeds of $98,175, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the funding of the second back-end note resulted in an initial debt discount of $98,175, an initial derivative expense of $62,254 and an initial derivative liability of $160,429. For the six months ended June 30, 2019, amortization of the debt discount of $31,013 was charged to interest expense. The Company also recorded a debt issue discount of $10,000 and amortized $3,159 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the second back-end note balance is $15,000, with carrying values of $40,997, net of unamortized discounts of $74,003.

 

On December 24, 2018, the Company issued to a third-party investor a convertible redeemable note (the “Note”) with a face value of $195,000 and two back-end convertible redeemable notes for $97,500 each. The notes mature on December 24, 2019, have a stated interest of 8% and each note is convertible at any time following the funding of such note into a variable number of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The initial note was funded on December 26, 2018, when the Company received proceeds of $177,000, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $177,000, an initial derivative expense of $92,464 and an initial derivative liability of $269,464. For the six months ended June 30, 2019, amortization of the debt discount of $88,500 was charged to interest expense. The Company also recorded a debt issue discount of $18,000 and amortized $9,000 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, and December 31, 2018, the initial note balance is $195,000, with carrying values of $100,100 and $2,600, respectively, net of unamortized discounts of $94,900 and $192,400, respectively.

 

On January 22, 2019, the Company issued to a third-party investor a convertible redeemable note (the “Note”) with a face value of $245,000 and two back-end convertible redeemable notes for $122,500 each. The notes mature on January 22, 2020, have a stated interest of 8% and each note is convertible at any time following the funding of such note into a variable number of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The initial note was funded on January 22, 2019, when the Company received proceeds of $200,000, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $200,000, an initial derivative expense of $134,208 and an initial derivative liability of $334,208. For the six months ended June 30, 2019, amortization of the debt discount of $87,500 was charged to interest expense. The Company also recorded a debt issue discount of $25,000 and amortized $10,938 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the initial note balance is $245,000, with a carrying value of $118,437, net of unamortized discounts of $126,563.

 

  20  

 

On February 22, 2019, the Company issued to a third-party investor a convertible redeemable note (the “Note”) with a face value of $116,667. The note matures on February 22, 2020, has a stated interest of 8% and is convertible at any time following the funding of such note into a variable number of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The note was funded on February 22, 2019, when the Company received proceeds of $90,000, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $90,000, an initial derivative expense of $36,138 and an initial derivative liability of $126,138. For the six months ended June 30, 2019, amortization of the debt discount of $31,875 was charged to interest expense. The Company also recorded a debt issue discount of $16,667, and amortized $5,903 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the note balance is $116,667, with a carrying value of $47,778, net of unamortized discounts of 68,889.

 

On March 8, 2019, the Company issued to a third-party investor a convertible redeemable note (the “Note”) with a face value of $133,333. The note matures on February 22, 2020, has a stated interest of 8% and is convertible at any time following the funding of such note into a variable number of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The note was funded on March 8, 2019, when the Company received proceeds of $106,200, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $106,200, an initial derivative expense of $82,538 and an initial derivative liability of $188,738. For the six months ended June 30, 2019, amortization of the debt discount of $33,097 was charged to interest expense. The Company also recorded a debt issue discount of $19,333, and amortized $6,025 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the note balance is $133,333, with carrying values of $46,922, net of unamortized discounts of $86,411.

 

On March 20, 2019, the Company issued to a third-party investor a convertible redeemable note (the “Note”) with a face value of $89,075 and a back-end convertible redeemable note for $89,075. The notes mature on March 20, 2020, hasa stated interest of 8% and is convertible at any time following the funding of such note into a variable number of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The initial note was funded on March 20, 2019, when the Company received proceeds of $75,000, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $75,000, an initial derivative expense of $48,913 and an initial derivative liability of $123,913. For the six months ended June 30, 2019, amortization of the debt discount of $20,756 was charged to interest expense. The Company also recorded a debt issue discount of $9,210, and amortized $2,549 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the initial note balance is $89,075, with carrying values of $28,170, net of unamortized discounts of $60,905.

 

Also, on March 20, 2019, the Company issued to a third-party investor a convertible redeemable note (the “Note”) with a face value of $89,075 and a back-end convertible redeemable note for $89,075. The notes mature on March 20, 2020, has a stated interest of 8% and is convertible at any time following the funding of such note into a variable number of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The initial note was funded on March 20, 2019, when the Company received proceeds of $75,000, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $75,000, an initial derivative expense of $48,913 and an initial derivative liability of $123,913.. For the six months ended June 30, 2019, amortization of the debt discount of $20,756 was charged to interest expense. The Company also recorded a debt issue discount of $9,210, and amortized $2,549 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the initial note balance is $89,075, with carrying values of $28,170, net of unamortized discounts of $60,905.

 

On April 12, 2019, the Company issued to a third-party investor a convertible redeemable note (the “Note”) with a face value of $208,000. The note matures on April 12, 2020, has a stated interest of 8% and is convertible at any time following the funding of such note into a variable number of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The note was funded on April 12, 2019, when the Company received proceeds of $175,000, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $175,000, an initial derivative expense of $104,450 and an initial derivative liability of $279,450. For the six months ended June 30, 2019, amortization of the debt discount of $36,359 was charged to interest expense. The Company also recorded a debt issue discount of $21,550, and amortized $4,477 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the note balance is $208,000, with a carrying value of $52,286, net of unamortized discounts of $155,714.

 

  21  

 

Also, on April 12, 2019, the Company issued to a third-party investor a convertible redeemable note (the “Note”) with a face value of $208,000. The note matures on April 12, 2020, has a stated interest of 8% and is convertible at any time following the funding of such note into a variable number of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The note was funded on April 12, 2019, when the Company received proceeds of $175,000, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $175,000, an initial derivative expense of $104,450 and an initial derivative liability of $279,450. For the six months ended June 30, 2019, amortization of the debt discount of $36,359 was charged to interest expense. The Company also recorded a debt issue discount of $21,550, and amortized $4,477 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the note balance is $208,000, with a carrying value of $52,286, net of unamortized discounts of $155,714.

 

On May 15, 2019, the Company issued to a third-party investor a convertible redeemable note (the “Note”) with a face value of $208,000. The note matures on May 15, 2020, has a stated interest of 8% and is convertible at any time following the funding of such note into a variable number of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The note was funded on May 15, 2019, when the Company received proceeds of $175,000, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $175,000, an initial derivative expense of $104,082 and an initial derivative liability of $279,082. For the six months ended June 30, 2019, amortization of the debt discount of $21,815 was charged to interest expense. The Company also recorded a debt issue discount of $21,550, and amortized $2,686 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the note balance is $208,000, with a carrying value of $35,951, net of unamortized discounts of $172,049.

 

Also, on May 15, 2019, the Company issued to a third-party investor a convertible redeemable note (the “Note”) with a face value of $167,352. The note matures on May 15, 2020, has a stated interest of 8% and is convertible at any time following the funding of such note into a variable number of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The note was funded on May 15, 2019, when the Company received proceeds of $140,250, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $140,250, an initial derivative expense of $85,329 and an initial derivative liability of $225,579. For the six months ended June 30, 2019, amortization of the debt discount of $17,483 was charged to interest expense. The Company also recorded a debt issue discount of $17,352, and amortized $2,686 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the note balance is $167,352, with a carrying value of $29,455, net of unamortized discounts of $137,897.

 

On June 13, 2019, the Company issued to a third-party investor a convertible redeemable note (the “Note”) with a face value of $119,000. The note matures on June 13, 2020, has a stated interest of 8% and is convertible at any time following the funding of such note into a variable number of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The note was funded on June 13, 2019, when the Company received proceeds of $100,000, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $100,000, an initial derivative expense of $49,779 and an initial derivative liability of $149,779. For the six months ended June 30, 2019, amortization of the debt discount of $4,155 was charged to interest expense. The Company also recorded a debt issue discount of $12,500, and amortized $520 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the note balance is $119,000, with a carrying value of $11,175, net of unamortized discounts of $107,825.

 

Also, on June 13, 2019, the Company issued to a third-party investor a convertible redeemable note (the “Note”) with a face value of $119,000. The note matures on June 13, 2020, has a stated interest of 8% and convertible at any time following the funding of such note into a variable number of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The note was funded on June 13, 2019, when the Company received proceeds of $100,000, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $100,000, an initial derivative expense of $49,779 and an initial derivative liability of $149,779. For the six months ended June 30, 2019, amortization of the debt discount of $4,155 was charged to interest expense. The Company also recorded a debt issue discount of $12,500, and amortized $520 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the note balance is $119,000, with a carrying value of $11,175, net of unamortized discounts of $107,825.

 

  22  

 

A summary of the convertible note balances as of June 30, 2019, and December 31, 2018, is as follows:

 

   

June 30,

2019

 

December 31,

2018

Principal balance   $ 2,936,955     $ 1,277,108  
Unamortized discounts     (1,978,128 )     (1,125,942 )
Ending balance, net   $ 958,827     $ 151,166  

 

 

The following is a summary of the Company’s convertible notes and related discounts as of June 30, 2019:

 

    Principal Balance   Debt Discounts   Total
Balance at January 1, 2019   $ 1,277,108     $ (1,125,942 )   $ 151,166  
New issuances     2,026,022       (2,026,022 )     —    
Conversions     (366,175 )     —         (366,175 )
Amortization     —         1,173,836       1,173,836  
Balance at June 30, 2019   $ 2,936,955     $ (1,978,128 )   $ 958,827  

        

 

NOTE 13 – DERIVATIVE LIABILITIES

 

The Company determined that the conversion features of the convertible notes represented embedded derivatives since the Notes are convertible into a variable number of shares upon conversion. Accordingly, the notes are not considered to be conventional debt under EITF 00-19 and the embedded conversion feature is bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of these derivative instruments is recorded as liabilities on the consolidated balance sheet with the corresponding amount recorded as a discount to each Note, with any excess of the fair value of the derivative component over the face amount of the note recorded as an expense on the issue date. Such discounts are amortized from the date of issuance to the maturity dates of the Notes. The change in the fair value of the derivative liabilities are recorded in other income or expenses in the condensed consolidated statements of operations at the end of each period, with the offset to the derivative liabilities on the balance sheet. See Note 12.

 

The Company used the Monte Carlo simulation valuation model with the following assumptions for new notes issued during the six months ended June 30, 2019, risk-free interest rates from 2.00% to 2.59% and volatility of 319% to 387%, and as of December 31, 2018, risk-free interest rates from 2.56% to 2.62% and volatility of 355% to 391%.

 

A summary of the activity related to derivative liabilities for the six months ended June 30, 2019, is as follows:

 

    June 30, 2019
Beginning Balance   $ 1,807,404  
Initial Derivative Liability     2,717,846  
Fair Value Change     (696,761 )
Reclassification for conversions     (746,421 )
Ending Balance   $ 3,082,068  

 

Derivative liability expense of $342,360 for the six months ended June 30, 2019, consisted of the initial derivative expense of $1,039,121 and the above decrease in the fair value of $696,761.

 

 

NOTE 14- OPERATING LEASE RIGHT-OF-USE ASSETS AND OPERATING LEASE LIABILITIES

 

Operating lease right-of-use assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value is our incremental borrowing rate, estimated to be 7.5%, as the interest rate implicit in most of our leases is not readily determinable. Operating lease expense is recognized on a straight-line basis over the lease term. During the three and six months ended June 30, 2019, the Company recorded $98,133 and $194,062, respectively, and $36,000 and $72,000 for the three and six months ended June 30, 2018, respectively, as operating lease expense which is included in rent expense on the statements of operations and includes $36,000 and $72,000 of rent to a related party during the three and six months ended June 30, 2019, and 2018, respectively.

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On June 14, 2017, the company entered into a five-year lease with LLC1 (see Note 10) for approximately 6,944 square feet and a monthly rent of $12,000.

 

On September 10, 2018, pursuant to the Amos Audiology acquisition, the Company assumed a lease dated December 1, 2017 and expiring April 30, 2023, in Walnut Creek, California. Lease payments in the first year of the lease are $3, 988 per month and increase by 3% on December 1 each new lease year. As of December 31, 2018, the Company was in arrears of $25,182 (including late fees) in lease payments and has agreed with the landlord to pay the arrears in seven monthly payments of $3,597 in addition to the monthly lease payments for January 2019 through July 2019.

 

On October 15, 2018, the Company entered into lease to operate a retail hearing aid clinic in Roseville, California expiring December 31, 2023. Initial lease payments of $3,102 begin on January 1, 2019, and increase by 3% on January 1 each new lease year.

 

On December 1, 2018, the Company entered into lease to operate a retail hearing aid clinic in Sacramento, California expiring March 31, 2024. Initial lease payments of $3,002 begin on April 1, 2019, and increase by 3.33% on April 1, 2020 and 2021, and by 3% on April 1, 2022.

 

On February 1, 2019, the Company entered into a lease to operate a retail hearing aid clinic in Elk Grove, California expiring January 31, 2024. Initial lease payments of $2,307 begin on February 1, 2019, and increase by an average of 2.6% on February 1, each new lease year.

 

On February 1, 2019, the Company entered into a lease to operate a retail hearing aid clinic in Fremont, California expiring February 28, 2021. Initial lease payments of $2,019 begin on March 1, 2019, and increases by 3% on March 1, 2020.

 

On April 15, 2019, the Company entered into a lease to operate a retail hearing aid clinic in Pleasanton, California expiring April 30, 2024. Initial lease payments of $3,550 begin on May 1, 2019, and increases by 3% on each new lease year throughout the term.

 

On June 1, 2019, the Company entered into a lease to operate a retail hearing aid clinic in Hayward, California expiring December 31, 2020. Initial lease payments of $1,816 begin on June 1, 2019, and increases to $1,871 on January 1, 2020.

 

On June 1, 2019, the Company entered into a lease to operate a retail hearing aid clinic in Santa Rosa, California expiring June 30, 2023. Initial lease payments of $2,327 begin on June 1, 2019, and increases by approximately 2.5% annually beginning on July 1, 2020.

 

In adopting ASC Topic 842, Leases (Topic 842), the Company has elected the ‘package of practical expedients’, which permit it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter is not applicable to the Company. In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 month or less. During the six months ended June 30, 2019, upon adoption of ASC Topic 842, the Company recorded right-of-use assets and lease liabilities of $1,428,534.

 

Right-of- use assets are summarized below:

 

    June 30, 2019
Office and retail leases   $ 1,428,534  
Less accumulated amortization     (126,350 )
Right-of-us assets, net   $ 1,302,184  

 

Operating lease liabilities are summarized as follows:

 

    June 30, 2019
Lease liability   $ 1,317,947  
Less current portion     (323,309 )
Long term portion   $ 994,739  

 

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Maturity of lease liabilities are as follows:

 

    Amount
For the six months ending December 31, 2019   $ 205,506  
For the year ending December 31, 2020     415,006  
For the year ending December 31, 2021     378,257  
For the year ending December 31, 2022     308,645  
For the year ending December 31, 2023     192,785  
Thereafter     28,407  
Total   $ 1,528,606  
Less: present value discount     (210,659 )
Lease liability   $ 1,317,947  

 

 

NOTE 15– COMMITMENTS AND CONTINGENCIES

 

Consulting Agreements

 

On August 9, 2018, the Company entered into a monthly Consulting Services Master Agreement (the “CSMA”). The CSMA requires a two- month minimum and a 30- day termination notice. Pursuant to the CSMA, the Company is to compensate the consultant $12,500 per month by the issuance of restricted shares of common stock, based on the average closing trading prices for the three days prior to each monthly payment. For the six months ended June 30, 2019, the Company issued 515,818 shares of common stock under the CSMA and the parties agreed to terminate the CSMA.

 

On August 15, 2018, the Company entered into a six-month Consulting Agreement (the “CA”). Pursuant to the CA, the Company agreed to issue 2,500,000 shares of restricted common stock to the consultant.

 

On October 3, 2018, the Company entered into a Manufacturing Design and Marketing Agreement (the “Agreement”) with Zounds, whereby, Zounds will provide design, technology, manufacturing and supply chain services to the Company, to enable the Company to manufacture comparable hearing aids and related components and accessories to be sold under the Company’s exclusive brand names (the “Manufacturer’s Products”) through the Company’s various marketing and distribution channels. The Company will pay Zounds One Million ($1,000,000) (the “Technology Access Fee”). The Technology Access Fee, as amended will be paid in eight (8) installments of $75,000 each, in four- week intervals until $600,000 is paid and $400,000 is to be paid as Product Surcharges based on $200 per unit manufactured for up to the first 2,000 units. Once $400,000 of Product Surcharges are paid said per unit surcharge will be discontinued. During the six months ended June 30, 2019, the Company has paid $280,800 towards the Technology Access Fee and as of June 30, 2019, and December 31, 2018, $536,000 and $816,800 is included in accounts payable and accrued expenses, respectively.

 

On October 31, 2018, the Company entered into a three-year Joint Development Agreement (the “JD Agreement”) and an Exclusive Distribution Agreement (the “ED Agreement”) with Erchonia Corporation (“Erchonia”). As part of the JD Agreement, the Company and Erchonia will conduct FDA clinical research and trials for the purposes of obtaining 510k FDA Clearances for devices, technologies, methods and techniques used in the treatment of hearing relating conditions and disorders such as Tinnitus, Sensorineural hearing Loss, dizziness and other disorders. The agreements give the Company the exclusive worldwide rights for all designs and any newly developed Erchonia 3LT lasers and related technologies and gives the Company the rights to license and distribute such products worldwide. Pursuant to the JD Agreement, the Company has agreed to issue 1,000,000 shares of common stock. The Company valued the common stock to be issued at $60,000, based on the market price of the common stock on the date of the JD Agreement, to be amortized over the three-year term. For the three and six months ended June 30, 2019, the Company amortized $5,000 and $13,333, respectively, as stock-based compensation. As of June 30, 2019, there remains $46,667, of deferred stock compensation on the condensed consolidated balance sheet, to be amortized over the three-year contract term.

 

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On December 7, 2018, the Company entered into a one- year consulting agreement (the “Media Consulting Agreement”) with a third- party consultant (the “Consultant”). The Consultant will provide communication and broadcast services, as well as strategic planning services. Pursuant to the Media Consulting Agreement, the Company has agreed to issue the Consultant 3,125,000 shares of restricted common stock. On December 7, 2018, the Company recorded 3,125,000 shares of common stock to be issued. The Company valued the common stock to be issued at $125,000 based on the market price of the common stock on the date of the Media Consulting Agreement, to be amortized over the term of the agreement. The Company issued 1,712,329 of the shares and there remain 1,412,671 shares to be issued. The Company amortized $31,250 and $62,500 for the three and six months ended June 30, 2019, respectively, and is included in Professional fees on the condensed consolidated Statement of operations. As of June 30, 2019, there remains $54,861 of deferred stock compensation on the consolidated balance sheet, to be amortized in 2019.

 

On April 1, 2019, the Company entered into a six- month consulting agreement with a third- party consultant (the “Consultant”). The Consultant will provide consulting services related to the conception and implementation of the Company’s business development plan, as well as other strategic planning services. Pursuant to the agreement, the Company issued the Consultant 2,000,000 shares of restricted common stock. The Company valued the common stock at $128,000 based on the market price of the common stock on the date of the agreement, to be amortized over the term of the agreement. The Company amortized $64,000 for the three and six months ended June 30, 2019, and is included in Professional fees on the condensed consolidated Statement of operations. As of June 30, 2019, there remains $64,000 of deferred stock compensation on the consolidated balance sheet, to be amortized in 2019.

 

On April 3, 2019, the Company entered into a six- month consulting agreement with a third- party consultant (the “Consultant”). The Consultant will provide consulting services related to the conception and implementation of the Company’s marketing plans, promoting the goals and objectives of the Company. Pursuant to the agreement, the Company paid $20,000 and issued 1,000,000 shares of restricted common stock to the Consultant. The Company valued the common stock at $75,000 based on the market price of the common stock on the date of the agreement, to be amortized over the term of the agreement. The Company amortized $37,500 for the three and six months ended June 30, 2019, and is included in Professional fees on the condensed consolidated Statement of operations. As of June 30, 2019, there remains $37,500 of deferred stock compensation on the consolidated balance sheet, to be amortized in 2019.

 

On April 17, 2019, the Company entered into a six- month consulting agreement with a third- party consultant (the “Consultant”). The Consultant will provide consulting services related to the corporate communications. Pursuant to the agreement, the Company issued 1,000,000 shares of restricted common stock to the Consultant. The Company valued the common stock at $67,500 based on the market price of the common stock on the date of the agreement, to be amortized over the term of the agreement. The Company amortized $28,125 for the three and six months ended June 30, 2019, and is included in Professional fees on the condensed consolidated Statement of operations. As of June 30, 2019, there remains $39,375 of deferred stock compensation on the consolidated balance sheet, to be amortized in 2019.

 

Legal Matters

 

On May 26, 2017, Helix Hearing Care (California), Inc. a California corporation (“Helix”), filed a complaint (the “Complaint”) against the InnerScope and the Moores, in the Circuit Court of the 11th Judicial Circuit in and for Miami-Dade County, Florida, that includes a rescission of the Consulting Agreement and a demand that all monies paid pursuant to the Consulting Agreement be returned, on the basis that an injunction against certain Officers and Directors renders the Consulting Agreement impossible to perform. The Company had previously received $1,250,000 under the Consulting Agreement. InnerScope was not named as an enjoined party in such previous litigation, and the services contemplated under the Consulting Agreement are not within the scope of the injunction, thus InnerScope believes the accusation by the third party is frivolous and without merit, as well as not providing sufficient cause for the Agreement to be terminated. InnerScope and the Moores filed their Answer and Affirmative Defenses to the Complaint on June 27, 2017.  On the same date, InnerScope, the Moores, and MFHC filed a counterclaim. On February 27, 2018, the Counterclaim was amended to include four claims for breach of contract, one claim for anticipatory breach of contract, one claim for negligent misrepresentation, and one claim for account stated. On August 13, 2018, Helix, the Company and the Moores signed a Settlement Agreement, whereby, the Company received $450,000, both parties dismissing all claims against the other party with prejudice and Matthew, Mark and Kimberly have been released from their covenant not to compete agreement signed in August 2016 with Helix.

 

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NOTE 16 – STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

The Company has 25,000,000 authorized shares of $0.0001 preferred stock.

 

Series A Preferred Stock

 

On June 4, 2018, the Company filed in the State of Nevada a Certificate of Designation of a series of preferred stock, the Series A Preferred Stock. 9,510,000 shares were designated as Series A Preferred Stock. The Series A Preferred Stock has mandatory conversion rights, whereby each share of Series A Preferred Stock will convert two (2) shares of common stock upon the Company filing Amended and Restated Articles of Incorporation with the Secretary of State of Nevada, increasing the authorized shares of common stock. The Series A Preferred Stock has voting rights on an is if converted basis. The Series A Preferred Stock does not have any right to dividends. On June 4, 2018 the Company issued 3,170,000 shares of Series A Preferred Stock each to Matthew, Mark and Kimberly, in exchange for each of them cancelling and returning to treasury 6,340,000 shares of common stock. The issuances were made in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act, and Rule 506(b) promulgated thereunder, as the shareholders are accredited investors, there was no general solicitation, and the transaction did not involve a public offering. On August 8, 2018, Matthew, Mark and Kim each converted 3,170,000 shares of Series A Preferred Stock for 6,340,000 shares of common stock. The common stock issued replaced the 19,010,000 shares in the aggregate that the Moore’s cancelled in June 2018. As of June 30, 2019, and December 31, 2018, there were no shares of Series A Preferred Stock issued and outstanding.

 

Series B Preferred Stock

 

On June 4, 2018, the Company also filed in the State of Nevada a Certificate of Designation of a series of preferred stock, the Series B Preferred Stock. 900,000 shares were designated as Series B Preferred Stock. The Series B Preferred Stock is not convertible into common stock, nor does the Series B Preferred Stock have any right to dividends and any liquidation preference. The Series B Preferred Stock entitles its holder to a number of votes per share equal to 1,000 votes. On June 4, 2018, the Company issued 300,000 shares of its Series B Preferred Stock each to Matthew, Mark and Kimberly, in consideration of $45,000 of accrued expenses, the Company’s failure to timely pay current and past salaries, and the willingness to accrue unpaid payroll and non-reimbursement of business expenses without penalty or action for all amounts. The issuances were made in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act, and Rule 506(b) promulgated thereunder, as the shareholders are accredited investors, there was no general solicitation, and the transaction did not involve a public offering. The Company determined that fair value of the Series B Preferred Stock issued to the Company’s CEO was $817,600. The fair value was determined as set forth in the Statement of Financial Accounting Standard ASC 820-10-35-37, Fair Value in Financial Instruments. As of June 30, 2019, and December 31, 2018, there were 900,000 shares of Series B Preferred Stock issued and outstanding.

 

Common Stock

 

The Company has 490,000,000 authorized shares of $0.0001 common stock. As of June 30, 2019, and December 31, 2018, there are 161,826,468 and 120,425,344, respectively, shares of common stock outstanding.

 

On January 24, 2019, the Company issued 515,818 shares of restricted common stock pursuant to the CSMA (See Note 15). The shares were valued at $12,500 based on the average closing price for the three days prior to the effective date of the CSMA.

 

During the six months ended June 30, 2019, the Company issued 3,961,177 shares of common stock that were classified as common stock to be issued as of December 31, 2018.

 

During the six months ended June 30, 2019, the Company issued 37,764 shares of common stock to an employee as part of their compensation. The Company agreed to issue $10,000 of stock, over a twelve- month period starting November 2018 based on continual employment, based on the average closing price of the Company’s common stock for the 3 days prior to employment, and accordingly recorded stock-based compensation of $1,392 and $2,500 for the three and six months ended June 30, 2019, included in Compensation and benefits in the condensed consolidated statement of operations, included herein.

.

  27  

 

During the six months ended June 30, 2019, the Company issued 104,166 shares of common stock to an employee as part of their compensation. The Company agreed to issue $20,000 of stock, over a twelvemonth period based on continual employment, based on the highest closing price of the Company’s common stock for the 5 days prior to employment, and accordingly recorded stock-based compensation of $1,146 and $5,000 for the three and six months ended June 30, 2019, included in Compensation and benefits in the condensed consolidated statement of operations, included herein.

 

During the six months ended June 30, 2019, the Company issued 84,270 shares of common stock to an employee as part of their compensation. The Company agreed to issue $10,000 of stock, over a twelve- month period based on continual employment, based on the average closing price of the Company’s common stock for the 3 days prior to employment, and accordingly recorded stock-based compensation of $2,500 for the six months ended June 30, 2019, included in Compensation and benefits in the condensed consolidated statement of operations, included herein.

 

During the six months ended June 30, 2019, the Company issued 64,404 shares of common stock each to two employees as part of their compensation. The Company agreed to issue $20,000 of stock to each employee over a six- month period starting November 2018 based on continual employment, to each, based on the average closing price of the Company’s common stock for the 3 days prior to employment, and accordingly recorded stock-based compensation of $6,750 and $10,000 for the three and six months ended June 30, 2019, included in Compensation and benefits in the condensed consolidated statement of operations, included herein.

 

During the six months ended June 30, 2019, the Company issued 113,637 shares of common stock to an employee as part of their compensation. The Company agreed to issue $20,000 of stock, over a twelve- month period based on continual employment, based on the highest closing price of the Company’s common stock for the 5 days prior to employment, and accordingly recorded stock-based compensation of $1,629 and $5,000 for the three and six months ended June 30, 2019, included in Compensation and benefits in the consolidated statement of operations, included herein.

 

On April 1, 2019, the Company issued the to a consultant 2,000,000 shares of restricted common stock. The Company valued the common stock at $128,000 based on the market price of the common stock on the date of the agreement, to be amortized over the term of the agreement.

 

On April 2, 2019, the Company issued 625,000 shares of restricted common stock in settlement of $25,000 of accounts payable owed. The Company valued the stock at $40,625 based on the market price of the common stock on the date of the agreement. The Company recorded a loss on debt extinguishment of $15,625 related to the issuance of 625,000 shares.

 

On April 3, 2019, the Company issued 1,000,000 shares of restricted common stock to a consultant. The Company valued the common stock at $75,000 based on the market price of the common stock on the date of the agreement, to be amortized over the term of the agreement.

 

On April 17, 2019, the Company issued 1,000,000 shares of restricted common stock to a consultant. The Company valued the common stock at $67,500 based on the market price of the common stock on the date of the agreement, to be amortized over the term of the agreement.

 

On May 22, 2019, the Company issued 666,666 shares of restricted common stock to a consultant for financial services provided. The Company valued the common stock at $32,000 based on the market price of the common stock on the date of the agreement, and is included in stock-based compensation expense for the three and six months ended June 30, 2019.

 

During the six months ended June 30, 2019, the Company issued 31,163,818 shares of common stock for conversion of $366,175 of principal and $52,790 of accrued interest and fees, for a total of $418,965.

 

Common Stock to be issued

 

During the six months ended June 30, 2019, the Company issued 3,961,177 shares of common stock that were classified as common stock to be issued as of December 31, 2018.

 

  28  

 

During the six months ended June 30, 2019, the Company recorded 468,645 shares of common stock to be issued to employees as part of their compensation. The Company agreed to issue stock, over a twelve- month period based on continual employment, based on their offer of employment, and, accordingly, recorded $25,000 for the three and six months ended June 30, 2019, for the common stock to be issued (issued on July 5, 2019).

 

As of June 30, 2019, there were 2,881,316 shares of common stock to be issued.

 

 

NOTE 17 – SUBSEQUENT EVENTS

 

From July 1, 2019, through August 24, 2019, the Company received conversion notices for the issuances of 35,281,904 shares of common stock for conversion of $365,600 of principal and $19,006 of accrued interest on convertible notes.

On May 31, 2019, the Company entered into a lease beginning July 1, 2019, to operate a retail hearing aid clinic in Greenhaven, California expiring June 30, 2022. Initial lease payments of $1,450 begin on July 1, 2019, and increase by approximately 5% annually beginning on July 1, 2020.

 

On July 1, 2019, the Company issued to a third-party investor a convertible redeemable note (the “Note”) with a face value of $183,975. The note matures on July 1, 2020, has a stated interest of 8% and is convertible at any time following the funding of such note into a variable number of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The note was funded on July 1, 2019, when the Company received proceeds of $150,000, after disbursements for the lender’s transaction costs, fees and expenses.

 

On July 5, 2019, the Company issued 468,645 shares of restricted common stock to employees (see note 16).

 

On July 18, 2019, the Company received proceeds of $100,000, after disbursements for the lender’s transaction costs, fees and expenses of the $122,500 back-end note dated January 22, 2019.

 

On August 9, 2019, the Company issued to a third-party investor a convertible redeemable note (the “Note”) with a face value of $122,650. The note matures on August 9, 2020, has a stated interest of 8% and is convertible at any time following the funding of such note into a variable number of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The note was funded on August 9, 2019, when the Company received proceeds of $100,000, after disbursements for the lender’s transaction costs, fees and expenses.

 

On August 20, 2019, the Company received proceeds of $75,000, after disbursements for the lender’s transaction costs, fees and expenses of the $89,085 back-end note dated March 20, 2019.

 

On August 26, 2019, the Company filed Amended and Restated Articles of Incorporation (the “Amendment”) with the Nevada Secretary of State, pursuant to which the Company increased the authorized shares of capital stock of the Company to 1,000,000,000, consisting of 975,000,000 shares of common stock, par value $0.0001, and 25,000,000 shares of preferred stock, par value $0.0001 (the “Preferred Stock”), with the Preferred Stock issuable in such series, and with such designations, rights and preferences, as the Board of Directors may determine from time to time.

  

The Company has evaluated subsequent events through the date the financial statements were issued and filed with the Securities and Exchange Commission. The Company has determined that there are no other such events that warrant disclosure or recognition in the financial statements, except as stated herein.

 

 

  29  

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and notes thereto for the years ended December 31, 2018 and 2017 and filed by the Company on Form 10-K with the Securities and Exchange Commission on April 16, 2019.

 

This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future.

 

While our financial statements are presented on the basis that we are a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time, our independent auditor’s report on our financial statements for the years ended December 31, 2018 and 2017 includes a “going concern” explanatory paragraph that describes substantial doubt about our ability to continue as a going concern. Management’s plans in regard to the factors prompting the explanatory paragraph are discussed below and also in Note 3 to the unaudited condensed consolidated financial statements.

 

Corporate History and Current Business

 

InnerScope Hearing Technologies, Inc. (“Company”, “InnerScope”) is a Nevada Corporation incorporated on June 15, 2012, with its principal place of business in Roseville, California. The Company was originally named InnerScope Advertising Agency, Inc. and was formed to provide advertising and marketing services to retail establishments in the hearing device industry. On August 25, 2017, the Company changed its name to InnerScope Hearing Technologies, Inc. to better reflect the Company’s current direction as a technology driven company with a scalable business to business (BTB) solution and business to consumer (and BTC) solution. The Company also competes in the DTC (Direct-to-Consumer) markets with its own line of “Hearables”, and “Wearables”, including APPs on the iOS and Android markets. On 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. Additionally, the Company has opened 9 retail hearing device clinics, manages two clinics owned by a related party and plans on using management’s unique and successful talents on acquiring and opening additional audiological brick and mortar clinics to be owned and operated by the Company. 

 

Results of Operations

 

For the three and six months ended June 30, 2019 compared to the three and six months ended June 30, 2018

 

Revenues

 

Revenues for the three and six months ended June 30, 2019 were $219,673 and $406,202, respectively, compared to $50,014 and $105,991 for the three and six months ended June 30, 2018, respectively. The revenue increase was primarily the result of the sales from retail clinics during the three and six month periods ending June 30, 2019, partially offset by a decrease in direct print and mail services for the three and six months ending June 30, 2019. The Company is focusing on the higher margins associated with the sales of hearing aids and hearing aid products. A breakdown of the net increase in sales is as follows:

 

  30  

 

   

Three months ended

June 30,

 

Six months ended

June 30,

    2019   2018  

2019

 

2018

Retail clinic sales   $ 217,007     $ —       $ 382,901     $ —    
Online sales     2,666       9,027       8,301       18,523  
Direct print, mail services and product     —         17,664       —         35,449  
Sub total     219,673       26,691       391,202       53,972  
                                 
Related party- direct print and mail services     —         8,323       —         22,019  
Related party-Marketing and consulting fee     —         15,000       15,000       30,000  
Sub total     —         23,323       15,000       52,019  
Total revenues   $ 219,673     $ 50,014     $ 406,202     $ 105,591  

 

Retail clinic sales

 

Retail clinic sales will continue to grow as the Company has opened three additional retail clinics in the second quarter of 2019, and opened an additional clinic in July 2019, bringing the current total to 9 clinics. The Company anticipates to open as many as xx more by December 31, 2019.

 

Online sales

 

Beginning in the second quarter of 2018, the Company began to market a line of PSAP hearables and wearables and during the third quarter of 2018, expanded their line of products to include FDA registered hearing aid devices. The Company has introduced the products through new marketing campaigns, to bring awareness to the products and anticipates sales of these products to increase during the remainder of 2019 and beyond.

 

Related Party

 

On December 24, 2016, Moore Holdings, LLC. (“Moore Holdings”) acquired two retail stores from the buyer of the MFHC stores. On March 1, 2017, the Company entered into a twelve- month Marketing Agreement with each of the stores to provide telemarketing and design and marketing services for $2,500 per month per store, resulting in $15,000 of revenues for the six months ended June 30, 2019, and $15,000 and $30,000 for the three and six months ended June 30, 2018, respectively. The Marketing Agreement is currently on a month to month basis. As of April 1, 2019, the Company stopped recording the marketing income and will ony record such income going forward based on payments received from the related party. For the three and six months ended June 30, 2018, the Company also provided direct print and mailing services for the two retail sales and recognized revenue of $8,323, and $22,019, respectively, for the services.

 

Cost of sales

 

The Company records cost of sales on products sold in the retail clinics on delivery to the customer and for online sales, when shipped. We recognize the costs of designing, producing, printing and mailing advertisements for our client’s direct mail marketing campaigns in cost of sales in the month of the mailing as well as the licensing of telemarketing software. Cost of sales for the three and six months ended June 30, 2019, was $99,463 and $181,827, respectively, compared to $31,802 and $70,666 for the three and six months ended June 30, 2018, respectively.

 

Operating Expenses

 

Operating expenses were $1,138,958 and $2,115,689 for the three and six months ended June 30, 2019, respectively, compared to $1,173,044 and $1,603,274 for the three and six months ended June 30, 2018, respectively. The increase in expenses in the current periods was as follows:

 

  31  

 

   

Three months ended

June 30,

 

Six months ended

June 30,

  Description   2019   2018   2019   2018
Compensation and benefits   $ 399,170     $ 153,167     $ 748,823     $ 312,705  
Stock compensation     233,793       772,600       358,292       836,840  
Professional fees     42,047       115,419       69,026       166,666  
Advertising and promotion     143,800       66,007       311,584       91,328  
Investor relations     89,528       23,778       164,776       76,419  
Rent, including related party of $36,000 for three months (2018 and 2019) and $72,000 for six months (2018 and 2019)     98,133       36,000       194,062       72,000  
Other general and administrative     132,487       6,073       269,126       47,316  
Total   $ 1,138,958     $ 1,173,044     $ 2,115,689     $ 1,603,274  

 

Compensation and benefits increased in the current three and six month periods, as the Company acquired Amos Audiology in September 2018 as well as having opened two additional retail clinics in 2018, compared to having a total of eight clinics as of June 30, 2019, all of which required staffing as well as additional office support staff.

 

Stock based compensation of $233,793 and $358,292 for the three and six months ended June 30, 2019, respectively, is comprised of:

 

· The amortization of deferred stock compensation of $165,876 and $263,792 for the three and six months ended June 30, 2019.

 

· On January 24, 2019, the Company issued 515,818 shares of restricted common stock pursuant to a consultant agreement. The shares were valued at $12,500 and included in stock- based compensation expense for the six months ended June 30, 2018, based on the average closing price for the three days prior to the effective date of the consultant’s agreement.

 

· On May 22, 2019, the Company issued 666,666 shares of restricted common stock for financial services performed. The shares were valued at $32,000 and included in stock-based compensation expense for the three and six months ended June 30, 2019.

 

· During the six months ended June 30, 2019, the Company issued 468,645 shares of restricted common stock and also recorded 468,645 of shares of common stock to be issued (issued July 5, 2019) to employees. The shares were valued at $35,917 and $50,000, based on the market price of the common stock, the date the Company agreed to issue the shares and are included in stock-based compensation expense for the three and six months ended June 30, 2019, respectively.

 

Stock based compensation for the three and six months ended June 30, 2018, is comprised of:

 

· On February 23, 2018, the Company issued 111,111 shares of common stock to a marketing consultant. The shares were valued at $7,778, based on the market price of the common stock on January 31, 2018, the date the Company agreed to issue the shares and are included in the six months ended June 30, 2018.

 

· On February 23, 2018, the Company issued 10,397 shares of common stock to an employee. The shares were valued at $728, based on the market price of the common stock on January 31, 2018, the date the Company agreed to issue the shares and are included in the six months ended June 30, 2018.

 

· On February 28, 2018, the Company recorded 133,067 shares of common stock to be issued to a marketing consultant (see Note 12) and recorded $8,117 of stock-based compensation expense (based on the market price of the common stock on that date) and are included in the six months ended June 30, 2018.

 

· On March 31, 2018, the Company recorded 133,333 shares of common stock to be issued to the same marketing consultant and recorded $9,067 of stock-based compensation expense (based on the market price of the common stock on that date) and are included in the six months ended June 30, 2018.

  32  

 

 

· The amortization of deferred stock compensation of $25,000 is included in the six months ended June 30, 2018.

 

· On April 30, 2018, the Company recorded 166,667 shares of common stock to be issued to the same marketing consultant and recorded $6,883 of stock-based compensation expense (based on the market price of the common stock on that date) and is included in the three and six months ended June 30, 2018.

 

· On May 31, 2018, the Company recorded 380,952 shares of common stock to be issued to the same marketing consultant and recorded $6,667 of stock-based compensation expense (based on the market price of the common stock on that date) and is included in the three and six months ended June 30, 2018.

 

· On June 4, 2018, the Company issued 300,000 shares of its Series B Preferred Stock each to Matthew, Mark and Kimberly, in consideration of $45,000 of accrued expenses, the Company’s failure to timely pay current and past salaries, and the willingness to accrue unpaid payroll and non-reimbursement of business expenses without penalty or action for all amounts. The Company determined that fair value of the Series B Preferred Stock issued to the Company’s CEO was $817,600, and accordingly $772,600 is included in stock compensation expense for the three and six months ended June 30, 2018. The fair value was determined as set forth in the Statement of Financial Accounting Standard ASC 820-10-35-37, Fair Value in Financial Instruments.

 

Professional fees for the three and six months ended June 30, 2019, were $42,047 and $69,026, respectively, compared to $115,419 and $166,666 for the three and six months ended June 30, 2018, respectively. Professional fees consisted of: 

 

   

Three months ended

June 30,

 

Six months ended

June 30,

  Description   2019   2018   2019   2018
Legal fees   $ 298     $ 34,481     $ 9,228     $ 67,169  
Business consulting     700       32,124       1,370       44,124  
Accounting and auditing fees     40,500       31,152       54,000       47,000  
Information technology     549       4,112       4,427       8,373  
Total   $ 42,047     $ 115,419     $ 69,026     $ 166,666  

 

Advertising and marketing expenses increased in the three and six months ended June 30, 2019, as a result of the Company heavily promoting their retail clinics. The costs include direct mail advertising as well as newspaper print advertising.

 

Rent, including related party, increased for the three and six months ended June 30, 2019, compared to the three and six months ended June 30, 2018 as a result of the eight new leases related to the Company’s retail clinics in the 2019 periods, none of which were open during the 2018 periods.

 

Other income (expense), net

 

Other expenses, net, were $486,664 and $1,617,136 for the three and six months ended June 30, 2019, respectively, compared to $698,193 and $983,020 for the three and six months ended June 30, 2018. For the three and six months ended June 30, 2019, a credit to derivative expenses of $235,478 and an expense of $342,360, respectively, related to convertible notes and interest expense of $728,456 and $1,235,198, respectively, including amortization of debt discounts increased significantly compared to the same periods in 2018, as a result of more issuances of convertible notes. For the three and six months ended June 30, 2018, the derivative expenses of $518,711 and $669,970, respectively. Interest expense also increased as a result of the convertible notes, and interest expense of $182,528 and $313,792, respectively, pursuant to the terms and conditions of the convertible notes issued by the Company.

 

Net loss

 

Net loss for the three and six months ended June 30,2019, was $1,505,411 and $3,508,449, respectively, compared to $1,853,025 and $2,550,969 for the three and six months ended June 30, 2018, respectively, as a result of the increases in operating and other expenses as described above.

 

  33  

 

Capital Resources and Liquidity

 

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs to pay ongoing obligations. As of June 30, 2019, we had cash of $5,017, a decrease of $82,809, from $87,826 as of December 31, 2018. As of June 30, 2019, we had current liabilities of $5,939,297 (including derivative liabilities of $3,082,068) compared to current assets of $596,204 which resulted in working capital deficit of $5,343,093. The current liabilities are comprised of accounts payable, accrued expenses, notes payable, convertible notes payable, operating lease liabilities, customer deposits, salaries and taxes payable, and derivative liabilities.

 

Our ability to operate over the next twelve months, is contingent upon continuing to realize sales revenue sufficient to fund our ongoing expenses. If we are unable to sustain our ongoing operations through sales revenue, we intend to fund operations through debt and/or equity financing arrangements, which may be insufficient to fund our working capital, or other cash requirements. There can be no assurance that such additional financing will be available to us on acceptable terms, or at all.  Since June 30, 2019, we generated cash flows of $483,500, from the issuance of $518,210 of convertible notes and $60,000 note payable and approximately $196,000 received from the sales of hearing aid products. We do not have any formal commitments or arrangements for the sales of stock or the advancement or loan of funds at this time.

 

Operating Activities

 

Cash used in operating activities was $1,682,111 for the six months ended June 30, 2019 compared to $572,621 for the six months ended June 30, 2018. For the six months ended June 30, 2019, the cash used in operations was a result of the net loss of $3,508,449 and the changes in operating assets and liabilities of $310,084, partially offset by the non- cash expense items of depreciation, amortization and amortization of debt discounts of $1,393.694, derivative expense of $342,360 and stock- based compensation of $358,292. For the six months ended June 30, 2018, the cash used in operations was a result of the net loss of $2,550,969 and increases in assets of $7,518, offset by increases in liabilities of $283,572 and the non- cash expense items of depreciation and amortization of $274,147, derivative expense of $669,970 and stock- based compensation of $836,840.

 

Investing Activities

 

Cash used in investing activities was $69,755 for the six months ended June 30, 2019, and consisted of purchases of fixed assets of $46,274 and payments of $23,481 for security deposits. There was no investing activity for the six months ended June 30, 2018.

 

Financing Activities

 

For the six months ended June 30, 2019, cash provided by financing activities was $1,669,057 compared to $534,654 for the six months ended June 30, 2018. For the six months ended June 30, 2019, the Company has received $1,678,725 from the issuance of $2,026,022 of convertible notes and cash of $21,000 from the issuance of a note payable of $26,672 and net payments of $6.116 were made from a related party. For the six months ended June 30, 2019, the Company made payments of $36,784 on notes payable. For the six months ended June 30, 2018, the Company has received $592,250 from the issuance of $654,050 of convertible notes, cash of $32,600 from the issuance of a note of $43,358, and related party notes payable issued of in the aggregate of $31,200. For the six months ended June 30, 2018, the Company made principal payments of $94,725 on convertible notes, $20,671 on notes payable and $6,000 was paid on related party notes payable.

 

OFF BALANCE SHEET ARRANGEMENTS

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.

 

  34  

 

Critical Accounting Policies

 

Basis of presentation

 

The accompanying condensed consolidated financial statements are prepared in accordance with Generally Accepted Accounting Principles in the United States of America ("US GAAP"). The condensed consolidated financial statements of the Company include the consolidated accounts of InnerScope and its’ wholly owned subsidiaries ILLC and Intela-Hear, a California limited liability company. All intercompany accounts and transactions have been eliminated in consolidation. 

 

Use of estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Revenue Recognition

 

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.

 

Income taxes

 

The Company uses the liability method of accounting for Income Taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance can be provided for a net deferred tax asset, due to uncertainty of realization.

  

Net loss per common share

 

The Company reports earnings (loss) per share in accordance with ASC 260, "Earnings per Share." Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net loss by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding during the period. As of June 30, 2019, and 2018, the Company’s outstanding convertible debt is convertible into approximately 155,394,444 and 90,570,304 shares of common stock, subject to adjustment based on changes in the Company’s stock price, respectively. This amount is not included in the computation of dilutive loss per share because their impact is antidilutive.

 

  35  

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable.

 

Item 4. Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC. This information is accumulated to allow our management to make timely decisions regarding required disclosure. Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report and he determined that our disclosure controls and procedures were not effective due to control deficiencies. During the period we did not have additional personnel to allow segregation of duties to ensure the completeness or accuracy of our information. The Company does not have an Audit Committee to oversee management activities, and the Company is dependent on third party consultants for the financial reporting function.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act that occurred during the quarter ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

  36  

 

Part II. Other Information

 

Item 1. Legal Proceedings

 

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, on the basis that an injunction against certain Officers and Directors renders the Consulting Agreement impossible to perform. 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, InnerScope and the Moores executed a Settlement Agreement.

 

Item 1A. Risk Factors

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Act of 1934 and are not required to provide the information under this item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

On April 1, 2019, the Company issued 113,637 shares of common stock to an employee as part of their compensation. The Company agreed to issue $20,000 of stock, over a six- month period based on continual employment, based on the average closing price of the Company’s common stock for the 5 days prior to employment, and accordingly recorded stock-based compensation of $5,000, 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 3, 2019, the Company recorded 410,284 shares of restricted common stock to be issued pursuant to a consulting agreement. The shares were valued at $12,500 based on the average closing price for the three days prior to the month of service pursuant to the consultant’s agreement.

 

On April 17, 2019, the Company issued 1,000,000 shares of restricted common stock to a consultant. The Company valued the common stock at $67,500 based on the market price of the common stock on the date of the agreement, to be amortized over the term of the agreement.

 

On May 22, 2019, the Company issued 666,666 shares of restricted common stock to a consultant for financial services provided. The Company valued the common stock at $32,000 based on the market price of the common stock on the date of the agreement, and is included in stock-based compensation expense for the three and six months ended June 30, 2019.

 

  37  

 

The issuances described above related to the issuance of shares for services and are pursuant to agreements, were issued in reliance upon the exemption from securities registration afforded by the provisions of Section 4(a)(2) of the Securities Act.

 

On April 17, 2019, the Company issued 2,495,107 shares of common stock to Carebourn Capital, L.P. (“Carebourn”) in satisfaction of its obligations under, and the holder's election to convert $50,000 of principal and $2,397 of accrued interest, of the Company's convertible promissory note issued to Carebourn on June 27, 2018.

 

On May 31, 2019, the Company issued 716,124 shares of common stock to Carebourn in satisfaction of its obligations under, and the holder's election to convert $25,000 of principal and $1,260 of accrued interest, of the Company's convertible promissory note issued on March 27, 2018 to a third party and purchased by Carebourn on April 29, 2019.

 

On June 25, 2019, the Company issued 1.048.726 shares of restricted common stock to Eagle Equities, LLC (“Eagle”) in partial satisfaction of its obligations under, and the holder's election to convert a $18,000 principal portion and $940 of interest, of, the Company's convertible promissory note issued to Eagle on November 2, 2018.

 

On June 26, 2019, the Company issued 2,162,541 shares of restricted common stock to GS Capital Partners, LLC (“GS Capital”) in partial satisfaction of its obligations under, and the holder's election to convert a $37,500 principal portion and $1,101 of interest, of, the Company's convertible promissory note issued to GS Capital on December 4, 2018.

 

The issuances described above were made in reliance on the exemption from registration provided by Sections 3(a)(9) and 4(a)(1) of the Securities Act as the common stock was issued in exchange for debt securities of the Company held by each shareholder, there was no additional consideration for the exchange, there was no remuneration for the solicitation of the exchange, the shareholders were not affiliates, and they had held the underlying debt securities for the required time. The holders provided legal opinions pursuant to Section 4(a)(1) of Securities Act, or Rule 144 promulgated thereunder.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

 

Item 6. Exhibits

 

Exhibit

Number

  Description of Exhibit
3.1*   Articles of Incorporation
3.2*   Bylaws of InnerScope Advertising Agency, Inc.
3.3*   Amended and Restated Articles of Incorporation
3.4*   Amended and Restated Articles of Incorporation dated August 25, 2017
3.5*   Certificate of Designation Series A Preferred Stock dated June 4, 2018
3.6*   Certificate of Designation Series B Preferred Stock dated June 4, 2018
3.7*   Amended and Restated Articles of Incorporation dated August 7, 2018
4.3*   Private Placement Offering Memorandum
10.2*   InnerScope, Inc. Marketing Agreement between the Company and Moore Family Hearing Company, Inc.
10.3*   Acquisition Agreement and Plan of Share Exchange dated June 20, 2012, between the Company and InnerScope Advertising Agency, LLC
10.4*   Acquisition Agreement and Plan of Share Exchange dated November 1, 2013, between the Company and Intela-Hear, LLC
10.5*   Promissory Note dated April 1, 2013, between the Company and Matthew Moore
  38  

 

10.6*   Promissory Note dated June 25, 2013, between the Company and Matthew Moore
10.7*   June 2012 Business Consulting Agreement
10.8+*   GN ReSound Sales Agreement
10.9+*   Store Expansion Consulting Agreement
10.10+*   Consulting Agreement
10.11#*   Employment Agreement with Matthew Moore, CEO
10.12#*   Employment Agreement with Kimberly Moore, CFO
10.13*   Financial Consulting Agreement between the Company and Venture Equity, LLC
10.14*   Consulting and Representation Agreement between the Company and CorporateAds.com
10.15*  

Business Loan Agreement, dated May 5, 2017, between InnerScope Advertising Agency, Inc. and Moore Holdings, LLC and First Community Bank.

10.16*  

Commercial Security Agreement, dated May 5, 2017, between InnerScope Advertising Agency, Inc. and Moore Holdings, LLC and First Community Bank.

10.17*   U.S. Small Business Administration Note.
10.18*  

Deed of Trust, dated May 5, 2017, among InnerScope Advertising Agency, Inc. and Moore Holdings, LLC. and First Community Bank and Placer Title Company.

10.19*  

Securities Purchase Agreement dated October 5, 2017 by and between InnerScope Hearing Technologies, Inc. and Power Up Lending Group, LTD.

10.20*  

Convertible Promissory Note dated October 5, 2017, by and between InnerScope Hearing Technologies, Inc. and Power Up Lending Group, LTD.

10.21*  

Securities Purchase Agreement dated November 10, 2017, by and between InnerScope Hearing Technologies, Inc. and Carebourn Capital, L.P.

10.22*  

Convertible Promissory Note dated November 10, 2017, by and between InnerScope Hearing Technologies, Inc. and Carebourn Capital, L.P.

10.23*  

Securities Purchase Agreement dated February 8, 2018 by and between InnerScope Hearing Technologies, Inc. and Power Up Lending Group, LTD.

10.24*  

Convertible Promissory Note dated February 8, 2018, by and between InnerScope Hearing Technologies, Inc. and Power Up Lending Group, LTD.

10.25*  

Securities Purchase Agreement dated April 8, 2018, by and between InnerScope Hearing Technologies, Inc. and Carebourn Capital, L.P.

10.26*  

Convertible Promissory Note dated April 8, 2018, by and between InnerScope Hearing Technologies, Inc. and Carebourn Capital, L.P.

10.27*  

Securities Purchase Agreement dated May 11, 2018, by and between InnerScope Hearing Technologies, Inc. and One44 Capital LLC

10.28*  

Convertible Promissory Note dated May 11, 2018, by and between InnerScope Hearing Technologies, Inc. and One44 Capital LLC

10.29*  

Convertible Back- End Promissory Note dated May 11, 2018, by and between InnerScope Hearing Technologies, Inc. and One44 Capital LLC

10.30*   Mutual Settlement Agreement and Release with Helix Hearing Care (California), Inc.
10.31*   Manufacturing Design and Marketing Agreement.
10.32*   Securities Purchase Agreement between InnerScope Hearing Technologies, Inc. and Eagle Equities, LLC, dated November 2, 2018.
10.33*   Form of 8% Convertible Redeemable Notes issued by Company to Eagle Equities, LLC, dated November 2, 2018.
10.34*   $255,500 Principal Amount 8% Collateralized Secured Promissory Note issued by Eagle Equities, LLC.
10.35*  

First Amendment to Manufacturing Design and Marketing Agreement (the “Zounds Agreement”) between InnerScope Hearing Technologies, Inc. and Zounds Hearing, Inc., a Delaware corporation (“Zounds”), dated November 2, 2018

10.36*   Joint Development Agreement between InnerScope Hearing Technologies, Inc. and Erchonia Corporation.
10.37*   Exclusive Distributor Agreement between InnerScope Hearing Technologies, Inc. and Erchonia Corporation.
  39  

 

31.1**   Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
31.2**   Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
32.1**   Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
101.INS**   XBRL Instance
101.SCH**   XBRL Taxonomy Extension Schema
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase
101.DEF**   XBRL Taxonomy Extension Definition Linkbase
101.LAB**   XBRL Taxonomy Extension Labels Linkbase
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase

 

* Previously filed.

 

+ Confidential Treatment has been requested for certain portions thereof pursuant to Confidential Treatment Request under Rule 406 promulgated under the Securities Act. Such provisions and attachments have been filed with the Securities and Exchange Commission.

 

** Filed Herewith

 

# Denotes management contract or compensatory plan or arrangement.

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: August 30, 2019

 

INNERSCOPE HEARING TECHNOLOGIES, INC.

 

By: /s/ Matthew Moore                      

Matthew Moore

Chief Executive Officer (principal executive officer)

 

By: /s/ Kimberly Moore                       

Kimberly Moore

Chief Financial Officer (principal financial and accounting officer)

 

 

 

40

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