Notes
to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 - ORGANIZATION
Business
InnerScope Hearing
Technologies, Inc. (“Company”, “InnerScope”) is a Nevada Corporation incorporated on June 15, 2012, with
its principal place of business in Roseville, California. ISAA was formed to provide advertising and marketing services to retail
establishments in the hearing device industry. On June 20, 2012, ISAA entered into an Acquisition and Plan of Share Exchange with
InnerScope Advertising Agency, LLC (“ILLC”), a commonly owned entity, whereby ISAA acquired 100% of ILLC. On November
1, 2013, ISAA entered into an Acquisition and Plan of Share Exchange with Intela-Hear, LLC (“Intela-Hear”), a commonly
owned entity, whereby ISAA acquired 100% of the outstanding equity of Intela-Hear in exchange for 27,000,000 shares of the Company’s
common stock. This resulted in Intela-Hear becoming a wholly-owned subsidiary of the Company. On August 25, 2017, the Company
changed its name to InnerScope Hearing Technologies, Inc.
InnerScope is a
technology driven company with scalable Business to Business (“BTB”) and Business to Consumer (“BTC”)
solutions. The Company offers a BTB SaaS based Patient Management System (PMS) software program, designed to improve operations
and communication with patients. InnerScope also offers a Buying Group experience for audiology practice, enabling owners to lower
product costs and increase their margins. The Company will compete in the DTC (Direct-to-Consumer) over the counter hearing aid
markets with its own line of “Hearables”, and “Wearables”, including APPs on the iOS and Android markets.
The company also plans on opening, operating and expanding a chain of audiological and retail hearing device clinics.
The
Company also provides a comprehensive range of services (including consulting services), grouped into four fundamental disciplines:
advertising/marketing, customer relationship management, public relations and specialty communications. The Company serves the
retail hearing aid dispensing community through generating traffic and consumer interest for hearing aid dispensing practices
and providing consulting services to hearing aid dispensaries. For the three and nine months ended September 30, 2017, approximately
24.8% and 15.1%, respectively, of revenues were from a related party, compared to the three and nine months ended September 30,
2016, where revenues from a that same related party were 83.1% and 69.9%, respectively. On August 5, 2016, the Company and the
related party agreed to cancel their Marketing Agreement as a result of the sale by the related party of substantially all of
their assets (see note 5).
On
August 5, 2016, the Company along with Mark Moore (“Mark”, the Company’s Chairman of the Board), Matthew
Moore (“Matthew”, the Company’s Chief Executive Officer) and Kim Moore (“Kim”, the Company’s
Chief Financial Officer) entered into a Store Expansion Consulting Agreement (the “Expansion Agreement”) with a third
party (the “Client”). Mark, Matthew and Kim are herein referred to collectively as the “Moores”. Pursuant
to the Expansion Agreement, the Company and the Moores were responsible for all physical plant and marketing details for the Client’s
new store openings during the initial term of six-months. The Expansion Agreement was cancelled on January 6, 2017. The Client
has decided to do their own marketing in-house and eliminate this out-sourced contract, and has decided to open only one
location and delay the opening of any other new stores. For the nine months ended September 30, 2017, the Company has
recognized $100,000 of income for the one new store, opened in January 2017, and $400,000 in other income for payments received
for the Expansion Agreement pursuant to the cancellation. The Client also paid an additional $30,000 for the cancellation of the
Store Expansion Agreement and a marketing agreement.
Also
on August 5, 2016, the Company and the Moores entered into a Consulting Agreement (the “Consulting Agreement”) with
the same Client as the store Expansion Agreement. Under the Consulting Agreement, including the Non-Compete provision covering
a ten-mile radius of any retail store, the Company and the Moores will provide unlimited licensing of the Intela-Hear brand name,
exclusive access to the Aware Aural Rehab Program within 10 miles of retail stores, exclusive territory of all services within
10 miles of retail stores and 40 hours per month of various consulting services. The Consulting Agreement continues until January
31, 2019, unless terminated for cause, as defined in the Consulting Agreement. On May 26, 2017, the Company and the Moores were
named in an action filed by the Client, that includes a demand that all monies paid pursuant to the Consulting Agreement be returned.
The Company believes the claim is frivolous and without merit, as well as not providing sufficient cause for the Agreement to
be terminated (See Note 9).
NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING PRINCIPLES
Basis of
Presentation and Principles of Consolidation
The accompanying
condensed consolidated financial statements have been prepared by the Company without audit. In the opinion of management, all
adjustments necessary to present the financial position, results of operations and cash flows for the stated periods have been
made. Except as described below, these adjustments consist only of normal and recurring adjustments. Certain information and note
disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or omitted. These condensed consolidated unaudited financial
statements should be read in conjunction with a reading of the Company’s consolidated financial statements and notes thereto
included in Form 10-K filed with the SEC on March 31, 2017. Interim results of operations for the three and nine months ended
September 30, 2017 and 2016 are not necessarily indicative of future results for the full year. Certain amounts from the 2016
period have been reclassified to conform to the presentation used in the current period.
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.
Emerging
Growth Companies
The
Company qualifies as an “emerging growth company” under the 2012 JOBS Act. Section 107 of the JOBS Act provides that
an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities
Act for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption
of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to take
advantage of the benefits of this extended transition period.
Use of Estimates
The preparation
of financial statements in conformity with accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reported period.
Significant estimates relied upon in preparing these financial statements include collectability of notes receivable from an officer,
and through July 31, 2016, the allocation of our President’s compensation to the Company. Actual results could differ from
those estimates.
Cash and Cash Equivalents
The Company considers
all highly liquid investments with an original term of three months or less to be cash equivalents. These investments are carried
at cost, which approximates fair value. Cash and cash equivalent balances may, at certain times, exceed federally insured limits.
If the amount of a deposit at any time exceeds the federally insured amount at a bank, the uninsured portion of the deposit could
be lost, in whole or in part, if the bank were to fail.
Accounts receivable
The Company records
accounts receivable at the time products and services are delivered. An allowance for losses is established through a provision
for losses charged to expenses. Receivables are charged against the allowance for losses when management believes collectability
is unlikely. The allowance (if any) is an amount that management believes will be adequate to absorb estimated losses on existing
receivables, based on evaluation of the collectability of the accounts and prior loss experience. As of September 30, 2017, management’s
evaluation did not require any allowance for uncollectible receivables.
Sales Concentration
and Credit Risk
Following is a
summary of customers who accounted for more than ten percent (10%) of the Company’s revenues for the three and nine months
ended September 30, 2017 and 2016, and accounts receivable balance as of September 30, 2017:
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Accounts
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Receivable
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September
30, 2017
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September
30, 2016
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as
of
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3
months
%
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9
months
%
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3
months
%
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9
months
%
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September
30, 2017
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Customer
A
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29.3%
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—
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—
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—
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$
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5,660
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Customer
B
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22.9%
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17.8%
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—
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—
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55,799
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Customer
C, related
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24.8%
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16.1%
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42.7%
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69.9%
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57,890
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Customer
D
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—
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33.3%
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57.3%
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30.1%
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—
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Deferred
Commission and Commission Payable, Stockholder
The Company records
deferred commission when cash has been paid, but the related services have not been provided by the party (stockholder). Commission
expense will be recognized when the services are provided. As of December 31, 2016, the Company had advanced $133,334, and in
January, an additional $375,000. For the nine months ended September 30, 2017, the Company expensed $508,334 (included in other
expenses in the Condensed Consolidated Statements of Operations), due to uncertainty of future services being provided, based
on the Complaint filed on May 26, 2017 (see Note 9).
Inventory
Inventory is valued
at the lower of cost or market value. Cost is determined using the first in first out (FIFO) method. Provision for potentially
obsolete or slow-moving inventory is made based on management analysis or inventory levels and future sales forecasts.
Notes Receivable,
Officer
The Company records
notes receivable when a recipient has issued a note to the Company in exchange for cash. The Company records as a current asset,
any portion of the note that is due in the subsequent twelve (12) months for the date of the balance sheet, and any payments due
in excess of twelve months of the balance sheet are classified as long term. As of September 30, 2017, $12,925 (includes $121
of interest due) is due by June 30, 2018. The Company received payments of $5,337 of principal and interest during the nine months
ended September 30, 2017.
Intangible
Assets
Costs for intangible
assets are accounted for through the capitalization of those costs incurred in connection with developing or obtaining such assets.
Capitalized costs are included in intangible assets in the consolidated balance sheet. During the nine months ended September
30, 2017, the Company purchased the domain name
www.innd.com
from
a third party for $3,000.
Property
and Equipment
Property and equipment
are stated at cost, and depreciation is provided by use of a straight-line method over the estimated useful lives of the assets.
The Company reviews property and equipment for potential impairment whenever events or changes in circumstances indicate that
the carrying amounts of assets may not be recoverable. The estimated useful lives of property and equipment are as follows:
Computer equipment
|
3 years
|
The Company's property
and equipment consisted of the following at September 30, 2017 and December 31, 2016:
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September
30,
2017
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December
31,
2016
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Computer equipment
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$
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2,650
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$
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2,650
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Accumulated
depreciation
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(846
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)
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(183
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)
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Balance
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$
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1,804
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$
|
2,467
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Depreciation expense
of $221 and $663 was recorded for the three and nine months ended September 30, 2017, respectively.
Investment
in Undivided Interest in Real Estate
The Company accounts
for its’ investment in undivided interest in real estate using the equity method, as the Company is severally liable only
for the indebtedness incurred with its interest in the property. The Company includes its allocated portion of net income or loss
in Other income (expense) in its Statement of Operations, with the offset to the equity investment account on the balance sheet.
For the three months ended September 30, 2017, the Company recognized a gain of $2,962 and a loss of $983 for the nine months
ended September 30, 2017. As of September 30, 2017, the carrying value of our equity method investment in this privately-held
company was $1,221,341 (see Note 7).
Revenue
Recognition
The
Company recognizes revenue in accordance with FASB ASC 605, Revenue Recognition. ASC 605 requires that four basic criteria are
met (1) persuasive evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is fixed
or determinable and (4) collectability is reasonably assured. The Company recognizes revenue during the period in which the services
are performed. In addition to the revenue recognized for the delivery of services and product, for the nine months ended September
30, 2017, the Company received and recognized $100,000 of revenue related to the Store Expansion agreement, and $30,000 of income
from the cancellation of the Marketing and Store Expansion Agreements.
Deferred
Revenue
The
Company records deferred revenues from the Consulting Agreement when cash has been received, but the related services have not
been provided. Revenue will be recognized when the services are provided and the terms of the agreement have been fulfilled. As
of September 30, 2017, the Company has deferred revenue of $847,223 related to the Consulting Agreement. On May 26, 2017, the
Company and the Moores were named in an action filed that includes a demand that all monies paid pursuant to the Consulting Agreement
be returned. The Company believes the claim is frivolous and without merit, as well as not providing sufficient cause for the
Agreement to be terminated (See Note 9). The Company has not recognized any revenue in 2017 from the Consulting Agreement as a
result of this litigation.
Fair Value
of Financial Instruments
The Company's financial
instruments consist primarily of cash, notes and interest receivable, officer and accounts payable and amount due to a related
party (MFHC). The carrying amounts of such financial instruments approximate their respective estimated fair value due to
the short-term maturities. The estimated fair value is not necessarily indicative of the amounts the Company would
realize in a current market exchange or from future earnings or cash flows.
Income Taxes
The Company accounts
for income taxes in accordance with ASC 740-10, Income Taxes. Deferred tax assets and liabilities are recognized to reflect the
estimated future tax effects, calculated at the tax rate expected to be in effect at the time of realization. A valuation allowance
related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not
be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date
of enactment.
ASC 740-10 prescribes
a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides
guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition
issues. Interest and penalties are classified as a component of interest and other expenses. To date, the Company has not been
assessed, nor paid, any interest or penalties.
Uncertain tax positions
are measured and recorded by establishing a threshold for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the
effective date may be recognized or continue to be recognized.
Earnings
(Loss) Per Share
The Company reports
earnings (loss) per share in accordance with ASC 260, "Earnings per Share." Basic earnings (loss) per share is computed
by dividing net income (loss), after deducting preferred stock dividends accumulated during the period, by the weighted-average
number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net loss by
the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding
during the period. As of September 30, 2017, and 2016, the Company did not have any outstanding common stock equivalents or any
other potentially dilutive securities.
Recent Accounting
Pronouncements
Recent accounting
pronouncements issued by the FASB and the SEC did not have, or are not believed by management to have, a material impact on the
Company's present or future consolidated financial statements.
NOTE 3 –
GOING CONCERN AND MANAGEMENT’S PLANS
These
unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“US GAAP”), which contemplates continuation of the Company 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 net losses from continuing operations of $279,403, and $1,189,635 for the three and nine months ended September 30,
2017, respectively. At September 30, 2017, the Company had a working capital deficit of $1,052,500, and an accumulated deficit
of $1,063,315. 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.
Through
August 5, 2016, the Company was dependent on the Marketing Agreement with MFHC, (the Company and MFHC agreed to cancel the Marketing
Agreement which generated approximately 43% and 70%, respectively, of the Company’s revenues for the three and nine months
ended September 30, 2016, as a result of the sale by MFHC of substantially all of their assets) and is now dependent on the sale
of our services to third parties and the Consulting Agreement. On May 2, 2017, the Company received a demand that all monies paid
pursuant to the Consulting Agreement be returned. On May 26, 2017, the Company and the Moores were named in an action filed that
includes a demand that all monies paid pursuant to the Consulting Agreement be returned. The Company believes the claim is frivolous
and without merit, as well as not providing sufficient cause for the Agreement to be terminated (See Note 9). The Company has
filed a countersuit for breach of contract, demanding that all monies owed to it, pursuant to the Consulting Agreement, be paid,
together with interest thereon.
Management’s
Plans
The Company’s
plans include the realization of the Consulting Agreement to provide the Company with working capital. Additionally, the Company
plans to develop and deploy a revenue eco-system strategy, including expanding the revenue model to other major sectors of the
global hearing industry. The Company, recently announced plans to acquire AUDserv Inc., and will create 7 separate revenue-generating
divisions. Each division will generate revenue and be poised for growth, increasing the Company’s market penetration.
The 7 separate
divisions are:
Patient Management
System (PMS) Division: a SaaS based software program which was created, designed and customized by and for audiologists, specifically
to fill a much-needed clinical gap solved in other multidiscipline software programs. It allows audiological retail clinics to
better manage their day-to-day operations through efficient clinical workflow, patient follow up, and logical organization of
data. The PMS software platform delivers a comprehensive business solution. Once the data is uploaded, the platform seamlessly
integrates the needs of the audiologist, management, patient and marketing. The software also provides a link between an electronic
medical record (EMR) system containing patient's medical history, all while seamlessly integrating the schedule and patient files
of the clinics’ patient management platform. EMR systems are not designed for Audiology and the records are often not integrated.
The Company’s PMS software solves that problem by linking the two platforms.
Buying Group Division:
The Company will create an exclusive Buying Group experience that will permit hearing aid practices of all sizes to reduce their
wholesale costs by aggregating their orders with other practices to obtain a lower per unit cost.
Direct-to-Consumer
(DTC) Division: The Company will be competing within the new emerging “Hearables” and “Wearables” markets
in “Personal Sound Amplification Products” (PSAP’s) and the Over-the-Counter (OTC) hearing aid market created
by the result of recently passed Congressional legislation, H.R.1652 - Over-the-Counter Hearing Aid Act of 2017 (OTC). The Hearing
Aid Act of 2017, allows the purchase of hearing aids and related products without seeking a medical professional. The Company
will invest in “Hearable” technology, as well as create its own brands and technology in the PSAP and OTC hearing
aids in the DTC markets.
APP Development
Division: The Company plans on building apps for the iOS and Android markets that will be dedicated to serving the hearing impairment
population around the world. The APPs will be developed to help the audiology and hearing aid retail practices that have joined
the Buying Group or using the Company’s PMS software as well as APPs for the hearing-impaired consumer to use for a better
hearing experience.
Advertising and
Marketing Division: This division will be built on the Company’s current business and will include graphic artists, digital
and print marketing experts, and telemarketers. This division will assist all divisions in helping to market and deploy all products
and services to practices and consumers, as well as assisting Buying Group members with advertising and marketing for their own
practices.
Retail Division:
The Company plans to open a chain of Audiological and Hearing Aid Clinics throughout the United States and eventually abroad.
Research and Development
Division (“R&D”): Management has been researching and developing products and solutions for the Business to Business
(“BTB”) and Business to Consumer (“BTC”) hearing impaired markets for more than 3 decades. The R&D
team which will comprised of world renowned scientists, business professionals and industry leaders will develop and deploy products.
NOTE 4 –
NOTE RECEIVABLE, OFFICER
On April 1, and
June 25, 2013, in exchange for two notes receivable, the Company loaned the President of the Company $10,000 and $10,500, respectively.
The terms of the notes include an interest rate of 1.5% per annum and the notes, as amended are due on their fifth-year anniversary,
with quarterly payment beginning October 1, 2016. Interest income, related party of $57 and $179 was recorded for the three and
nine months ended September 30, 2017, respectively, and $77 and $231 for the three and nine months ended September 30, 2016, respectively.
As of September 30, 2017, and December 31, 2016, notes and interest receivable, related party was $12,925 and $18,084, respectively.
NOTE 5 –
NOTE PAYABLE, OFFICER
During the nine
months ended September 30, 2017, an officer made, in the aggregate, advances to the Company of $14,500. These advances are due
on demand.
NOTE 6 –
RELATED PARTY TRANSACTIONS
The Company loaned
the President $20,500 during the year ended December 31, 2013 (see Note 4). The Company recorded interest income of $57 and $179
for the three and nine months ended September 30, 2017, respectively, and $77 and $231 for the three and nine months ended September
30, 2016.
During the
nine months ended September 30, 2017, an officer made, in the aggregate, advances to the Company of $14,500. These advances are
due on demand.
Pursuant
to a Marketing Agreement (cancelled August 5, 2016), the Company provided marketing programs to promote and sell hearing aid instruments
and related devices to Moore Family Hearing Company (“MFHC”). MFHC owned and operated retail hearing aid stores. Based
on common control of MFHC and the Company, all transactions with MFHC are classified as related party transactions. On August
8, 2016, in consideration of $128,000 (the “Cancellation Fee”), MFHC and the Company agreed to cancel the Marketing
Agreement as a result of the sale by MFHC of substantially all of their assets (see Note 9). On August 11, 2016, MFHC paid $229,622
to the Company (inclusive of the balance owed as of June 30, 2016, the Cancellation Fee and other related party activity).
Pursuant to
the Marketing Agreement, beginning in January 2014, the monthly fee was increased from $2,500 to $3,200 per retail location.
For the three and nine months ended September 30, 2016 (through August 5, 2016), there were 20 stores resulting in revenue of
$74,667 and $458,667, respectively. The Company has offset the accounts receivable owed from MFHC for expenses of the Company
that have been paid by MFHC. As a result of these payments, in addition to MFHC’s payments to the Company during the
year ended December 31, 2016, the balance due to MFHC as of September 30, 2017 and December 31, 2016 was $22,548 and $13,048,
respectively, is included in accounts payable, related party.
On April 1, 2013,
the Company entered into a five-year sublease agreement with MFHC to sublease approximately 729 square feet of office space for
$1,500 per month. The monthly rent reduced the amounts owed to the Company from MFHC for the marketing services provided to MFHC.
For the nine months ended September 30, 2017, the Company expensed $1,500 and for the three and nine months ended September 30,
2016, the Company expensed $4,500 and $13,500, respectively, related to this lease.
On February 1,
2016, the Company entered into a one-year sublease agreement with MFHC to sublease approximately 2,119 square feet of office space
for $4,026 per month. The monthly rent reduced the amounts owed to the Company from MFHC for the marketing services provided to
MFHC. Effective April 30, 2016, MFHC released the Company from the sublease. For the nine months ended September 30, 2016, the
Company expensed $12,078 related to this lease.
Prior
to August 1, 2016, the Company’s President was being compensated from MFHC, as he also held a position with MFHC. During
that time the Company estimated the portion of the President’s salary that should be allocated to the Company, and subsequent
to August 1, 2016, the Company agreed to compensation of $225,000 per year. Effective August 1, 2016, the Company agreed to compensate
our Chief Financial Officer $125,000 per annum. On November 15, 2016, the Company entered into employment agreements with our
CEO and CFO, which includes an annual base salary of $225,000 and $125,000, respectively. The Company expensed $56,250 and $168,750
for the President, for the three and nine months ended September 30, 2017, respectively and $31,250 and $93,750, respectively,
of expense for the CFO. For the three and nine months ended September 30, 2016, the Company expensed $37,500 and $81,625, respectively,
for the allocation of the President’s salary. As of September 30, 2017, the Company owed the CEO $34,615 and the CFO $14,423
for unpaid wages, as well as $1,877 of accrued payroll taxes. Accordingly $50,915 is reported as officer salaries payable as of
September 30, 2017.
In
September 2016, the officers and directors of the Company formed a California Limited Liability Company
(“LLC1”), for the purpose of acquiring commercial real estate and other business activities. On December 24,
2016, LLC1 acquired two retail stores from the buyer of the MFHC stores. On March 1, 2017, the Company entered into a
twelve-month Marketing Agreement with each of the stores to provide telemarketing and design and marketing services for
$2,500 per month per store, resulting in $15,000 and $35,000 of revenues for the three and nine months ended September 30,
2017, respectively. Additionally, for the three and nine months ended September 30, 2017, the Company invoiced LLC1 $10,948
and $27,890, respectively, for the Company’s production, printing and mailing services. On May 9, 2017, the Company and
LLC1 purchased certain real property from an unaffiliated party (see Note 7). On June 14, 2017, the company entered into a
five-year lease with LLC1 for approximately 6,944 square feet and a monthly rent of $12,000. For the three and nine months
ended September 30, 2017, the Company expensed $36,000 and $40,499, respectively, related to this lease.
During
the nine months ended September 30, 2017, the officers of the corporation paid expenses on behalf of the Company. As of September
30, 2017, the net amount owed the officers is $132,032 and is included in accounts payable, related party.
In
November 2016, the Company’s Chairman formed a California Limited Liability Company (“LLC2”), for the purpose
of providing consulting services to the Company. The Company entered into an agreement with LLC2, and paid LLC2 $375,000 during
the year ended December 31, 2016, for services performed and to be performed. Of the $375,000 amount paid, $241,667 was recognized
as consulting fees- stockholder for the year ended December 31, 2016, and the remaining $133,334 was recorded as deferred commissions-
stockholder as of December 31, 2016. For the nine months ended September 30, 2017, the Company paid LLC2 an additional $771,000
($96,000 of which reduced previous amounts owed) and expensed $808,334 ($60,000 as commissions for services performed and $748,334
as other expense). As of September 30, 2017, the deferred commissions-stockholder is $-0-.
On May 9, 2017,
the Company and LLC1 purchased certain real property from an unaffiliated party. The Company and LLC1 have agreed that the Company
purchased and owns 49% of the building and LLC1 purchased and owns 51% of the building. The contracted purchase price for the
building was $2,420,000 and the total amount paid at closing was $2,501,783 including, fees, insurance, interest and real estate
taxes. The Company paid for their building interest by delivering cash at closing of $209,971, and being a co-borrower on a note
in the amount of $2,057,000, of which the Company has agreed with LLC1 to pay $1,007,930 (see Note 7).
NOTE 7–
INVESTMENT IN UNDIVIDED INTEREST IN REAL ESTATE
On May 9, 2017,
the Company and LLC1 purchased certain real property from an unaffiliated party. The Company and LLC1 have agreed that the Company
purchased and owns 49% of the building and LLC1 purchased and owns 51% of the building. The contracted purchase price for the
building was $2,420,000 and the total amount paid at closing was $2,501,783 including, fees, insurance, interest and real estate
taxes. The Company paid for their building interest by delivering cash at closing of $209,971, and being a co-borrower on a note
in the amount of $2,057,000, of which the Company has agreed with LLC1 to pay $1,007,930.
The Company accounted
for the investment using the equity method. The allocated portion of the results in an equity method investment in a privately-held,
related party, company are included in the Company’s condensed consolidated statements of operations. For the three and
nine months ended September 30, 2017, $2,962 (net income) and $983 (net loss), respectively, are included in “Other income
(expense), net”. As of September 30, 2017, the carrying value of our equity method investment in this privately-held company
was $1,221,341.
NOTE 8–
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 a 6% per annum interest rate and is secured by a first position Deed of Trust and business assets
located at the property. The Company initially recorded a liability of $1,007,930 for its portion of the SBA Note, with the offset
being to Investment in undivided interest in real estate on the balance sheet presented herein. As of September 30, 2017, the
current and long-term portion of the SBA Note is $18,243 and $986,760, respectively. Future principal payments for the Company’s
portion are:
|
Year
|
|
Amount
|
|
2017
|
|
|
$
|
4,494
|
|
|
2018
|
|
|
|
18,518
|
|
|
2019
|
|
|
|
19,660
|
|
|
2020
|
|
|
|
20,708
|
|
|
2021
|
|
|
|
22,150
|
|
|
Thereafter
|
|
|
|
919,473
|
|
|
Total
|
|
|
$
|
1,005,003
|
|
NOTE 9–
COMMITMENTS AND CONTINGENCIES
Lease Agreements
On April 1, 2013,
the Company entered into a five-year sublease agreement with MFHC to sublease approximately 729 square feet of office space for
$1,500 per month. The monthly rent reduced the amounts owed to the Company from MFHC for the marketing services provided to MFHC.
On February 1,
2014, the Company entered into a two-year sublease agreement for approximately 2,119 square feet of office space in Roseville,
Ca, for $3,000 per month.
On February 1,
2017, the Company and MFHC terminated any remaining subleases with MFHC and the Company agreed to a month-to-month lease directly
with the landlord for $8,436 per month.
On
June 14, 2017, the company entered into a five-year lease with LLC1 for approximately 6,944 square feet and a monthly rent of
$12,000.
Consulting
Agreements
Effective June
20, 2012, the Company entered into an eighteen-month Business Consulting Agreement (the “BCA”). Pursuant to the BCA,
the consultant is to assist the Company in becoming a “public” company and the Company agreed to a monthly compensation
of $2,500 and the issuance of the number of shares equal to 4.9% of the outstanding shares of the Company at all times until the
completion of the transaction. The Company has issued the consultant 2,940,000 shares of common stock. The Company continues to
use the services of the consultant on a month-to-month basis at the rate of $2,500 per month. For the three and nine months ended
September 30, 2017 and 2016, the Company has recorded expenses of $7,500 and $22,500, respectively, in professional fees.
On
August 5, 2016, the Company along with Mark Moore (“Mark”, the Company’s chairman), Matthew Moore (“Matthew”,
the Company’s Chief Executive Officer) and Kim Moore (“Kim”, the Company’s Chief Financial Officer) entered
into a Store Expansion Consulting Agreement (the “Expansion Agreement”) Mark, Matthew and Kim are herein referred
to collectively as the Moores. Pursuant to the Expansion Agreement, the Company and the Moores will be responsible for all physical
plant and marketing details for new store openings during the initial term of six-months. The Expansion Agreement was cancelled
on January 6, 2017. The Company’s client has decided to do their own marketing in-house and eliminate this out-sourced contract,
and has decided to delay the opening of any new stores. For the nine months ending September 30, 2017, the Company has received
and recognized $400,000 in other income for payments received for the cancellation of the Expansion Agreement.
Also
on August 5, 2016, the Company and the Moores entered into a Consulting Agreement (the “Consulting Agreement”) with
the same party as the store Expansion Agreement. Under the Consulting Agreement, including the Non-Compete provision covering
a ten- mile radius of any retail store, the Company and the Moores will provide unlimited licensing of the Intela-Hear brand name,
exclusive access to the Aware Aural Rehab Program within 10 miles of retail stores, exclusive territory of all services within
10 miles of retail stores and 40 hours per month of various consulting services. The Consulting Agreement continues until January
31, 2019, unless terminated for cause, as defined in the Consulting Agreement. On May 2, 2017, the Company received a demand letter
threatening litigation unless all monies paid pursuant to the Consulting Agreement are returned. On May 26, 2017, a complaint
(the “Complaint”) was filed against the Company and the Moores, which includes a request for rescission of the Consulting
Agreement. The Company believes the Complaint by the third party is frivolous and without merit, as well as not providing
sufficient cause for the Agreement to be terminated. The Company has filed a countersuit against this third party for breach of
contract so that it may recover the amounts owed under the Consulting Agreement, however, effective January 1, 2017, the Company
has not recognized revenue from the Consulting Agreement.
Effective
August 5, 2016, the Company entered into a Marketing Agreement (the “Marketing Agreement”). Pursuant to the Marketing
Agreement, the Company will provide marketing concepts and designs to promote its’ products and use the Company’s
advertising services for an initial six-month period. Pursuant to the Marketing Agreement and the current structure, the Company
will receive $50,000 per month. On January 6, 2017, the Marketing Agreement was cancelled.
On
November 17, 2016, the Company entered into an Agreement with a Limited Liability Company, whose sole member is the Company’s
Chairman. Pursuant to the Agreement, consulting services are to be provided to the Company related to the physical plant and marketing
of new store openings for hearing aid dispensaries as well as the marketing and general operations of hearing aid dispensary business.
For the nine months ended September 30, 2017, the Company paid LLC2 an additional $771,000 ($96,000 of which reduced previous
amounts owed) and expensed $808,334 ($60,000 as commissions for services performed and $748,334 as other expense). A summary of
the activity for the nine months ended September 30, 2017, is as follows:
Deferred commissions-stockholder
|
|
2017
|
Beginning balance
|
|
$
|
133,334
|
|
Payments made
|
|
|
771,000
|
|
Reduction of commissions owed
|
|
|
(96,000
|
)
|
Commission expense recorded
|
|
|
(60,000
|
)
|
Other expense recorded
|
|
|
(748,334
|
)
|
Ending balance
|
|
$
|
—
|
|
On April 3, 2017,
the Company entered into a one (1) year Financial Consulting Agreement (the “FC Agreement”), with a Consultant (the
“FC Consultant”). Pursuant to the FC Agreement, the FC Consultant will assist the Company in its’ public company
filing requirements. The Company has agreed to compensate the FC Consultant $4,500 per month and to issue 333,334 shares of restricted
common stock of the Company. The Company valued the shares at $0.30 per share (the market price of the common stock on the date
of the agreement) and will amortize the cost over the one-year life of the agreement, accordingly, the Company recorded stock
compensation expense of $25,000 and $50,000, respectively, for the three and nine months ended September 30, 2017, and there remains
a $50,000 balance of deferred stock compensation (in the equity section of the balance sheet herein) that will be amortized over
the remaining term of the agreement. Under certain circumstances, the monthly fee can be reduced to $3,500 after the first six
months of the FC Agreement. The FC Consultant was previously providing services for the Company. For the three and nine months
ended September 30, 2017, the Company expensed fees to the FC Consultant of $13,500 and $40,500 respectively, and for the three
and nine months ended September 30, 2016, the Company paid the FC Consultant $11,250 and $33,750, respectively.
On April 7, 2017,
the Company entered into a Consulting and Representation Agreement (the “CR Agreement”), with a consultant (the “CR
Consultant”). Pursuant to the CR Agreement the CR Consultant will assist the Company to broaden its visibility to the investing
public. The Company has agreed to compensate the CR Consultant $700 per month and to issue 300,000 restricted shares of the Company’s
common stock to the CR Consultant. The Company valued the shares at $0.30 per share (the market price of the common stock on the
date of the agreement) and recorded stock compensation expense of $90,000 for the nine months ended September 30, 2017. The initial
term was for fifteen (15) days with an automatic extension for one hundred seventy (170) days.
On August 18, 2017,
the Company signed a Letter of Intent (the “LOI”) to acquire all of the outstanding equity interests (the “Stock”)
of AUDserv, Inc. (“AUDserve”), a Delaware corporation and any and all of its affiliates and/or subsidiaries. This
transaction has not yet occurred and is subject to the execution of a fully executed agreement. AUDserv operates three divisions,
predominantly in the business-to-business sector, including a highly scalable SaaS based practice management platform, and key
infrastructure. The LOI contemplates a future executed agreement calling for the Company to acquire the AUDserv Stock in exchange
for Company stock worth $1,000,000 at the date of closing, or a minimum of 2,898,550 shares of common stock, subject to an increase
in the number of shares based on the market price at the closing. Among the conditions of a contemplated closing is that the Company
is required to pay all debts and payables of AUDserve at the time of closing, unless other agreements are reached with such creditors,
with the Company providing sufficient evidence to the satisfaction of the creditors. The LOI, as amended, contemplates a closing
date no later than December 31, 2017, and if such closing does not occur by said date, the parties are released from their obligations
under the LOI. The closing is subject to the Company performing due diligence satisfactory to the Company.
Legal
Matters
On May 26, 2017,
Helix Hearing Care (California), Inc. a California corporation (“Helix”), filed a complaint (the “Complaint”)
against the Company and the Moores, in the Circuit Court of the 11
th
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. The Company was not named as an enjoined party in such previous
litigation, and the services contemplated under the Consulting Agreement are not within the scope of the injunction, thus the
Company believes 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 for specific performance and three counts
of breach of contract. The plaintiff has filed a motion to dismiss the counterclaim, in addition to their answer to
the counterclaim. A hearing on the Motion to Dismiss has not been set at this time.
NOTE
10 – STOCKHOLDERS’ EQUITY
Common Stock
The Company has
225,000,000 authorized shares of $0.0001 common stock. As of September 30, 2017, there are 61,539,334 shares of common stock outstanding.
On April 3, 2017,
the Company issued 333,334 shares of restricted common stock to a consultant. The Company valued the shares at $0.30 per share
(the market price of the common stock on the date of the agreement) and will amortize the cost over the one-year life of the agreement,
accordingly, the Company recorded stock compensation expense of $25,000 and $50,000, respectively, for the three and nine months
ended September 30, 2017, and there remains a balance of $50,000 of deferred stock compensation (in the equity section of the
balance sheet herein) that will be amortized over the remaining term of the agreement.
On April 7, 2017,
the Company issued 300,000 shares of restricted common stock to a consultant. The Company valued the shares at $0.30 per share
(the market price of the common stock on the date of the agreement) and recorded stock compensation expense of $90,000 for the
nine months ended September 30, 2017.
Preferred
Stock
The Company has
25,000,000 authorized shares of $0.0001 preferred stock. As of September 30, 2017, and December 31, 2016, there were no shares
of preferred stock issued and outstanding.
NOTE
11 – SUBSEQUENT EVENTS
On October 11,
2017, the Company completed the closing of a private placement financing transaction (the “Transaction”) with Power
Up Lending Group, LTD (“Power Up”), pursuant to a Securities Purchase Agreement (the “Purchase Agreement”)
dated October 5, 2017. Pursuant to the Purchase Agreement, Power Up purchased a 12% Convertible Promissory Note (the “Note”),
dated October 5, 2017, in the principal amount of $48,000.00. On October 11, 2017, the Company received proceeds of $45,000 which
excluded transaction costs, fees, and expenses of $3,000. Principal and interest is due and payable July 15, 2018, and the Note
is convertible into shares of the Company’s common stock at any time after one hundred eighty (180) days, at the average
of the two lowest closing bid prices during the ten (10) prior trading days from which a notice of conversion is received by the
Company multiplied by sixty-five percent (65%), representing a thirty-five percent (35%) discount.
On November
10, 2017, the Company issued a convertible promissory note (the “Note”), with a face value of $299,000, maturing on
January 12, 2019, and stated interest of 10% to a third-party investor. The note is convertible at any time after ninety (90)
days of the funding of the note into a variable number of the Company's common stock, based on a conversion ratio of 65% of the
lowest trading price for the 20 days prior to conversion. The note was funded on November 10, 2017, when the Company received
proceeds of $250,000, after disbursements for the lender’s transaction costs, fees and expenses. The Note also requires
daily payments of $700 per day via ACH until the note is satisfied in full.