We have audited the accompanying consolidated
balance sheets of InnerScope Hearing Technologies, Inc. (the Company) as of December 31, 2017 and 2016, and the related consolidated
statements of operations, stockholders’ deficit, and cash flows for each of the years in the two-year period ended December
31, 2017, and the related notes to the consolidated financial statements (collectively referred to as the financial statements).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the two year period ended
December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required
to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the
Company has incurred a net loss of $1,913,332 for the year ended December 31, 2017. Additionally, the Company has a
working capital deficit of $1,709,346 and an accumulated deficit of $1,787,012 at December 31, 2017. These and other factors raise
substantial doubt about the Company’s ability to continue as a going concern. Management’s plan regarding these matters
is also described in Note 3 to the financial statements. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
D. Brooks and Associates CPA’s, P.A.
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
NOTE 1 - ORGANIZATION
Business
InnerScope
Hearing Technologies, Inc. (“Company”, “InnerScope”) is a Nevada Corporation incorporated on June 15,
2012, with its principal place of business in Roseville, California. The Company was originally named InnerScope Advertising Agency,
Inc. and was formed to provide advertising and marketing services to retail establishments in the hearing device industry. On
August 25, 2017, the Company changed its name to InnerScope Hearing Technologies, Inc.
to
better reflect the Company’s current direction as a technology driven company with a scalable business to business (B2B)
solution and business to consumer (and B2C) solution. Recently, the Company began offering its own line of “Hearable”,
and “Wearable” Personal Sound Amplifier Products (PSAPs).
On
June 20, 2012, the Company entered into an Acquisition and Plan of Share Exchange with InnerScope Advertising Agency, LLC (“ILLC”),
a commonly owned entity, whereby the Company acquired 100% of ILLC. On November 1, 2013, the Company entered into an Acquisition
and Plan of Share Exchange with Intela-Hear, LLC (“Intela-Hear”), a commonly owned entity, whereby the Company acquired
100% of the outstanding equity of Intela-Hear in exchange for 27,000,000 shares of the Company’s common stock. This resulted
in Intela-Hear becoming a wholly-owned subsidiary of the Company.
On
August 5, 2016, the Company along with Mark Moore (“Mark”, the Company’s Chairman of the Board), Matthew
Moore (“Matthew”, the Company’s Chief Executive Officer) and Kim Moore (“Kim”, the Company’s
Chief Financial Officer) entered into a Store Expansion Consulting Agreement (the “Expansion Agreement”) with a third
party (the “Client”). Mark, Matthew and Kim are herein referred to collectively as the “Moores”. Pursuant
to the Expansion Agreement, the Company and the Moores were responsible for all physical plant and marketing details for the Client’s
new store openings during the initial term of six-months. The Expansion Agreement was cancelled on January 6, 2017. The Client
has decided
to do their own marketing in-house and eliminate this out-sourced contract
and decided to open only one location and delay the opening of any other new stores.
For the year ended December
31, 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 were to provide unlimited licensing of the Intela-Hear brand
name, exclusive access to the Aware Aural Rehab Program within 10 miles of retail stores, exclusive territory of all services
within 10 miles of retail stores and up to 40 hours per month of various consulting services. The Consulting Agreement continues
until January 31, 2019, unless terminated for cause, as defined in the Consulting Agreement. On May 26, 2017, the Company and
the Moores were named in an action filed by the Client, that included a demand that all monies paid pursuant to the Consulting
Agreement be returned. The Company believes the claim is frivolous and without merit, as well as not providing sufficient cause
for the Agreement to be terminated (See Note 12).
NOTE 2 – SUMMARY
OF SIGNIFICANT ACCOUNTING PRINCIPLES
Basis
of Presentation and Principles of Consolidation
The
accompanying consolidated financial statements are prepared in accordance with Generally Accepted Accounting Principles in the
United States of America ("US GAAP"). The consolidated financial statements of the Company
include
the consolidated accounts of InnerScope and its’ wholly owned subsidiaries ILLC and Intela-Hear. 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 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 December
31, 2017, management’s evaluation resulted in the establishment of an allowance for uncollectible receivables of $63,799.
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 years ended December
31, 2017 and 2016, and accounts receivable balance as of December 31, 2017:
|
|
|
|
|
|
Accounts
|
|
|
December
31,
|
|
Receivable
|
|
|
2017
|
|
2016
|
|
as
of
|
|
|
%
|
|
%
|
|
December
31, 2017
|
Customer
A
|
|
|
16.4
|
%
|
|
|
—
|
|
|
$
|
63,799
|
|
Customer
B
|
|
|
14.8
|
%
|
|
|
—
|
|
|
|
4,000
|
|
Customer
C, related
|
|
|
18.3
|
%
|
|
|
48.3
|
%
|
|
|
81,193
|
|
Customer
D
|
|
|
27.6
|
%
|
|
|
51.7
|
%
|
|
|
—
|
|
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 2017, an additional $375,000 was advanced. For the year ended December 31, 2017, the Company expensed $508,334
(included in other expenses in the Consolidated Statements of Operations), due to uncertainty of future services being provided,
based on the Complaint filed on May 26, 2017 (see Note 7 and 12).
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. Interest income, related party of
$228 and $299 was recorded for the years ended December 31, 2017 and 2016, respectively. As of December 31, 2017, and 2016, notes
and interest receivable, related party was $-0- and $18,063, respectively. Principal amounts due in the next 12 months of the
balance sheet date are shown as a current asset and amounts due after 12 months are shown as a long-term asset. The Company received
payments of $18,311 of principal and interest during the year ended December 31, 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 year ended December
31, 2017, the Company purchased the domain name
www.innd.com
from
a third party for $3,000.
Property
and Equipment
Property
and equipment are stated at cost, and depreciation is provided by use of a straight-line method over the estimated useful lives
of the assets. The Company reviews property and equipment for potential impairment whenever events or changes in circumstances
indicate that the carrying amounts of assets may not be recoverable. The estimated useful lives of property and equipment are
as follows:
Computer equipment
|
3
years
|
The
Company's property and equipment consisted of the following at December 31, 2017 and 2016:
|
|
December
31,
2017
|
|
December
31,
2016
|
Computer equipment
|
|
$
|
2,651
|
|
|
$
|
2,651
|
|
Accumulated
depreciation
|
|
|
(1,068
|
)
|
|
|
(184
|
)
|
Balance
|
|
$
|
1,583
|
|
|
$
|
2,467
|
|
Depreciation
expense of $884 and $184 was recorded for the years ended December 31, 2017, and 2016, 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 year ended December 31, 2017, the Company recognized a loss of $1,378. As of December 31, 2017, the carrying
value of the Company’s investment in undivided interest in real estate was $1,224,903 (see Note 6).
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
December 31, 2017, for each fair value hierarchy level:
December
31, 2017
|
|
Derivative
Liability
|
|
Total
|
Level I
|
|
$
|
—
|
|
|
$
|
—
|
|
Level II
|
|
$
|
—
|
|
|
$
|
—
|
|
Level III
|
|
$
|
540,965
|
|
|
$
|
540,965
|
|
Embedded
Conversion Features
The
Company evaluates embedded conversion features within convertible debt under ASC 815 "Derivatives and Hedging" to determine
whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at
fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under
ASC 815, the instrument is evaluated under ASC 470-20 "Debt with Conversion and Other Options" for consideration of
any beneficial conversion feature.
Derivative
Financial Instruments
The
Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates
all of it financial instruments, including stock purchase warrants, to determine if such instruments are derivatives or contain
features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the
derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the
fair value reported as charges or credits to income.
For
option-based simple derivative financial instruments, the Company uses the Monte Carlo simulations to value the derivative instruments
at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.
Debt
Issue Costs and Debt Discount
The
Company may record debt issue costs and/or debt discounts in connection with raising funds through the issuance of debt. These
costs may be paid in the form of cash, or equity (such as warrants). These costs are amortized to interest expense through the
maturity of the debt. If a conversion of the underlying debt occurs prior to maturity a proportionate share of the unamortized
amounts is immediately expensed.
Original
Issue Discount
For
certain convertible debt issued, the Company may provide the debt holder with an original issue discount. The original issue discount
would be recorded to debt discount, reducing the face amount of the note and is amortized to interest expense through the maturity
of the debt. If a conversion of the underlying debt occurs prior to maturity a proportionate share of the unamortized amounts
is immediately expensed.
Revenue
Recognition
The
Company 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, or when the delivery of services and product occur. For the year ended December 31, 2017, the Company received
and recognized $100,000 of revenue related to the Store Expansion agreement, and $30,000 of income from the cancellation of the
Marketing and Store Expansion Agreements.
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 December 31, 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 included a demand that all monies paid pursuant to the Consulting Agreement
be returned. The Company believes the claim is frivolous and without merit, as well as not providing sufficient cause for the
Agreement to be terminated (See Note 12). The Company has not recognized any revenue in 2017 from the Consulting Agreement as
a result of this litigation.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740-10, Income Taxes. Deferred tax assets and liabilities are recognized
to reflect the estimated future tax effects, calculated at the tax rate expected to be in effect at the time of realization. A
valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred
tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and
rates of the date of enactment.
ASC
740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements
and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure
and transition issues. Interest and penalties are classified as a component of interest and other expenses. To date, the Company
has not been assessed, nor paid, any interest or penalties.
Uncertain
tax positions are measured and recorded by establishing a threshold for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition
threshold at the effective date may be recognized or continue to be recognized.
Earnings
(Loss) Per Share
The
Company reports earnings (loss) per share in accordance with ASC 260, "Earnings per Share." Basic earnings (loss) per
share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during each
period. Diluted earnings per share is computed by dividing net loss by the weighted-average number of shares of common stock,
common stock equivalents and other potentially dilutive securities outstanding during the period. As of December 31, 2017, the
Company’s outstanding convertible debt is convertible into approximately 10,043,445 shares of common stock. This amount
is not included in the computation of dilutive loss per share because their impact is antidilutive. As of December 31, 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
The
accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. which
assumes the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The Company
experienced a net loss of $1,913,332 for the year ended December 31, 2017. At December 31, 2017, the Company had a working capital
deficit of $1,709,346, and an accumulated deficit of $1,787,012. These factors raise substantial doubt about the Company’s
ability to continue as a going concern and to operate in the normal course of business. These consolidated financial statements
do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification
of liabilities that might result from this uncertainty.
Through
August 5, 2016, the Company was dependent on the Marketing Agreement with MFHC, (the Company and MFHC agreed to cancel the Marketing
Agreement, which generated approximately 48.3%, of the Company’s revenues for the year ended December 31, 2016, as a result
of the sale by MFHC of substantially all of their assets) and is now dependent on the sale of our products and services to third
parties. On May 2, 2017, the Company received a demand that all monies paid pursuant to the Consulting Agreement be returned.
On May 26, 2017, the Company and the Moores were named in an action filed that includes a demand that all monies paid pursuant
to the Consulting Agreement be returned. The Company believes the claim is frivolous and without merit, as well as not providing
sufficient cause for the Agreement to be terminated (See Note 8). The Company has filed a countersuit for breach of contract,
demanding that all monies owed to it, pursuant to the Consulting Agreement, be paid, together with interest thereon.
Management’s
Plans
The
Company has begun to implement an industry encompassing revenue strategy, including the current revenue model to other
major sectors of the global hearing industry. The Company plans include generating revenues from 7 separate revenue streams.
Each stream will generate revenue and be poised for growth, increasing the Company’s market penetration.
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 $228 and $299
was recorded for the years ended December 31, 2017, and 2016, respectively. The note and interest were paid in full during the
year ended December 31, 2017. As of December 31, 2017, and 2016, notes and interest receivable, related party was $-0- and $18,084,
respectively.
NOTE
5 – ADVANCES PAYABLE, SHAREHOLDERS
Chief
Executive Officer
During
the year ended December 31, 2017, our CEO (stockholder) paid expenses of the Company and accounts payable on behalf of the Company
of $149,370. During the year ended December 31, 2017, the Company reimbursed the CEO $10,733 of the amount advanced. As of December
31, 2017, the Company owed the President $138,637, which is included in Advances payable, stockholders on the consolidated balance
sheet included herein.
Chief
Financial Officer
During
the year ended December 31, 2017, our Chief Financial Officer (stockholder) made, in the aggregate, advances to the Company of
$14,500. These advances were due on demand and were paid back during the year ended December 31, 2017.
Director
During
the year ended December 31, 2017, our Chairman (stockholder) paid expenses of the Company and accounts payable on behalf of the
Company of $39,201. During the year ended December 31, 2017, the Company reimbursed the Chairman $1,000. As of December 31, 2017,
the Company owed the Chairman $38,201, which is included in Advances payable, stockholders on the consolidated balance sheet included
herein.
NOTE
6 – NOTE PAYABLE, STOCKHOLDER
On
December 29, 2017, our CEO (stockholder) loaned the Company $65,000. The note is due on demand and carries interest at 8% per
annum.
NOTE
7 – RELATED PARTY TRANSACTIONS
The
Company loaned the CEO $20,500 during the year ended December 31, 2013 (see Note 4). The Company recorded interest income of $228
and $299 for the years ended December 31, 2017, and 2016, respectively. The note and interest were paid in full during the year
ended December 31, 2017.
During
the year ended December 31, 2017, our Chief Financial Officer (stockholder) made, in the aggregate, advances to the Company of
$14,500. These advances were paid back during the year ended December 31, 2017.
During
the year ended December 31, 2017, our CEO (stockholder) paid expenses of the Company and accounts payable on behalf of the Company
of $149,370. During the year ended December 31, 2017, the Company reimbursed the CEO $10,733. As of December 31, 2017, the Company
owed the CEO $138,637, which is included in Advances payable, stockholders on the consolidated balance sheet included herein.
During
the year ended December 31, 2017, our Chairman (stockholder) paid expenses of the Company and accounts payable on behalf of the
Company of $39,201. During the year ended December 31, 2017, the Company reimbursed the Chairman $1,000. As of December 31, 2017,
the Company owed the Chairman $38,201, which is included in Advances payable, stockholders on the consolidated balance sheet included
herein.
Pursuant
to a Marketing Agreement (cancelled August 5, 2016), the Company provided marketing programs to promote and sell hearing aid instruments
and related devices to Moore Family Hearing Company (“MFHC”). MFHC owned and operated retail hearing aid stores. Based
on common control of MFHC and the Company, all transactions with MFHC are classified as related party transactions. On August
8, 2016, in consideration of $128,000 (the “Cancellation Fee”), MFHC and the Company agreed to cancel the Marketing
Agreement as a result of the sale by MFHC of substantially all of their assets. On August 11, 2016, MFHC paid $229,622 to the
Company (inclusive of the balance owed as of June 30, 2016, the Cancellation Fee and other related party activity).
Pursuant
to the Marketing Agreement, beginning in January 2014, the monthly fee was increased from $2,500 to $3,200 per retail location.
For the year ended December 31, 2016 (through August 5, 2016), there were 20 stores resulting in revenue of $458,667. The Company
has offset the accounts receivable owed from MFHC for expenses of the Company that have been paid by MFHC. As a result of these
payments, in addition to MFHC’s payments to the Company during the year ended December 31, 2016, the balance due to MFHC
as of December 31, 2017 and 2016, was $22,548 and $13,048, respectively.
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 year ended December 31, 2017, and 2016, the Company expensed $1,500 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 year ended December 31, 2016,
the Company expensed $12,078 related to this lease.
Prior
to August 1, 2016, the Company’s CEO 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 its
CEO and CFO, which includes annual base salaries of $225,000 and $125,000, respectively. The Company expensed $225,000 and $124,519
for the CEO and CFO, for the year ended December 31, 2017, respectively, and $117,522 and $52,885, respectively, of expense for
the CEO and CFO, respectively, for the year ended December 31, 2016. As of December 31, 2017, the Company owes the CEO and CFO
$4,327 and $40,385, respectively for accrued and unpaid wages. The Company has also recorded payroll tax liability of $2,536 for
the unpaid wages. These amounts are included in Officer salaries payable on the balance sheets included herein.
In
September 2016, the officers and directors of the Company formed a California Limited Liability Company (“LLC1”),
for the purpose of acquiring commercial real estate and other business activities.
On
December 24, 2016, LLC1 acquired two retail stores from the buyer of the MFHC stores. On March 1, 2017, the Company entered into
a twelve-month Marketing Agreement with each of the stores to provide telemarketing and design and marketing services for $2,500
per month per store, resulting in $50,000 of revenues for the year ended December 31, 2017. Additionally, for the year ended December
31, 2017, the Company invoiced LLC1 $36,499, for the Company’s production, printing and mailing services. As of December
31, 2017, LLC1 owes the Company $73,996. On May 9, 2017, the Company and LLC1 purchased certain real property from an unaffiliated
party (see Note 8). On June 14, 2017, the Company entered into a five-year lease with LLC1 for approximately 6,944 square feet
and a monthly rent of $12,000. For the year ended December 31, 2017, the Company expensed $64,499 related to this lease and is
included in Rent, related party, on the consolidated statement of operations, included herein.
In
November 2016, the Company’s Chairman formed a California Limited Liability Company (“LLC2”), for the purpose
of providing consulting services to the Company.
The Company entered into an
agreement with LLC2, and paid LLC2 $375,000 during the year ended December 31, 2016, for services performed and to be performed.
Of the $375,000 amount paid, $241,667 was recognized as consulting fees- stockholder for the year ended December 31, 2016, and
the remaining $133,334 was recorded as deferred commissions- stockholder as of December 31, 2016. During the year ended December
31, 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) due to uncertainty of future services being provided,
based on the Complaint filed on May 26, 2017. As of December 31, 2017, the deferred commissions-stockholder is $-0- (see Note
12).
On
May 9, 2017, the Company and LLC1 purchased certain real property from an unaffiliated party. The Company and LLC1 have agreed
that the Company purchased and owns 49% of the building and LLC1 purchased and owns 51% of the building. The contracted purchase
price for the building was $2,420,000 and the total amount paid at closing was $2,501,783 including, fees, insurance, interest
and real estate taxes. The Company paid for their building interest by delivering cash at closing of $209,971 and being a co-borrower
on a note in the amount of $2,057,000, of which the Company has agreed with LLC1 to pay $1,007,930 (see Note 8).
NOTE
8– INVESTMENT IN UNDIVIDED INTEREST IN REAL ESTATE
On
May 9, 2017, the Company and LLC1 purchased certain real property from an unaffiliated party. The Company and LLC1 have agreed
that the Company purchased and owns 49% of the building and LLC1 purchased and owns 51% of the building. The contracted purchase
price for the building was $2,420,000 and the total amount paid at closing was $2,501,783 including, fees, insurance, interest
and real estate taxes. The Company paid for their building interest by delivering cash at closing of $209,971 and being a co-borrower
on a note in the amount of $2,057,000, of which the Company has agreed with LLC1 to pay $1,007,930.
The
allocated portion of the results in an equity method investment in a privately-held, related party, company are included in the
Company’s consolidated statements of operations. For the year ended December 31, 2017, a net loss of $1,378 is included
in “Other income (expense), net”. As of December 31, 2017, the carrying value of our investment in undivided interest
in real estate was $1,224,903.
The
condensed balance sheet as of December 31, 2017 and the condensed statement of operation for the year ended December 31, 2017
for the real property is as follows:
Current assets:
|
|
|
Cash and cash equivalents
|
|
$
|
8,331
|
|
Accounts receivable, net
|
|
|
2,711
|
|
Prepaid expenses and other current
assets
|
|
|
37,471
|
|
Total current assets
|
|
|
48,512
|
|
Land and Building, net
|
|
|
2,397,848
|
|
Other assets, net
|
|
|
54,246
|
|
Total assets
|
|
$
|
2,500,606
|
|
|
|
|
|
|
Current portion of mortgage payable
|
|
$
|
37,792
|
|
Other current liabilities
|
|
|
19,828
|
|
Total current liabilities
|
|
|
57,620
|
|
Mortgage payable, long-term
|
|
|
2,004,440
|
|
Total liabilities
|
|
|
2,062,060
|
|
Total equity
|
|
|
438,546
|
|
Total liabilities and equity
|
|
$
|
2,500,606
|
|
Rental
income
|
|
$
|
154,454
|
|
Expenses:
|
|
|
|
|
Property taxes
|
|
|
16,752
|
|
Depreciation
and amortization
|
|
|
27,229
|
|
Insurance
|
|
|
6,253
|
|
Repairs and
maintenance
|
|
|
17,829
|
|
Other
|
|
|
15,083
|
|
Interest
expense
|
|
|
74,120
|
|
Total
expenses
|
|
|
157,266
|
|
Net
loss
|
|
$
|
(2,812
|
)
|
NOTE
9– NOTE PAYABLE - UNDIVIDED INTEREST IN REAL ESTATE
On
May 9, 2017, the Company and LLC1 purchased certain real property from an unaffiliated party. The Company and LLC1 have agreed
that the Company purchased and owns 49% of the building and LLC1 purchased and owns 51% of the building. The contracted purchase
price for the building was $2,420,000 and the total amount paid at closing was $2,501,783 including, fees, insurance, interest
and real estate taxes. The Company is a co-borrower on a $2,057,000 Small Business Administration Note (the “SBA Note”).
The SBA Note carries a 25-year term, with 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 December 31,
2017, the current and long-term portion of the SBA Note is $18,518 and $982,176, respectively. Future principal payments for the
Company’s portion are:
|
Year
|
|
Amount
|
|
2018
|
|
|
$
|
18,518
|
|
|
2019
|
|
|
|
19,660
|
|
|
2020
|
|
|
|
20,708
|
|
|
2021
|
|
|
|
22,150
|
|
|
2022
|
|
|
|
23,516
|
|
|
Thereafter
|
|
|
|
896,142
|
|
|
Total
|
|
|
$
|
1,000,694
|
|
NOTE
10– CONVERTIBLE NOTES PAYABLE
On
October 11, 2017, the Company completed the closing of a private placement financing transaction (the “Transaction”)
with a third-party investor, pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) dated October
5, 2017. Pursuant to the Purchase Agreement, the investor purchased a 12% Convertible Promissory Note (the “Note”),
dated October 5, 2017, in the principal amount of $48,000. On October 11, 2017, the Company received proceeds of $45,000 which
excluded transaction costs, fees, and expenses of $3,000. Principal and interest is due and payable July 15, 2018, and the Note
is convertible into shares of the Company’s common stock at any time after one hundred eighty (180) days, at the average
of the two lowest closing bid prices during the ten (10) prior trading days from which a notice of conversion is received by the
Company multiplied by sixty-five percent (65%), representing a thirty-five percent (35%) discount. The embedded conversion feature
included in the note resulted in an initial debt discount of $40,300, and an initial derivative liability of $40,300. For the
year ended December 31, 2017, amortization of the debt discount of $12,561 was charged to interest expense. The Company also recorded
a debt issue discount of $3,000 and has amortized $935 to interest expense for the year ended December 31, 2017. As of December
31, 2017, the note balance is $48,000, with a carrying value of $18,196, net of unamortized discounts of $29,804.
On
November 10, 2017, the Company issued a convertible promissory note (the “Note”), with a face value of $299,000, maturing
on January 12, 2019, and stated interest of 10% to a third-party investor. The note is convertible at any time after ninety (90)
days of the funding of the note into a variable number of the Company's common stock, based on a conversion ratio of 65% of the
lowest trading price for the 20 days prior to conversion. The note was funded on November 10, 2017, when the Company received
proceeds of $250,000, after disbursements for the lender’s transaction costs, fees and expenses. The Note also requires
daily payments of $700 per day via ACH through January 12, 2019, when all unpaid principal and interest is due. The embedded conversion
feature included in the note resulted in an initial debt discount of $250,000, an initial derivative expense of $213,549 and an
initial derivative liability of $463,549. For the year ended December 31, 2017, amortization of the debt discount of $41,417 was
charged to interest expense. The Company also recorded an original issue discount and debt issue discount of $49,000 and has amortized
$8,118 to interest expense for the year ended December 31, 2017. During the year ended December 31, 2017, the Company made principal
payments of $18,200 and as of December 31, 2017, the note balance is $280,800 (of which $112,800 is classified as long- term liability),
with a carrying value of $86,727 (of which $12,587 is classified as long-term liability), net of unamortized discounts of $249,465
(of which $100,213 is classified as long-term liability).
On
December 12, 2017, the Company completed the closing of a private placement financing transaction (the “Transaction”)
when a third-party investor purchased a convertible note (the “Convertible Note”). The Convertible Note carries a
10% annual interest rate and is in the principal amount of $50,000. Principal and interest is due and payable December 12, 2018,
and the Note is convertible into shares of the Company’s common stock at any time after one hundred eighty (180) days, at
a conversion price (the “Conversion Price”) equal to seventy-five percent (75%) of the average closing price of the
Company’s common stock for the ten (10) days immediately preceding the conversion, representing a twenty-five percent (25%)
discount. The embedded conversion feature included in the note resulted in an initial debt discount of $13,207, and an initial
derivative liability of $13,207. For the year ended December 31, 2017, amortization of the debt discount of $404 was charged to
interest expense. As of December 31, 2017, the note balance is $50,000, with a carrying value of $37,197, net of unamortized discounts
of $12,803.
A
summary of the convertible notes payable balance as of December 31, 2017, is as follows:
|
|
Current
portion
|
|
Long-term
portion
|
|
Total
|
Principal balance
|
|
$
|
266,000
|
|
|
$
|
112,800
|
|
|
$
|
378,800
|
|
Unamortized
discount
|
|
|
(191,860
|
)
|
|
|
(100,213
|
)
|
|
|
(292,073
|
)
|
Ending
balance, net
|
|
$
|
74,140
|
|
|
$
|
12,587
|
|
|
$
|
86,727
|
|
The
following is a roll-forward of the Company’s convertible notes and related discounts for the year ended December 31, 2017:
|
|
Principal
Balance
|
|
Debt
Discounts
|
|
Total
|
Balance at January
1, 2017
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
New issuances
|
|
|
397,000
|
|
|
|
(355,507
|
)
|
|
|
41,493
|
|
Cash payments
|
|
|
(18,200
|
)
|
|
|
—
|
|
|
|
(18,200
|
)
|
Amortization
|
|
|
—
|
|
|
|
63,434
|
|
|
|
63,434
|
|
Balance
at December 31, 2017
|
|
$
|
378,800
|
|
|
$
|
(292,073
|
)
|
|
$
|
86,727
|
|
NOTE 11 –
DERIVATIVE LIABILITIES
The
Company determined that the conversion features of the convertible notes represented embedded derivatives since the Notes are
convertible into a variable number of shares upon conversion. Accordingly, the notes are not considered to be conventional debt
under EITF 00-19 and the embedded conversion feature is bifurcated from the debt host and accounted for as a derivative liability.
Accordingly, the fair value of these derivative instruments is recorded as liabilities on the consolidated balance sheet with
the corresponding amount recorded as a discount to each Note, with any excess of the fair value of the derivative component over
the face amount of the note recorded as an expense on the issue date. Such discounts are amortized from the date of issuance to
the maturity dates of the Notes. The change in the fair value of the derivative liabilities are recorded in other income or expenses
in the condensed consolidated statements of operations at the end of each period, with the offset to the derivative liabilities
on the balance sheet. See Note 10.
The
Company valued the derivative liabilities at issuance and December 31, 2017, at $517,056 and $540,965, respectively. The Company
used the Monte Carlo simulation valuation model with the following assumptions as of December 31, 2017, risk-free interest rates
from 1.53% to 1.76% and volatility of 303% to 355%.
A summary of the activity
related to derivative liabilities for the year ended on December 31, 2017, is as follows:
|
|
December
31,
2017
|
Beginning
Balance
|
|
$
|
-0-
|
|
Initial Derivative
Liability
|
|
|
517,056
|
|
Fair Value Change
|
|
|
52,125
|
|
Reclassification
for principal payments
|
|
|
(28,216
|
)
|
Ending
Balance
|
|
$
|
540,965
|
|
Derivative
liability expense of $265,674 for the year ended December 31, 2017, consisted of the initial derivative expense of $213,549 and
the above fair value change of $52,125.
NOTE
12– 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.
Future
principal payments for the Company’s portion are:
|
Year
|
|
Amount
|
|
2018
|
|
|
$
|
144,000
|
|
|
2019
|
|
|
|
144,000
|
|
|
2020
|
|
|
|
144,000
|
|
|
2021
|
|
|
|
144,000
|
|
|
2022
|
|
|
|
66,000
|
|
|
Total
|
|
|
$
|
642,000
|
|
Consulting
Agreements
On
August 5, 2016, the Company along with Mark Moore (“Mark”, the Company’s chairman), Matthew Moore (“Matthew”,
the Company’s Chief Executive Officer) and Kim Moore (“Kim”, the Company’s Chief Financial Officer) entered
into a Store Expansion Consulting Agreement (the “Expansion Agreement”) Mark, Matthew and Kim are herein referred
to collectively as the Moores. Pursuant to the Expansion Agreement, the Company and the Moores were responsible for all physical
plant and marketing details for new store openings during the initial term of six-months. The Expansion Agreement was cancelled
on January 6, 2017. The Company’s client has decided
to do their own marketing in-house
and eliminate this out-sourced contract and has decided to delay the opening of any new stores.
For the year ended
December 31, 2017, the Company has received and recognized $160,000 in other income, net, for payments received for the cancellation
of the Expansion Agreement.
Also
on August 5, 2016, the Company and the Moores entered into a Consulting Agreement (the “Consulting Agreement”) with
the same party as the store Expansion Agreement. Under the Consulting Agreement, including the Non-Compete provision covering
a ten- mile radius of any retail store, the Company and the Moores were to provide unlimited licensing of the Intela-Hear brand
name, exclusive access to the Aware Aural Rehab Program within 10 miles of retail stores, exclusive territory of all services
within 10 miles of retail stores and 40 hours per month of various consulting services. The Consulting Agreement was to continue
until January 31, 2019, unless terminated for cause, as defined in the Consulting Agreement. On May 2, 2017, the Company received
a demand letter threatening litigation unless all monies paid pursuant to the Consulting Agreement are returned. On May 26, 2017,
a complaint (the “Complaint”) was filed against the Company and the Moores, which includes a request for rescission
of the Consulting Agreement. The Company believes the Complaint by the third party is frivolous and without merit, as well
as not providing sufficient cause for the Agreement to be terminated. The Company has filed a countersuit against this third party
for breach of contract so that it may recover the amounts owed under the Consulting Agreement, however, effective January 1, 2017,
the Company has not recognized revenue from the Consulting Agreement, and accordingly, $847,223 is classified as deferred revenue
on the consolidated balance sheets presented herein.
Effective
August 5, 2016, the Company entered into a Marketing Agreement (the “Marketing Agreement”) with MFHC. 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 year ended December 31, 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) due to uncertainty of
future services being provided, based on the Complaint filed on May 26, 2017. A summary of the activity for the year ended December
31, 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 $75,000 for the year ended December 31, 2017, and there remains a $25,000 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 years ended December 31, 2017, and 2016, the Company expensed fees
to the FC Consultant of $54,000 and $47,300 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 year ended
December 31, 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. 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 contemplated 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, contemplated a closing date no later than March 31, 2018, which did not occur and the parties
have been released from their obligations under the LOI.
Effective
December 1, 2017, the Company entered into a one-year Marketing Services Agreement (the “MSA”). Pursuant to the
terms of the MSA, the Company will receive consulting and advisory services regarding the implementation of marketing
programs, including the design and creation of commercial websites and commercialization of products through social media or
other marketing methods. The Company will pay consideration for the services of $5,000 cash and $5,000 of common stock each
month. The Company will issue the number of shares of common stock equal to a twenty-five percent (25%) discount to the
lowest closing price of the common stock for the five (5) last trading days of the common stock for that month. The Company
recorded 102,564 shares of common stock to be issued as of December 31, 2017 and recorded $8,974 of stock-based compensation
expense (based on the market price on the date of the agreement) for the year ended December 31, 2017. The shares were issued
on February 27, 2018.
On
December 1, 2017, the Company entered into a three-month Consulting and Marketing Agreement (the “CMA”) with a third
party. Pursuant to the terms of the CMA the Company will compensate the third-party $15,000 per month in consideration for consulting
services related to development of business plans, corporate strategy and marketing.
On
December 8, 2017, the Company entered in a month to month contract regarding investor relation services with a third-party for
$3,600 per month beginning January 1, 2018.
Legal
Matters
On
May 26, 2017, Helix Hearing Care (California), Inc. a California corporation (“Helix”), filed a complaint (the “Complaint”)
against the InnerScope and the Moores, in the Circuit Court of the 11
th
Judicial Circuit in and for Miami-Dade
County, Florida, that includes a rescission of the Consulting Agreement, 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. Helix’s response to the Amended Counterclaim is due on April 5, 2018. The written
responses to Helix’s discovery is due on April 25, 2018.
NOTE
13 – STOCKHOLDERS’ EQUITY
Common
Stock
The
Company has 225,000,000 authorized shares of $0.0001 common stock. As of December 31, 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 $75,000 for the year ended December 31,
2017, and there remains a balance of $25,000 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 year ended December 31, 2017.
Common
Stock to be issued
On
December 31, 2017, the Company recorded 102,564 shares of common stock to be issued to a marketing consultant (see Note 12) and
recorded $8,974 of stock-based compensation expense (based on the market price on the date of the agreement) for the year ended
December 31, 2017. The shares were certificated on February 27, 2018.
Preferred
Stock
The
Company has 25,000,000 authorized shares of $0.0001 preferred stock. As of December 31, 2017, and 2016, there were no shares of
preferred stock issued and outstanding.
NOTE
14 – SUBSEQUENT EVENTS
On
February 5, 2018, the Company completed the closing of a private placement financing transaction whereby a third-party investor
purchased a convertible note. The Convertible Note carries a 10% annual interest rate and is in the principal amount of $35,000.
Principal and interest is due and payable February 5, 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 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 Date, representing
a twenty-five percent (25%) discount.
On
February 9, 2018, the Company completed the closing of a private placement financing transaction whereby a third-party investor,
pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) dated February 8, 2018. Pursuant to the Purchase
Agreement, the investor purchased a 12% Convertible Promissory Note, dated February 8, 2017, in the principal amount of $58,300.
On February 9, 2018, the Company received proceeds of $50,000 which excluded transaction costs, fees, and expenses of $8,300.
Principal and interest is due and payable November 20, 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 twenty (20)
prior trading days from which a notice of conversion is received by the Company multiplied by seventy-five percent (75%), representing
a twenty-five percent (25%) discount.
On
February 27, 2018, the Company entered into a Business Loan Agreement (the “BLA”) with a third- party, whereby the
Company received $32,600 on March 1, 2018. The BLA requires the Company to make twelve monthly payments of principal and interest
of $3,613 per month.
On
March 2, 2018, the Company completed the closing of a private placement financing transaction whereby a third-party investor purchased
a convertible note. The Convertible Note carries a 10% annual interest rate and is in the principal amount of $50,000. Principal
and interest is due and payable March 2, 2019, and the Note is convertible into shares of the Company’s common stock at
any time after one hundred eighty (180) days, at a conversion price 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 Date, representing a twenty-five
percent (25%) discount.
On
March 7, 2018, the Company entered into an agreement with a third-party to provide financial, management consulting and advisory
and due diligence related services. The one-month agreement required a non-refundable deposit of $9,500, which was paid in March,
2018.
On
March 26, 2018, the Company completed the closing of a private placement financing transaction whereby a third-party investor
purchased a convertible note. The Convertible Note carries a 10% annual interest rate and is in the principal amount of $25,000.
Principal and interest is due and payable March 26, 2019, and the Note is convertible into shares of the Company’s common
stock at any time after one hundred eighty (180) days, at a conversion price 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 Date, representing
a twenty-five percent (25%) discount.
On
March 27, 2018, the Company completed the closing of a private placement financing transaction whereby a third-party investor
purchased a convertible note. The Convertible Note carries a 10% annual interest rate and is in the principal amount of $50,000.
Principal and interest is due and payable March 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 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 Date, representing
a twenty-five percent (25%) discount.
From
January 1, 2018, through the date of this report, the Company’s CEO loaned the Company $27,500 and the Company repaid $1,000.
As of the date of this report the outstanding loan balance to the Company’s CEO is $91,500.
F-21