SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended: March 31, 2018

 

OR

 

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

 

For the transition period from ________________ to __________________

 

Commission File Number 333-209341

 

INNERSCOPE ADVERTISING AGENCY, INC.

(Exact name of registrant as specified in its charter)

 

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

 

2151 Professional Drive, Second Floor, Roseville, CA 95661

(Address of principal executive offices)

 

(916) 218-4100

(Registrant's telephone number, including area code)

 

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

 

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

 

Indicate by check mark whether the registrant is a larger accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer ☐ Accelerated filer ☐

Non-accelerated filer ☐

(Do not check if a smaller reporting company)

Smaller reporting company ☑

 

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

 

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

 

The number of shares outstanding of the Registrant's $0.0001 par value Common Stock as of May 25, 2018, was 62,312,857 shares.

 

 
 

  

INNERSCOPE HEARING TECHNOLOGIES, INC.

FORM 10-Q

Quarterly Period Ended March 31, 2018

 

INDEX

 

FORWARD-LOOKING STATEMENTS Page
PART I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements  
  Condensed Consolidated Balance Sheets at March 31, 2018, and December 31, 2017 (Unaudited) 2
  Condensed Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017 (Unaudited)

3

  Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017 (Unaudited)

4

  Notes to Condensed Financial Statements (Unaudited) 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3. Quantitative and Qualitative Disclosures about Market Risks 26
Item 4. Controls and Procedures 26
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 27
Item 1A. Risk Factors 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Mine Safety Disclosures 27
Item 5. Other Information 27
Item 6. Exhibits 28
     
SIGNATURES  29

 

 
 

 

INNERSCOPE HEARING TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
 
   March 31,  December 31,
   2018  2017
       
ASSETS          
           
Current Assets:          
Cash and cash equivalents  $23,385   $84,720 
Accounts receivable, net   14,596    12,950 
Accounts receivable from related party   97,804    73,996 
Prepaid assets   86,918    101,110 
Inventory   28,734    5,959 
Total current assets   251,437    278,735 
           
Domain name  3,000   3,000 
Property, furniture and fixtures and equipment, net of accumulated depreciation of $1,289 (2018) and $1,068 (2017)   1,362    1,583 
Investment in undivided interest in real estate   1,222,598    1,224,903 
Total assets  $1,478,397   $1,508,221 
           
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
           
Current Liabilities:          
Accounts payable and accrued expenses  $222,004   $161,919 
Accounts payable to related party   22,548    22,548 
Notes payable - stockholder   91,500    65,000 
Advances payable, stockholders   187,760    176,838 
Current portion of convertible notes payable, net of discounts   275,384    74,140 
Current portion of note payable   18,793    18,518 
Note payable   43,358    —   
Officer salaries payable   95,192    47,248 
Income taxes payable   33,682    33,682 
Derivative liability   724,289    540,965 
Deferred revenue   847,223    847,223 
Total current liabilities   2,561,733    1,988,081 
           
Long term portion of note payable   977,494    982,176 
Long term portion of convertible note payable, net of discounts   —      12,587 
Total liabilities   3,539,227    2,982,844 
           
Commitments and contingencies          
           
Stockholders' Deficit:          
Common stock, $0.0001 par value; 225,000,000 shares authorized; 61,763,406 and 61,539,334 shares issued and outstanding March 31, 2018, and December 31, 2017, respectively   6,176    6,153 
Common stock to be issued, $0.0001 par value, 266,401 and 102,564 shares March 31, 2018, and December 31, 2017, respectively   27    10 
Preferred stock, $0.0001 par value; 25,000,000 shares authorized; no shares issued   —      —   
Additional paid-in capital   417,922    331,227 
Deferred stock compensation   —      (25,000)
Accumulated deficit   (2,484,955)   (1,787,012)
           
Total stockholders' deficit   (2,060,830)   (1,474,623)
           
   $1,478,397   $1,508,221 
           
           
See notes to condensed consolidated financial statements.

 

 2 

 

 

INNERSCOPE HEARING TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
       
  

Three Months Ended

March 31,

   2018  2017
       
Revenues:      
Revenues, other  $27,281   $139,460 
Revenues, related party   28,696    5,000 
Total revenues   55,977    144,460 
           
Cost of sales          
Cost of sales, other   24,781    15,392 
Cost of sales, related   14,083    —   
Total cost of sales   38,864    15,392 
           
Gross profit   17,113    129,068 
           
Operating Expenses:          
Compensation and benefits   159,539    156,673 
Advertising and promotion   25,321    —   
Professional fees (including stock based fees of $50,690 for 2018)   115,487    41,250 
Consulting fees, stockholder   —      60,000 
Rent, related party   36,000    18,372 
Investor relations   52,641    5,314 
Other general and administrative   41,242    10,294 
Total operating expenses   430,230    291,903 
           
Loss from operations   (413,116)   (162,835)
           
Other Income (Expense):          
Derivative expense   (151,259)   —   
Loss on investment in undivided interest in real estate   (2,305)   —   
Gain on contract cancellations   —      160,000 
Interest income, including $64 (2017) from officer   —      112 
Interest expense and finance charges   (131,263)   (368)
Total other income (expense), net   (284,827)   159,744 
           
Net loss  $(697,943)  $(3,091)
           
Basic and diluted loss per share  $(0.01)  $(0.00)
           
Weighted average number of common shares outstanding          
Basic and diluted   61,631,452    60,906,000 

 

 3 

 

 

INNERSCOPE HEARING TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
       
  

Three Months Ended

March 31,

 
    2018    2017 
Cash flows from operating activities:          
Net loss  $(697,943)  $(3,091)
Adjustments to reconcile net loss to net cash provided by (used in) operations:          
Loss on fair value of derivatives   151,259    —   
Amortization of debt discounts   110,266    —   
Depreciation   221    221 
Stock compensation expense   50,690    —   
Loss on investment in undivided interest in real estate   2,305    —   
Changes in operating assets and liabilities:          
Decrease (increase) in:          
Interest receivable, related party   —      82 
Accounts receivable   (1,646)   (9,460)
Inventory   (22,775)   (2,910)
Deferred commissions, stockholder   —      (375,000)
Prepaid assets   24,951    (44,755)
Accounts receivable, related party   (23,808)   —   
Increase (decrease) in:          
Accounts payable and accrued expenses   60,085    38,211 
Commissions payable, stockholder   —      (96,000)
Officer salaries payable   47,944    —   
Deferred revenue   —      625,000 
Due to related party   10,922    9,500 
Net cash provided by (used in) operating activities   (287,528)   141,798 
           
Cash flows from investing activities:          
Repayments from shareholder loans receivable   —      2,563 
Net cash Provided by investing activities   —      2,563 
           
Cash flows from financing activities:          
Proceeds from issuance of note payable   32,600    —   
Proceeds from advances, shareholder   27,500    —   
Proceeds from issuances of convertible notes payable   210,000    —   
Repayments of note payable   (4,407)   —   
Repayments of advances, shareholder   (1,000)   —   
Repayments of principal of convertible note payable   (38,500)   —   
Net cash provided by financing activities   226,193    —   
           
Net increase (decrease) in cash and cash equivalents   (61,335)   144,361 
           
Cash and cash equivalents, Beginning of period   84,720    493,514 
           
Cash and cash equivalents, End of period  $23,385   $637,875 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $5,707   $368 
Cash paid for income taxes  $—     $—   
           
Schedule of non-cash Investing or Financing Activity:          
Reclassification of derivative liabilities upon principal repayments of convertible notes  $61,044   $—   
           
           
See notes to condensed consolidated financial statements.

 

 4 

 

 

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 three months ended March 31 2017, the Company has recognized $100,000 of income for the one new store, opened in January 2017, and $160,000 in other income, net, 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).

 

 5 

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

 

Basis of Presentation and Principles of Consolidation

 

The accompanying condensed consolidated financial statements in this report have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to present the financial position, results of operations and cash flows for the stated periods have been made. Except as described below, these adjustments consist only of normal and recurring adjustments. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated unaudited financial statements should be read in conjunction with a reading of the Company’s financial statements and notes thereto included in the Annual Report for the year ended December 31, 2017, filed with the United States Securities and Exchange Commission (the “SEC”) on April 17, 2018. Interim results of operations for the three months ended March 31, 2018, and 2017, are not necessarily indicative of future results for the full year. Certain amounts from the 2017 period have been reclassified to conform to the presentation used in the current period.

 

Emerging Growth Companies

 

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

 

Use of Estimates

 

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

 

Cash 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 March 31, 2018, and December 31, 2017, management’s evaluation resulted in the establishment of an allowance for uncollectible receivables of $63,799.

 

Advertising and Promotion

 

The Company expenses advertising costs as incurred. Advertising expenses for the three months ended March 31, 2018 and 2017, was $25,321 and $-0-, respectively.

 

 6 

 

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 months ended March 31, 2018 and 2017, and accounts receivable balance as of March 31, 2018:

 

         Accounts
   March 31,  Receivable
   2018  2017  as of
   %  %  March 31, 2018
Customer A, related   51.3%   —     $97,804 
Customer B   24.4%   —      —   
Customer C   —      90.0%   —   

 

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.

 

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 march 31, 2018, and December 31, 2017:

 

   March 31,
2018
  December 31,
2017
Computer equipment  $2,651   $2,651 
Accumulated depreciation   (1,289)   (1,068)
Balance  $1,362   $1,583 

 

Depreciation expense of $221 was recorded for the three months ended March 31, 2018, and 2017.

 

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 March 31, 2018, the Company recognized a loss of $2,305. As of March 31, 2018, and December 31, 2017, the carrying value of the Company’s investment in undivided interest in real estate was $1,222,598 and $1,224,903, respectively (see Note 8).

 

 7 

 

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 March 31, 2018, and December 31, 2017, for each fair value hierarchy level:

 

March 31, 2018  Derivative
Liabilities
  Total
Level I  $—     $—   
Level II  $—     $—   
Level III  $724,289   $724,289 
December 31, 2017          
Level I  $—     $—   
Level II  $—     $—   
Level III  $540,965   $540,965 

 

 8 

 

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 has adopted ASU 2014-09, as amended effective January 1, 2018, and determined that there was no significant impact on its revenue recognition.  The Company’s contracts with customers are generally on a purchase order basis and represent obligations that are satisfied at a point in time as defined in the new guidance.  Accordingly, revenue for each project is recognized when each project is complete, and any costs incurred before this point in time, are recorded as assets to be expensed during the period the related revenue is recognized. For the three months ended March 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.

 

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.

 

 9 

 

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 March 31, 2018, the Company’s outstanding convertible debt is convertible into approximately 18,095,361 shares of common stock. This amount is not included in the computation of dilutive loss per share because their impact is antidilutive. As of March 31, 2017, the Company did not have any outstanding common stock equivalents or any other potentially dilutive securities.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12, ASU 2016-20, ASU 2017-10, ASU 2017-13 and ASU 2017-14, which FASB issued in August 2015, March 2016, April 2016, May 2016, May 2016, December 2016, May 2017, September 2017 and November 2017, respectively (collectively, the amended ASU 2014-09). The amended ASU 2014-09 provides a single comprehensive model for the recognition of revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. It requires an entity to recognize revenue when the entity transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amended ASU 2014-09 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s). The amended ASU 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including qualitative and quantitative information about contracts with customers, significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The effective date for the amended ASU 2014-09 is for years beginning after December 15, 2017 with early adoption permitted. The Company adopted the new guidance effective January 1, 2017 under the modified retrospective transition approach and it did not have a material impact on the condensed consolidated financial statements of the Company.

  

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)”. Under this guidance, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard will have on our consolidated financial statements.

 

With the exception of the new standard discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 31, 2018, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as filed on April 17, 2018, that are of significance or potential significance to the Company.

 

 10 

 

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 $697,943 for the three months ended March 31, 2018. At March 31, 2018, the Company had a working capital deficit of $2,310,296, and an accumulated deficit of $2,484,955. 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, 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 12). 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, and in the three months ended March 31, 2018, has begun to market and sell products direct to consumers online.

 

NOTE 4 – ADVANCES PAYABLE, SHAREHOLDERS

 

Chief Executive Officer

 

A summary of the activity for the three months ended March 31, 2018, and the year ended December 31, 2017, representing amounts paid by the Company’s CEO (stockholder) on behalf of the Company and amounts reimbursed is as follows.

 

   March 31, 2018  December 31, 2017
Beginning Balance  $138,637   $-0- 
Amounts paid on Company’s behalf   100,387    149,370 
Reimbursements   (87,385)   (10,733)
Ending Balance  $151,639   $138,637 

 

The ending balances as of March 31, 2018, and December 31, 2017, are included in Advances payable, stockholders on the condensed consolidated balance sheet included herein.

 

Director

 

A summary of the activity for the three months ended March 31, 2018, and the year ended December 31, 2017, representing amounts paid by the Company’s Chairman (stockholder) on behalf of the Company and amounts reimbursed is as follows.

 

   March 31, 2018  December 31, 2017
Beginning Balance  $38,201   $-0- 
Amounts paid on Company’s behalf   17,920    39,201 
Reimbursements   (20,000)   (1,000)
Ending Balance  $36,121   $38,201 

 

The ending balances as of March 31, 2018, and December 31, 2017, are included in Advances payable, stockholders on the condensed consolidated balance sheet included herein.

 

 11 

 

NOTE 5 – NOTE PAYABLE, STOCKHOLDER

 

A summary of the activity for the three months ended March 31, 2018, and the year ended December 31, 2017, of amounts the Company’s CEO (stockholder) loaned the Company and amounts repaid is as follows:

 

   March 31, 2018  December 31, 2017
Beginning Balance  $65,000   $-0- 
Amounts loaned to the Company   27,500    65,000 
Repaid   (1,000)   -0- 
Ending Balance  $91,500   $65,000 

 

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

 

NOTE 6 – NOTE PAYABLE

 

On February 27, 2018, the Company entered into a Business Loan Agreement (the “BLA”) for $43,358 with a third- party, whereby the Company received $32,600 on March 1, 2018. The BLA requires the Company to make the first six monthly payments of principal and interest of $4,102 per month, and then $3,124 for months seven thru twelve.

 

NOTE 7 – RELATED PARTY TRANSACTIONS

 

The Company loaned the CEO $20,500 during the year ended December 31, 2013. The note and interest were paid in full during the year ended December 31, 2017. The Company recorded interest income of $64 for the three months ended March 31, 2017.

 

During the three months ended March 31, 2018 and the year ended December 31, 2017, our CEO (stockholder) paid expenses of the Company and accounts payable on behalf of the Company (see Note 4). As of March 31, 2018, and December 31, 2017, the Company owed the CEO $151,639 and $138,637, respectively, which is included in Advances payable, stockholders on the condensed consolidated balance sheet included herein.

 

During the three months ended March 31, 2018, and the year ended December 31, 2017, our Chairman (stockholder) paid expenses of the Company and accounts payable on behalf of the Company (see Note 4). As of March 31, 2018, and December 31, 2017, the Company owed the Chairman $36,121 and $38,201, respectively, which is included in Advances payable, stockholders on the condensed 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 through December 31, 2016, the balance due to MFHC as of March 31, 2018, and December 31, 2017, was $22,548, which is included in Accounts payable, related party, on the condensed consolidated balance sheet included herein.

 

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 three months ended March 31, 2017, the Company expensed $1,500 related to this lease.

 

 12 

 

Effective August 1, 2016, the Company agreed to compensation of $225,000 and $125,000 per year for the Company’s CEO and CFO, respectively. On November 15, 2016, the Company entered into employment agreements with its CEO and CFO, which includes their annual base salaries of $225,000 and $125,000, respectively. For the three months ended March 31, 2018, and 2017, the Company recorded expenses to its officers in the following amounts:

 

   Three months ended
March 31,
   2018  2017
 CEO   $56,250   $56,250 
 CFO    30,289    31,250 
 Total   $86,538   $87,500 

 

As of March 31, 2018, the Company owes the CEO and CFO $38,324 and $56,868, respectively, and as of December 31, 2017, the Company owed the CEO and CFO $4,327 and $40,385, respectively for accrued and unpaid wages. These amounts are included in Officer salaries payable on the balance sheets included herein.

 

In September 2016, the officers and directors of the Company formed a California Limited Liability Company (“LLC1”), for the purpose of acquiring commercial real estate and other business activities. On December 24, 2016, LLC1 acquired two retail stores from the buyer of the MFHC stores. On March 1, 2017, the Company entered into a twelve-month Marketing Agreement with each of the stores to provide telemarketing and design and marketing services for $2,500 per month per store, resulting in $15,000 and $5,000 of revenues for the three months ended March 31, 2018, and 2017, respectively. Additionally, for the three months ended March 31, 2018, the Company invoiced LLC1 $12,421 for the Company’s production, printing and mailing services and $1,275 for sale of products. As of March 31, 2018, and December 31, 2017, LLC1 owes the Company $97,804 and $73,996, respectively. 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 three months ended March 31, 2018, the Company expensed $36,000 related to this lease and is included in Rent, related party, on the condensed 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. For the three months ended March 31, 2017, the Company paid the LLC an additional $771,000 and expensed $300,000 ($60,000 as commissions and $240,000 as other expense) for services performed. As of December 31, 2017, the deferred commissions-stockholder is $-0-, as the Company wrote off $508,334 during the remainder of 2017, due to uncertainty of future services being provided, based on the Complaint filed on May 26, 2017.

 

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.

 

 13 

 

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 three months ended March 31, 2018, a net loss of $2,305 is included in “Other income (expense), net”. As of March 31, 2018, the carrying value of our investment in undivided interest in real estate was $1,222,598.

 

The unaudited condensed balance sheet as of March 31, 2018 and the unaudited condensed statement of operation for the three months ended March 31, 2018, for the real property is as follows:

 

Current assets:   
Cash and cash equivalents  $5,626 
Accounts receivable, net   3,000 
Prepaid expenses and other current assets   56,255 
Total current assets   64,480 
 Land and Building, net   2,386,956 
Other assets, net   55,693 
Total assets  $2,505,529 
      
Current portion of mortgage payable  $38,353 
Other current liabilities   38,448 
Total current liabilities   76,801 
Mortgage payable, long-term   1,994,886 
Total liabilities   2,071,687 
Total equity   433,842 
Total liabilities and equity  $2,505,529 

 

Rental income  $63,211 
Expenses:     
Property taxes   6,646 
Depreciation and amortization   11,446 
Insurance   2,033 
Repairs and maintenance   5,349 
Other   10,087 
Interest expense   32,355 
Total expenses   67,916 
Net loss  $(4,705)

 

 14 

 

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 an initial interest rate of 6% per annum, adjustable to the Prime interest rate plus 2%, and is secured by a first position Deed of Trust and business assets located at the property. The Company initially recorded a liability of $1,007,930 for its portion of the SBA Note, with the offset being to Investment in undivided interest in real estate on the balance sheet presented herein. As of March 31, 2018, the current and long-term portion of the SBA Note is $18,793 and $977,494, respectively. Future principal payments for the Company’s portion are:

 

  Twelve months ending March 31,  Amount
 2019   $18,793 
 2020    19,795 
 2021    21,173 
 2022    23,865 
 2023    25,195 
 Thereafter    887,466 
 Total   $996,287 

 

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 three months ended March 31, 2018, amortization of the debt discount of $12,994 was charged to interest expense. The Company also recorded a discount for debt issuance costs of $3,000 and has amortized $967 to interest expense for the three months ended March 31, 2018. As of March 31, 2018, and December 31, 2017, the note balance is $48,000, with a carrying value on March 31, 2018, of $32,157, net of unamortized discounts of $15,843.

 

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 three months ended March 31, 2018, amortization of the debt discount of $66,668 was charged to interest expense. The Company also recorded an original issue discount and debt issue discount of $49,000 and amortized $13,067 to interest expense for the three months ended March 31, 2018. During the three months ended March 31, 2018, the Company made principal payments of $38,500 and as of March 31, 2018, and December 31, 2017, the note balance is $242,300 and $280,800, respectively, with a carrying value as of March 31, 2018, of $72,568, net of unamortized discounts of $169,732.

 

 15 

 

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 three months ended March 31, 2018, amortization of the debt discount of $3,302 was charged to interest expense. As of March 31, 2018, and December 31, 2017, the note balance is $50,000, with a carrying value as of March 31, 2018, of $40,498, net of unamortized discounts of $9,502.

 

On February 1, 2018, the Company completed the closing of a private placement financing transaction (the “Transaction”) when a third-party investor purchased a convertible note (the “Convertible Note”). The Convertible Note carries a 10% annual interest rate and is in the principal amount of $35,000. Principal and interest is due and payable February 1, 2019, and the Note is convertible into shares of the Company’s common stock at any time after one hundred eighty (180) days, at a conversion price (the “Conversion Price”) equal to seventy-five percent (75%) of the average closing price of the Company’s common stock for the ten (10) days immediately preceding the conversion, representing a twenty-five percent (25%) discount. The embedded conversion feature included in the note resulted in an initial debt discount of $9,554, and an initial derivative liability of $9,554. For the three months ended March 31, 2018, amortization of the debt discount of $1,592 was charged to interest expense. As of March 31, 2018, the note balance is $35,000, with a carrying value of $27,038, net of unamortized discounts of $7,962.

 

On February 8, 2018, 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 February 8, 2018. Pursuant to the Purchase Agreement, the investor purchased a 12% Convertible Promissory Note (the “Note”), dated February 8, 2018, in the principal amount of $58,300. On February 8, 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 8, 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 seventy-five percent (75%), representing a twenty-five percent (25%) discount. The embedded conversion feature included in the note resulted in an initial debt discount of $50,000, an initial derivative liability of $65,525 and an initial derivative expense of $15,525. For the three months ended March 31, 2018, amortization of the debt discount of $8,912 was charged to interest expense. The Company also recorded a debt issue discount of $8,300 and has amortized $1,480 to interest expense for the three months ended March 31, 2018. As of March 31, 2018, the note balance is $58,300, with a carrying value of $10,392, net of unamortized discounts of $47,908.

 

On March 2, 2018, the Company completed the closing of a private placement financing transaction (the “Transaction”) when a third-party investor purchased a convertible note (the “Convertible Note”). The Convertible Note carries a 10% annual interest rate and is in the principal amount of $50,000. Principal and interest 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 (the “Conversion Price”) equal to seventy-five percent (75%) of the average closing price of the Company’s common stock for the ten (10) days immediately preceding the conversion, representing a twenty-five percent (25%) discount. The embedded conversion feature included in the note resulted in an initial debt discount of $13,399, and an initial derivative liability of $3,399. For the three months ended March 31, 2018, amortization of the debt discount of $1,117 was charged to interest expense. As of March 31, 2018, the note balance is $50,000, with a carrying value of $37,718, net of unamortized discounts of $12,282.

 

On March 26, 2018, the Company completed the closing of a private placement financing transaction (the “Transaction”) when a third-party investor purchased a convertible note (the “Convertible Note”). The Convertible Note carries a 10% annual interest rate and is in the principal amount of $50,000. Principal and interest 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 (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 $13,420, and an initial derivative liability of $13,420. For the three months ended March 31, 2018, amortization of the debt discount of $112 was charged to interest expense. As of March 31, 2018, the note balance is $50,000, with a carrying value of $36,692, net of unamortized discounts of $13,308.

 

 16 

 

On March 27, 2018, the Company completed the closing of a private placement financing transaction (the “Transaction”) when a third-party investor purchased a convertible note (the “Convertible Note”). The Convertible Note carries a 10% annual interest rate and is in the principal amount of $25,000. Principal and interest 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 (the “Conversion Price”) equal to seventy-five percent (75%) of the average closing price of the Company’s common stock for the ten (10) days immediately preceding the conversion, representing a twenty-five percent (25%) discount. The embedded conversion feature included in the note resulted in an initial debt discount of $6,736, and an initial derivative liability of $6,736. For the three months ended March 31, 2018, amortization of the debt discount of $56 was charged to interest expense. As of March 31, 2018, the note balance is $25,000, with a carrying value of $18,320, net of unamortized discounts of $6,680.

 

The following is a roll-forward of the Company’s convertible notes and related discounts for the three months ended March 31, 2018:

 

    
Convertible notes  $558,600 
Unamortized note discounts   (283,216)
Balance at March 31, 2018  $275,834 

 

The following is a summary of the Company’s convertible notes and related discounts as of March 31, 2018:

 

  

Principal

Balance

 

Debt

Discounts

  Total
Balance at January 1, 2018  $378,800   $(292,073)  $86,727 
New issuances   218,300    (101,409)   116,891 
Cash payments   (38,500)   —      (38,500)
Amortization   —      110,266    110,266 
Balance at March 31, 2018  $558,600   $(283,216)  $275,384 

 

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, March 31, 2018, and December 31, 2017, at $108,634, $724,289 and $540,965, respectively. The Company used the Monte Carlo simulation valuation model with the following assumptions for new notes issued during the three months ended March 31, 2018, risk-free interest rates from 1.82% to 2.10% and volatility of 303% to 308%, and as of March 31, 2018, risk-free interest rates from 1.93% to 2.09% and volatility of 313% to 518%.

 

 17 

 

A summary of the activity related to derivative liabilities for the three months ended on March 31, 2018, is as follows:

 

   March 31, 2018
Beginning Balance  $540,965 
Initial Derivative Liability   108,634 
Fair Value Change   135,734 
Reclassification for principal payments   (61,044)
Ending Balance  $724,289 

 

Derivative liability expense of $151,259 for the three months ended March 31, 2018, consisted of the initial derivative expense of $15,525 and the above fair value change of $135,734.

 

NOTE 12– COMMITMENTS AND CONTINGENCIES

 

Lease Agreements

 

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:

 

  For the twelve months ending March 31,  Amount
 2019   $144,000 
 2020    144,000 
 2021    144,000 
 2022    72,000 
 Total   $504,000 

 

Rent expense for the three months ended March 31, 2018, and 2017 was $36,000 (related party and $18,372 ($1,500 related party), respectively.

 

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 three months ended March 31, 2017, the Company has received and recognized $160,000 in other income, net, for payments received for the cancellation of the Expansion Agreement.

 

 18 

 

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 condensed consolidated balance sheets presented herein.

 

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. For the three months ended March 31, 2018, the Company recorded $15,000 of consulting expense and recorded $7,778 of stock-based compensation expense (pursuant to the terms of the MSA) from the issuance of 111,111 shares of common stock. The Company also recorded 266,401 shares of common stock to be issued as of March 31, 2018, and recorded stock- based compensation expense of $17,184 (pursuant to the terms of the MSA). Lastly, on February 27, 2018, the Company issued 102,564 shares of common stock that were previously recorded as common stock to be issued.as of December 31, 2017.

 

Legal Matters

 

On May 26, 2017, Helix Hearing Care (California), Inc. a California corporation (“Helix”), filed a complaint (the “Complaint”) against the InnerScope and the Moores, in the Circuit Court of the 11th Judicial Circuit in and for Miami-Dade County, Florida, that includes a rescission of the Consulting Agreement and a demand that all monies paid pursuant to the Consulting Agreement be returned, on the basis that an injunction against certain Officers and Directors renders the Consulting Agreement impossible to perform. The Company had previously received $1,250,000 under the Consulting Agreement. InnerScope was not named as an enjoined party in such previous litigation, and the services contemplated under the Consulting Agreement are not within the scope of the injunction, thus InnerScope believes the accusation by the third party is frivolous and without merit, as well as not providing sufficient cause for the Agreement to be terminated.

 

InnerScope and the Moores filed their Answer and Affirmative Defenses to the Complaint on June 27, 2017.  On the same date, InnerScope, the Moores, and MFHC filed a counterclaim. On February 27, 2018, the Counterclaim was amended to include four claims for breach of contract, one claim for anticipatory breach of contract, one claim for negligent misrepresentation, and one claim for account stated. The parties have also sent each other written discovery requests and have served written responses to the same.

 

NOTE 13 – STOCKHOLDERS’ EQUITY

 

Common Stock

 

The Company has 225,000,000 authorized shares of $0.0001 common stock. As of March 31, 2018, and December 31, 2017, there are 61,763,406 and 61,539,334, respectively, shares of common stock outstanding.

 

On February 23, 2018, the Company issued 111,111 shares of common stock to a consultant. The shares were valued at $7,778, based on the market price of the common stock on January 31, 2018, the date the Company agreed to issue the shares.

 

On February 23, 2018, the Company issued 10,397 shares of common stock to an employee. The shares were valued at $728, based on the market price of the common stock on January 31, 2018, the date the Company agreed to issue the shares.

 

 19 

 

On February 27, 2018, the Company issued 102,564 shares of common stock that were classified as common stock to be issued as of December 31, 2017.

 

Common Stock to be issued

 

On February 28, 2018, the Company recorded 133,067 shares of common stock to be issued to a marketing consultant (see Note 12) and recorded $8,117 of stock-based compensation expense (based on the market price of the common stock on that date). On March 31, 2018, the Company recorded 133,333 shares of common stock to be issued to the same marketing consultant and recorded $9,067 of stock-based compensation expense (based on the market price of the common stock on that date).

 

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

 

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

On April 8, 2018, the Company issued a convertible promissory note (the “Note”), with a face value of $95,450, maturing on July 8, 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 April 11, 2018, when the Company received proceeds of $75,000, after disbursements for the lender’s transaction costs, fees and expenses. The Note also requires daily payments of $375 per day via ACH through July 8, 2019, when all unpaid principal and interest is due.

 

On April 18, 2018, the Company issued 549,451 shares of common stock in satisfaction of $10,000 of principal pursuant to a conversion notice received by the Company from a convertible debt holder.

 

On May 11, 2018, the Company issued a convertible promissory note (the “Note”), with a face value of $100,000, maturing on May 11, 2019, and stated interest of 10% to a third-party investor. The note is convertible at any time after the funding of the note into a variable number of the Company's common stock, based on a conversion ratio of 62% of the lowest trading price for the 20 days prior to conversion. The note was funded on May 16, 2018, when the Company received proceeds of $75,825, after disbursements to vendors and for the lender’s transaction costs, fees and expenses.

 

 20 

 

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

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and notes thereto for the years ended December 31, 2017 and 2016 and filed by the Company on Form 10-K with the Securities and Exchange Commission on April 17, 2018.

 

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

 

While our financial statements are presented on the basis that we are a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time, our independent auditor’s report on our financial statements for the years ended December 31, 2017 and 2016 includes a “going concern” explanatory paragraph that describes substantial doubt about our ability to continue as a going concern. Management’s plans in regard to the factors prompting the explanatory paragraph are discussed below and also in Note 3 to the unaudited condensed consolidated financial statements.

 

Corporate History and Current Business

 

InnerScope Advertising Agency, Inc. (IAA) is a Nevada Corporation incorporated June 15, 2012, with its principal place of business in Roseville, California. On June 20, 2012, IAA acquired InnerScope Advertising Agency, LLC, to provide advertising/marketing services to the hearing device industry. Through this Acquisition and Plan of Share Exchange with InnerScope Advertising Agency, LLC (“ILLC”), a commonly owned entity, IAA acquired 100% of all membership interests in ILLC. On November 1, 2013, IAA entered into an Acquisition and Plan of Share Exchange with Intela-Hear, LLC (“Intela-Hear”), a commonly owned entity, whereby IAA acquired 100% of the outstanding membership interests of Intela- Hear.

 

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 three months ending March 31, 2017, the Company has received and recognized $400,000 in other income for payments received for the cancellation of the Expansion Agreement.

 

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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 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 this threat by the third party is frivolous and without merit, as well as not providing sufficient cause for the Agreement to be terminated. The Company intends to vigorously defend against any lawsuit filed against it in this matter, as well as take any required action to see that the obligations of the third party in this matter are strictly enforced. However, effective January 1, 2017, the Company has not recognized revenue from the Consulting Agreement.

 

Results of Operations

 

For the three months ended March 31, 2018 compared to the three months ended March 31, 2017

 

Revenues for the three months ended March 31, 2018 were $55,977 compared to $144,460 for the three months ended March 31, 2017. The revenue decrease was primarily the result of the cancellations of the third-party Consulting and Marketing Agreements in January 2017. For the three months ended March 31, 2018, a related customer accounted for 51% of our revenues and another customer accounted for approximately 24%. During the three months ended March 31, 2018, the Company began to market and sell Personal Sound Amplifier Products (“PSAP’s”) online on a direct to consumer basis. For the three months ended March 31, 2017, one customer accounted for 90% of our revenues. A breakdown of the net decrease in sales is as follows:

 

  

For the three months ended

March 31,

   2018  2017
Related party - Marketing and consulting fee  $15,000   $5,000 
Related party - Direct print and mail services   13,696    -0- 
Total related party   28,696    5,000 
Online sales   9,832    -0- 
Consulting fees   -0-    130,000 
Direct print, mail services and misc.   17,449    9,460 
Sub total   27,281    139,460 
Total revenues  $55,977   $144,460 

 

Related Party

 

Beginning in March 2017, the Company provided consulting and marketing services to Value Hearing, LLC, (“Value Hearing”), a related party, of $5,000, comprised of a monthly of $2,500 for each of the 2 stores that operate under Value Hearing. For the three months ending March 31, 2018, the Company also provided direct print and mail advertising services to the Value Hearing stores.

 

Online sales

 

During the three months ended March 31, 2018, the Company began to market a line of PSAP hearables and wearables and has currently expanded their line of products to include FDA approved hearing aid devices. The Company plans to introduce the products through new marketing campaigns in the quarter of 2018, to bring awareness to the products and anticipates sales of these products to increase during the remainder of 2018.

 

 22 

 

Other

 

Consulting and design and marketing

 

For the three months ended March 31, 2017, the Company recorded $100,000 of income related to the Store Expansion Agreement and $30,000 of income from the cancellation of the Marketing and Store Expansion Agreements.

 

Direct print, mail service and miscellaneous

 

For the three months ended March 31, 2018 and 2017, the Company developed marketing materials, including printing and mailing services, for direct marketing campaigns and the sale of accessory products and recorded revenues of $17,449 and $9,460, respectively.

 

Cost of sales

 

The Company records the costs of designing, producing, printing and mailing advertisements for our client’s direct mail marketing campaigns in cost of sales as well as the licensing of telemarketing software. Cost of sales for the three months ended March 31, 2018 and 2017 was $38,864 and $15,392, respectively.

 

Operating Expenses

 

Operating expenses increased to $430,230 for the three months ended March 31, 2018 from $291,903 for the three months ended March 31, 2017. The increase in expenses in the current periods was as follows:

 

    
Description  2018  2017
Compensation and benefits  $159,539   $156,673 
Professional fees   115,487    41,250 
Investor relations   52,641    5,314 
Commissions, stockholder   —      60,000 
Advertising and promotion   25,321    —   
Rent, including related party $36,000 (2018) and $1,500 (2017)   36,000    18,372 
General and other administrative   41,242    10,294 
Total  $430,230   $291,903 

   

Professional fees for the three months ended March 31, 2018, were $115,487 compared to $41,250 for the three months ended March 31, 2017, respectively. Professional fees consisted of: 

 

   2018       2017  
Legal fees  $32,686   $4,900 
Business consulting   12,000    7,500 
Stock-based compensation   50,690    —   
Accounting and auditing fees   15,848    27,106 
Information technology   4,262    1,744 
Total  $115,487   $41,250 

 

Legal fees increased in the current period for the costs incurred regarding the Helix matter, see Note 12.

 

 23 

 

Stock based compensation for the three months ended March 31, 2018, is comprised of:

 

On February 23, 2018, the Company issued 111,111 shares of common stock to a marketing consultant. The shares were valued at $7,778, based on the market price of the common stock on January 31, 2018, the date the Company agreed to issue the shares.

 

On February 23, 2018, the Company issued 10,397 shares of common stock to an employee. The shares were valued at $728, based on the market price of the common stock on January 31, 2018, the date the Company agreed to issue the shares.

 

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

 

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

 

The amortization of deferred stock compensation of $25,000.

 

Commissions, stockholder, for the three months ended March 31, 2017, are the result of the Company recording commission due on all amounts recognized as revenue in the period related to the Consulting Agreement and Store Expansion Agreement.

 

Rent increased for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 as a result of the Company on June 14, 2017, entered into a five-year lease with LLC1 for approximately 6,944 square feet and a monthly rent of $12,000.

 

General and administrative costs increased to $41,242 for the three months ended March 31, 2018, compared to $10,294 for the three months ended March 31, 2017, respectively.

 

Other income (expense), net

 

Other expense, net was $284,827 for the three months ended March 31, 2018, compared to other income of $159,744 for the three months ended March 31, 2017. The 2018 period was comprised of interest expense of $131,263 pursuant to the terms and conditions of the convertible notes issued by the Company, and derivative expense of $151,529 comprised of the initial derivative expense recorded on the convertible notes of $15,525 and change in the fair value of the derivatives of $135,734. The 2017 period was primarily as a result of the Company recognizing a gain $160,000 on the cancellation of Store Expansion Agreement. The Company received $400,000 during the three months ended March 31, 2017 and also paid $240,000 to a stockholder for services provided related to the income received pursuant to the Cancellation Agreement.

 

Net Income (loss)

 

Net loss for the three months ended March 31, 2018, was $697,943 compared to $3,091 for the three months ended March 31, 2017. This resulted from the increase in the loss of operating income and the change in other expenses other income, as described above.

 

Capital Resources and Liquidity

 

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs to pay ongoing obligations. As of March 31, 2018, we had cash and cash equivalents of $23,385, a decrease of $61,335, from $84,720 as of December 31, 2017. As of March 31, 2018, we had current liabilities of $2,561,733 (including deferred revenues of $847,223) compared to current assets of $251,437 which resulted in working capital deficit of $2,310,296. The current liabilities are comprised of accounts payable, accrued expenses, notes payable, convertible notes payable, derivative liabilities and deferred revenue.

 

 24 

 

Our ability to operate over the next twelve months, is contingent upon continuing to realize sales revenue sufficient to fund our ongoing expenses, as well as achieving a successful outcome in the litigation which would provide cash owed pursuant to the Consulting Agreement. If we are unable to sustain our ongoing operations through sales revenue, we intend to fund operations through debt and/or equity financing arrangements, which may be insufficient to fund our working capital, or other cash requirements. There can be no assurance that such additional financing will be available to us on acceptable terms, or at all.  Our ability to operate beyond March, 2019, is contingent upon continuing to realize sales revenue sufficient to fund our ongoing expenses, as well as the cash from the Consulting Agreement. If we are unable to sustain our ongoing operations through sales revenue, we intend to fund operations through debt and/or equity financing arrangements, which may be insufficient to fund our working capital, or other cash requirements. Since March 31, 2018, we have received $150,825, from the issuance of $195,450 of convertible notes. We do not have any formal commitments or arrangements for the sales of stock or the advancement or loan of funds at this time. There can be no assurance that such additional financing will be available to us on acceptable terms, or at all.

 

Operating Activities

 

Cash used in operations for the three months ended March 31, 2018, was $287,528 compared to cash provided by operating activities of $141,798 for the three months ended March 31, 2017. For the three months ended March 31, 2018, the cash used in operations was a result of the net loss of $697,943 and increases in assets of $23,278, offset by increases in liabilities of $118,951 and the non- cash expense items of depreciation and amortization of $110,487, derivative expense of $151,259 and stock based compensation of $50,690. For the three months ended March 31, 2017, the cash provided by operations was a result of the net loss of $3,091 and increases in accounts payable and accrued expenses of $38,211, deferred revenue of $625,000 and amount due to related party (MFHC) of $9,500, offset by decreases in commissions payable stockholder of $96,000, and increases of $375,000 for deferred commissions stockholder, $44,755 for prepaid assets and $9,460 in accounts receivables.

 

Investing Activities

 

Cash provided by investing activities was $2,563 for the three months ended March 31, 2017, comprised of the amount received by the Company of a note receivable from an officer.

 

Financing Activities

 

For the three months ended March 31, 2018, the Company has received $270,100 from the issuance of $218,300 of convertible notes, a note issued of $43,358, and related party notes payable issued of in the aggregate of $27,500. For the three months ended March 31, 2018, the Company made principal payments of $38,500 on convertible notes and $4,407 on notes payable. There was no financing activity for the three months ended March 31, 2017.

 

OFF BALANCE SHEET ARRANGEMENTS

 

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

 

Critical Accounting Policies

 

Basis of presentation

 

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

 

 25 

 

Use of estimates

 

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

 

Revenue Recognition

 

The Company has adopted ASU 2014-09, as amended effective January 1, 2018, and determined that there was no significant impact on its revenue recognition.  The Company’s contracts with customers are generally on a purchase order basis and represent obligations that are satisfied at a point in time as defined in the new guidance.  Accordingly, revenue for each project is recognized when each project is complete, and any costs incurred before this point in time, are recorded as assets to be expensed during the period the related revenue is recognized. For the three months ended March 31, 2018, 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.

 

Income taxes

 

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

  

Net loss per common share

 

The Company reports earnings (loss) per share in accordance with ASC 260, "Earnings per Share." Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net loss by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding during the period. As of March 31, 2018, the Company’s outstanding convertible debt is convertible into approximately 18,095,361 shares of common stock. This amount is not included in the computation of dilutive loss per share because their impact is antidilutive. As of March 31, 2017, the Company did not have any outstanding common stock equivalents or any other potentially dilutive securities.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable to smaller reporting companies.

 

Item 4. Evaluation of Disclosure Controls and Procedures

 

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

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act that occurred during the quarter ended March 31, 2018, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 26 

 

Part II. Other Information

 

Item 1. Legal Proceedings

 

On May 26, 2017, Helix Hearing Care (California), Inc. a California corporation (“Helix”), filed a complaint (the “Complaint”) against the InnerScope and the Moores, in the Circuit Court of the 11th Judicial Circuit in and for Miami-Dade County, Florida, that includes a rescission of the Consulting Agreement, on the basis that an injunction against certain Officers and Directors renders the Consulting Agreement impossible to perform. InnerScope was not named as an enjoined party in such previous litigation, and the services contemplated under the Consulting Agreement are not within the scope of the injunction, thus InnerScope believes the accusation by the third party is frivolous and without merit, as well as not providing sufficient cause for the Agreement to be terminated.

 

InnerScope and the Moores filed their Answer and Affirmative Defenses to the Complaint on June 27, 2017.  On the same date, InnerScope, the Moores, and MFHC filed a counterclaim. On February 27, 2018, the Counterclaim was amended to include four claims for breach of contract, one claim for anticipatory breach of contract, one claim for negligent misrepresentation, and one claim for account stated. The parties have also sent each other written discovery requests. The parties have also sent each other written discovery requests and have served written responses to the same.

 

Item 1A. Risk Factors

 

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

 

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

 

On February 23, 2018, the Company issued 111,111 shares of common stock to a consultant. The shares were valued at $7,778, based on the market price of the common stock on January 31, 2018, the date the Company agreed to issue the shares.

 

On February 23, 2018, the Company issued 10,397 shares of common stock to an employee. The shares were valued at $728, based on the market price of the common stock on January 31, 2018, the date the Company agreed to issue the shares.

 

On February 27, 2018, the Company issued 102,564 shares of common stock that were classified as common stock to be issued as of December 31, 2017.

 

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

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

 

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Item 6. Exhibits

 

Exhibit

Number

  Description of Exhibit
3.1*   Articles of Incorporation
3.2*   Bylaws of InnerScope Advertising Agency, Inc.
3.3*   Amended and Restated Articles of Incorporation
3.4*   Amended and Restated Articles of Incorporation dated August 25, 2017
4.3*   Private Placement Offering Memorandum
10.2*   InnerScope, Inc. Marketing Agreement between the Company and Moore Family Hearing Company, Inc.
10.3*   Acquisition Agreement and Plan of Share Exchange dated June 20, 2012, between the Company and InnerScope Advertising Agency, LLC
10.4*   Acquisition Agreement and Plan of Share Exchange dated November 1, 2013, between the Company and Intela-Hear, LLC
10.5*   Promissory Note dated April 1, 2013, between the Company and Matthew Moore
10.6*   Promissory Note dated June 25, 2013, between the Company and Matthew Moore
10.7*   June 2012 Business Consulting Agreement
10.8+*   GN ReSound Sales Agreement
10.9+*   Store Expansion Consulting Agreement
10.10+*   Consulting Agreement
10.11#*   Employment Agreement with Matthew Moore, CEO
10.12#*   Employment Agreement with Kimberly Moore, CFO
10.13*   Financial Consulting Agreement between the Company and Venture Equity, LLC
10.14*   Consulting and Representation Agreement between the Company and CorporateAds.com
10.15*   Business Loan Agreement, dated May 5, 2017, between InnerScope Advertising Agency, Inc. and Moore Holdings, LLC and First Community Bank.
10.16*   Commercial Security Agreement, dated May 5, 2017, between InnerScope Advertising Agency, Inc. and Moore Holdings, LLC and First Community Bank.
10.17*   U.S. Small Business Administration Note.
10.18*   Deed of Trust, dated May 5, 2017, among InnerScope Advertising Agency, Inc. and Moore Holdings, LLC. and First Community Bank and Placer Title Company.
10.19*   Securities Purchase Agreement dated October 5, 2017 by and between InnerScope Hearing Technologies, Inc. and Power Up Lending Group, LTD.
10.20*   Convertible Promissory Note dated October 5, 2017, by and between InnerScope Hearing Technologies, Inc. and Power Up Lending Group, LTD.
10.21*   Securities Purchase Agreement dated November 10, 2017, by and between InnerScope Hearing Technologies, Inc. and Carebourn Capital, L.P.
10.22*   Convertible Promissory Note dated November 10, 2017, by and between InnerScope Hearing Technologies, Inc. and Carebourn Capital, L.P.
10.23*  

Securities Purchase Agreement dated February 8, 2018 by and between InnerScope Hearing Technologies,

Inc. and Power Up Lending Group, LTD.

10.24*  

Convertible Promissory Note dated February 8, 2018, by and between InnerScope Hearing Technologies,

Inc. and Power Up Lending Group, LTD.

10.25*  

Securities Purchase Agreement dated April 8, 2018, by and between InnerScope Hearing

Technologies, Inc. and Carebourn Capital, L.P.

10.26*  

Convertible Promissory Note dated April 8, 2018, by and between InnerScope Hearing

Technologies, Inc. and Carebourn Capital, L.P.

10.27**  

Securities Purchase Agreement dated May 11, 2018, by and between InnerScope Hearing

Technologies, Inc. and One44 Capital LLC

10.28**  

Convertible Promissory Note dated May 11, 2018, by and between InnerScope Hearing

Technologies, Inc. and One44 Capital LLC

10.29**  

Convertible Back- End Promissory Note dated May 11, 2018, by and between InnerScope Hearing

Technologies, Inc. and One44 Capital LLC

31.1**   Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
31.2**   Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
3332.1**   Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
101.INS**   XBRL Instance
101.SCH**   XBRL Taxonomy Extension Schema
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase
101.DEF**   XBRL Taxonomy Extension Definition Linkbase
101.LAB**   XBRL Taxonomy Extension Labels Linkbase
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase

 

* Previously filed.

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

** Filed Herewith
# Denotes management contract or compensatory plan or arrangement.

 

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SIGNATURES

 

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

 

Dated: May 25, 2018

 

INNERSCOPE HEARING TECHNOLOGIES, INC.

 

By: /s/ Matthew Moore                    

Matthew Moore

Chief Executive Officer (principal executive officer)

 

By: /s/ Kimberly Moore                    

Kimberly Moore

Chief Financial Officer (principal financial and accounting officer)

 

 

29