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: SeptemberJune 30, 20182019

 

OR

 

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

 

For the transition period from ________________ to __________________

 

Commission File Number333-209341

 

INNERSCOPE HEARING TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

Nevada46-3096516
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)

 

2151 Professional Drive, Second Floor, Roseville, CA 95661

(Address of principal executive offices)

 

(916) 218-4100

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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☐☐ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate webWeb 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☐☐ No

 

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

 

Large accelerated filer☐Accelerated filer☐

Non-accelerated filer ☐

☑Smaller reporting company☑
(Do not check if a smaller reporting company)Emerging growth company☑

 

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

 

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

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

Title of each classTrading Symbol(s)Name of each exchange on which registered
NoneN/AN/A

 

The number of shares outstanding of the Registrant's $0.0001 par value Common Stock as of November 19, 2018,August 28, 2019, was 117,418,476197,577,017 shares.

 

 
 

 

INNERSCOPE HEARING TECHNOLOGIES, INC.

FORM 10-Q

Quarterly Period Ended SeptemberJune 30, 20182019

 

INDEX

 

FORWARD-LOOKING STATEMENTSPage
PART I. FINANCIAL INFORMATION 
  
Item 1.Financial Statements 
 Condensed Consolidated Balance Sheets at SeptemberJune 30, 2018,2019, and December 31, 20172018 (Unaudited)2
 Condensed Consolidated Statements of Operations for the three and ninesix months ended SeptemberJune 30, 20182019 and 20172018 (Unaudited)

3

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

4

 Condensed Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20182019 and 20172018 (Unaudited)  

45

 Notes to Condensed Consolidated Financial Statements (Unaudited)56
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations                                                                                                    

2530

Item 3.Quantitative and Qualitative Disclosures about Market Risks3136
Item 4.Controls and Procedures3136
   
PART II. OTHER INFORMATION 
   
Item 1.Legal Proceedings3237
Item 1A.Risk Factors3237
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds3237
Item 3.Defaults Upon Senior Securities3438
Item 4.Mine Safety Disclosures3438
Item 5.Other Information3438
Item 6.Exhibits3438
   
SIGNATURES

 

 
 

 

 

INNERSCOPE HEARING TECHNOLOGIES, INC.CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
    
(Unaudited)(Unaudited)
 September 30, December 31,
 2018 2017 June 30, December 31,
     2019 2018
ASSETS                
                
Current Assets:                
Cash and cash equivalents $64,884  $84,720 
Accounts receivable, net  23,613   12,950 
Cash $5,017  $87,826 
Accounts receivable, allowance for doubtful accounts $18,383  22,568   6,112 
Accounts receivable from related party  109,121   73,996   283,064   203,325 
Note receivable, other  27,975   —   
Prepaid assets  99,571   101,110 
Employee advances  59,721   40,942 
Prepaid expenses  107,503   167,992 
Inventory  35,806   5,959   118,331   91,510 
Total current assets  360,970   278,735   596,204   597,707 
                
Security deposit  4,616   —   
Security deposits  34,537   11,056 
Domain name $3,000  $3,000  $3,000  $3,000 
Intangible assets, net  12,466   —   
Property and equipment, net of accumulated depreciation of $1,510 (2018) and $1,068 (2017)  38,672   1,583 
Intangible assets, net of accumulated amortization of $80,420 (2019) and $2,168 (2018)  932,588   1,010,840 
Property and equipment, net of accumulated depreciation of $12,587 (2019) and $4,705 (2018)  81,833   43,450 
Operating leases right-of-use assets, net  1,302,184   —   
Investment in undivided interest in real estate  1,223,513   1,224,903   1,231,779   1,226,963 
Total assets $1,643,235  $1,508,221  $4,182,125  $2,893,014 
        
                
LIABILITIES AND STOCKHOLDERS' DEFICIT                
                
Current Liabilities:                
Accounts payable and accrued expenses $339,177  $161,919  $1,092,778  $1,233,653 
Accounts payable to related party  22,548   22,548   22,548   22,548 
Notes payable - stockholder  95,800   65,000   95,800   95,800 
Advances payable, stockholders  69,044   176,838   63,642   57,526 
Current portion of convertible notes payable, net of discounts  317,205   74,140 
Current portion of note payable  19,369   18,518 
Convertible notes payable, net of discounts  958,827   151,166 
Current portion of notes payable, net of deferred loan fees  28,721   29,270 
Current portion of note payable-undivided interest in real estate  20,096   19,660 
Customer deposits  48,914   —     71,409   56,698 
Officer salaries payable  122,758   47,248   156,201   188,942 
Income taxes payable  —     33,682   23,998   23,998 
Derivative liabilities  1,350,231   540,965   3,082,068   1,807,404 
Deferred revenue  —     847,223 
Operating lease liabilities, current portion  323,209   —   
Total current liabilities  2,385,046   1,988,081   5,939,297   3,686,665 
                
Long term portion of note payable  969,105   982,176 
Long term portion of convertible note payable, net of discounts  —     12,587 
Long term portion of note payable- undivided interest in real estate  956,542   964,847 
Operating lease liabilities, less current portion  994,739   —   
Total liabilities  3,354,150   2,982,844   7,890,578   4,651,512 
                
Commitments and contingencies                
                
Stockholders' Deficit:                
Preferred stock, $0.0001 par value; 25,000,000 shares authorized;                
Series A preferred stock, par value $0.0001, -0- shares authorized and issued and outstanding  —     —   
Series B preferred stock, par value $0.0001, 900,000 shares authorized and issued and outstanding (2018)  90   —   
Common stock, $0.0001 par value; 490,000,000 shares authorized; 103,951,750 and 61,539,334 shares issued and outstanding September 30, 2018, and December 31, 2017, respectively  10,395   6,153 
Common stock to be issued, $0.0001 par value, 1,371,511 and 102,564 shares September 30, 2018, and December 31, 2017, respectively  137   10 
Series A preferred stock, par value $0.0001, 9,510,000 shares authorized and -0- issued and outstanding  —     —   
Series B preferred stock, par value $0.0001, 900,000 shares authorized and issued and outstanding  90   90 
Common stock, $0.0001 par value; 490,000,000 shares authorized; 161,826,468 (2019) and 120,425,344 (2018) shares issued and outstanding, respectively  16,182   12,042 
Common stock to be issued, $0.0001 par value, 2,881,316 (2019) and 6,373,848 (2018) shares, respectively  288   637 
Additional paid-in capital  2,552,604   331,227   6,397,967   4,836,557 
Deferred stock compensation  (145,833)  (25,000)  (242,402)  (235,694)
Accumulated deficit  (4,128,308)  (1,787,012)  (9,880,578)  (6,372,129)
                
Total stockholders' deficit  (1,710,915)  (1,474,623)  (3,708,453)  (1,758,498)
                
 $1,643,235  $1,508,221  $4,182,125  $2,893,014 
                
                
See notes to condensed consolidated financial statements.

 

 2 

 

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

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 Three months ended June 30, Six months ended June 30,
 2018 2017 2018 2017 2019 2018 2019 2018
Revenues:                                
Revenues, other $44,724  $78,833  $98,696  $327,501 
Revenues $219,673  $26,691  $391,202  $53,972 
Revenues, related party  15,000   25,948   67,019   62,890   —     23,323   15,000   52,019 
Total revenues  59,724   104,781   165,715   390,391   219,673   50,014   406,202   105,991 
                                
Cost of sales                                
Cost of sales, other  25,714   70,307   74,972   204,810 
Cost of sales  99,463   24,477   181,827   49,258 
Cost of sales, related  3,371   10,597   24,779   26,413   —     7,325   —     21,408 
Total cost of sales  29,085   80,904   99,751   231,223   99,463   31,802   181,827   70,666 
                                
Gross profit  30,639   23,877   65,965   159,168   120,210   18,212   224,375   35,325 
                                
                
Operating Expenses:                                
Compensation and benefits (including stock- based fees of $772,600 for the nine months ended September 30, 2018)  177,778   159,114   1,263,084   482,382 
Compensation and benefits (including stock- based fees of $35,917 and $50,000 for the three and six months ended June 30, 2019 and $772,600 for the three and six months ended June 30, 2018)  435,086   925,767   798,823   1,085,306 
Advertising and promotion  46,408   —     137,736   —     143,800   66,007   311,584   91,328 
Professional fees (including stock- based fees of $62,597 and $126,837 for three and nine months ended September 30, 2018, respectively, and $25,000 and $140,000 for the three and nine months ended September 30, 2017, respectively)  174,952   81,226   405,858   302,122 
Consulting fees, stockholder  —     —     —     60,000 
Rent (including related party of $36,000 and $108,000 for the three and nine months ended September 30, 2018, respectively, and $36,000 and $73,500 for the three and nine months ended September 30, 2017)  45,062   36,000   119,937   75,377 
Professional fees (including stock- based fees of $197,876 and $308,292 for three and six months ended June 30, 2019 and $21,327 and $64,240 for three and six months ended June 30, 2018)  239,923   115,419   377,317   230,906 
Rent (including related party of $36,000 for three months ended June 30, 2019 and 2018 and $72,000 for six months ended June 30, 2019 and 2018  98,133   36,000   194,062   72,000 
Investor relations  11,482   10,022   87,901   22,927   89,528   23,778   164,776   76,419 
Other general and administrative  27,024   17,056   71,464   52,408   132,487   6,073   269,126   47,316 
Total operating expenses  482,705   303,418   2,085,980   995,216   1,138,958   1,173,044   2,115,689   1,603,274 
                                
Loss from operations  (452,066)  (279,541)  (2,020,015)  (836,048)  (1,018,748)  (1,154,832)  (1,891,314)  (1,567,949)
                                
Other Income (Expense):                
Derivative expense  (270,849)  —     (940,819)  —   
Other Expense:                
Derivative (income) expense  235,478   (518,711)  (342,360)  (669,970)
Gain on investment in undivided interest in real estate  (2,132)  2,962   (1,390)  (983)  5,856   3,046   4,816   741 
Gain on collections of bad debt  3,000   —     3,000   —   
Write off of deferred commissions  —     —     —     (508,334)
Gain on contract cancellations  1,297,223   —     1,297,223   160,000 
Gain on debt extinguishment  33,775   —     33,775   —   
Interest income, including $57 and $179 (2017) from officer  —     59   —     251 
Gain (loss) on debt extinguishment  459   —     (44,393)  —   
Interest expense and finance charges  (399,278)  (2,883)  (713,070)  (4,521)  (728,456)  (182,528)  (1,235,198)  (313,792)
Total other income (expense), net  661,739   138   (321,281)  (353,587)
Total other expense, net  (486,664)  (698,193)  (1,617,135)  (983,020)
                                
Net income (loss) $209,673  $(279,403) $(2,341,296) $(1,189,635)
Net loss $(1,505,411) $(1,853,025) $(3,508,449) $(2,550,969)
                                
Basic and diluted income (loss) per share $0.00  $(0.00) $(0.04) $(0.02)
Basic and diluted loss per share $(0.01) $(0.03) $(0.02) $(0.04)
                                
Weighted average number of common shares outstanding Basic and diluted  80,652,837   61,539,334   66,651,688   61,320,706   155,732,524   57,711,814   145,156,477   59,761,633 

See notes to condensed consolidated financial statements.

 3 

 

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

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

For the nine months ended

September 30,

  2018 2017
Cash flows from operating activities:        
Net loss $(2,341,296) $(1,189,635)
Adjustments to reconcile net loss to net cash used in operations:        
Loss on fair value of derivatives  940,819   —   
Amortization of debt discounts  619,336   —   
Depreciation  1,853   663 
Stock compensation expense  899,437   140,000 
Loss on investment in undivided interest in real estate  1,390   983 
Gain on debt extinguishment  (33,775)  —   
Gain on collection of bad debts  (3,000)  —   
Recognition of deferred revenues per settlement  (847,223)  —   
Changes in operating assets and liabilities:        
Decrease (increase) in:        
Interest receivable, related party  —     33 
Accounts receivable  (7,663)  (74,164)
Inventory  (29,847)  (4,764)
Deferred commissions, stockholder  —     133,334 
Prepaid assets  12,297   (68,621)
Other receivables  (5,725)  —   
Accounts receivable, related party  (35,125)  —   
Increase (decrease) in:        
Accounts payable and accrued expenses  138,530   65,802 
Commissions payable, stockholder  —     (96,000)
Officer salaries payable  75,510   44,185 
Deferred revenue  —     625,000 
Customer deposits  48,914   —   
Due to related party  (62,794)  141,532 
Net cash used in operating activities  (628,362)  (281,652)
         
Cash flows from investing activities:        
Purchase of domain name  —     (3,000)
Repayments from shareholder loans receivable  —     5,125 
Investment in undivided interest in real estate  —     (217,321)
Net cash used in investing activities  —     (215,196)
         
Cash flows from financing activities:        
Proceeds from issuance of note payable  32,600   —   
Advances to shareholder  (22,250)  —   
Proceeds from advances, shareholder  36,800   14,500 
Proceeds from issuances of convertible notes payable  772,500   —   
Repayments of note payable  (55,578)  —   
Repayments of advances, shareholder  (6,000)  —   
Repayments of principal of convertible note payable  (149,546)  —   
Net cash provided by financing activities  608,526   14,500 
         
Net decrease in cash and cash equivalents  (19,836)  (482,348)
         
Cash and cash equivalents, Beginning of period  84,720   493,514 
         
Cash and cash equivalents, End of period $64,884  $11,166 
         
Supplemental disclosure of cash flow information:        
Cash paid for interest $126,549  $4,521 
Cash paid for income taxes $—    $—   
         
Schedule of non-cash Investing or Financing Activity:        
Reclassification of derivative liabilities upon principal repayments of convertible notes $787,162  $—   
Issuance of note payable for investment in undivided interest in real estate $—    $1,007,930 
         
Acquisition of Assets        
Issuance of common stock as consideration for assets purchased $22,974  $—   
Assumed liabilities  33,047   —   
Property and equipment  (38,400)  —   
Other Assets  (4,614)  —   
Customer base  (300)  —   
Non- compete  (12,707)    
  $—    $—   
         
         
See notes to condensed consolidated financial statements.

 4 

 

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

5

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

6

NOTE 1 - ORGANIZATION

 

Business

 

InnerScope Hearing Technologies, Inc. (“Company”, “InnerScope”) is a Nevada Corporation incorporated on June 15, 2012, with its principal place of business in Roseville, California. The Company was originally named InnerScope Advertising Agency, Inc. and was formed to provide advertising and marketing services to retail establishments in the hearing device industry. On August 25, 2017, the Company changed its name to InnerScope Hearing Technologies, Inc.to better reflect the Company’s current direction as a technology driven company with a scalable business model, encompassing; business to business (B2B) solutionsolutions, direct to consumer (DTC) sales and marketing and business to consumer (and B2C) solution. Recently,solutions. The Company is a manufacturer and a DTC distributor/retailer of FDA (Food and Drug Administration) registered hearing aids, personal sound amplifier products (“PSAP’s”), hearing related treatment therapies,doctor-formulated dietary hearing supplements and proprietary CDB oil for treating tinnitus.The Company also owns and operates audiological and retail hearing device clinics and plans to continue to open and acquire additional clinics. As of the date of this filing, the Company began offering its own line of Foodowns nine retail hearing device clinics in California and Drug Administration (the “FDA”)registered Hearing Aids and its “Hearable”, and “Wearable” Personal Sound Amplifier Products (PSAPs).manages two additional clinics that are owned by a related party.

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 nine months ended September 30, 2017, the Company has recognized $100,000 of income for the one new store, opened in January 2017, an additional $30,000 for the cancellation of the Store Expansion Agreement and a marketing agreement, and $160,000 in other income, net, for payments received for the Expansion Agreement pursuant to the cancellation.

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 continued 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. On August 13, 2018, the Client, InnerScope and the Moores executed a Settlement Agreement (See Note 12).

 

 

NOTE 2 – Asset Purchase Acquisition of Kathy L Amos Audiology 

 

Effective September 10, 2018, the Company acquired all of the assets and assumed certain liabilities of Kathy L Amos Audiology (“Amos Audiology”) in exchange for 340,352 shares of common stock (the “Acquisition”). Amos Audiologyprovides retail hearing aid sales and audiological services in the East Bay area of San Francisco, California.Francisco.

 

Based on the fair value of the common stock issued of $22,974 based on the market price of the common stock on that date, and the assumed liabilities of $33,049, the total purchase consideration was $56,023.

 

The following table summarizes the purchase price allocation of the fair value of assets acquired and liabilities assumed in the acquisition:

 

  Purchase Price Allocation
 Fair value of consideration for Acquisition $22,974 
 Liabilities assumed  33,049 
   Total purchase consideration $56,023 
     
Tangible assets acquired $43,016 
Intangible assets  13,007 
  $56,023 

 

5

The total purchase price of $56,023 has been allocated to the tangible and intangible assets acquired and liabilities assumed based on preliminary estimated fair values as of the completion of the Acquisition. The fair value of Amos Audiology’s identifiable intangible assets was estimated primarily using the income approach which requires an estimate or forecast of all the expected future cash flows, either through the use of the relief-from-royalty method or the multi-period excess earnings method. The Company has preliminary determined that the identifiable intangible assets, consisting of a customer base and non-compete had fair values of $300 and $12,707, respectively.

7

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

 

Basis of Presentation and Principles of Consolidation

 

The accompanying condensed consolidated financial statements in this report have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to present the financial position, results of operations and cash flows for the stated periods have been made. Except as described below, these adjustments consist only of normal and recurring adjustments. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated unaudited financial statements should be read in conjunction with a reading of the Company’s financial statements and notes thereto included in the Annual Report for the year ended December 31, 2017,2018, filed with the United States Securities and Exchange Commission (the “SEC”) on April 17, 2018.16, 2019. Interim results of operations for the three and ninesix months ended SeptemberJune 30, 2018,2019, and 2017,2018, are not necessarily indicative of future results for the full year. Certain amounts from the 20172018 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.period for certain accounting standards.

 

Use of Estimates

 

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

 

Cash 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. CashWe held no cash equivalents as of June 30, 2019, and cash equivalentDecember 31, 2018. Cash balances may, at certain times, exceed federally insured limits. If the amount of a deposit at any time exceeds the federally insured amount at a bank, the uninsured portion of the deposit could be lost, in whole or in part, if the bank were to fail.

 

Accounts receivable

 

The Company records accounts receivable at the time products and services are delivered. An allowance for losses is established through a provision for losses charged to expense. Receivables are charged against the allowance for losses when management believes collectability is unlikely. The allowance (if any) is an amount that management believes will be adequate to absorb estimated losses on existing receivables, based on evaluation of the collectability of the accounts and prior loss experience. As of SeptemberJune 30, 2018,2019, and December 31, 2017,2018, management’s evaluation did not requirerequired the establishment of an allowance for uncollectible receivables.receivables of $18,383.

 

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 and ninesix months ended SeptemberJune 30, 20182018. No customer accounted for more than ten percent (10%) of the Company’s revenues for the three and 2017, and accounts receivable balance as of Septembermonths ended June 30, 2018:2019.

8

 

          Accounts
  September 30, 2018 September 30, 2017 Receivable
  3 months 9 months 3 months 9 months as of
  % % % % September 30, 2018
Customer A  —     —     29.3%  10.0% $—   
Customer B  —     —     22.9%  17.8% $—   
Customer C, related  25.1%  40.4%  24.8%  16.1% $109,121 
Customer D  —     —     —     33.3% $—   
Customer E  —     16.3%  —     —    $—   

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

 

Inventory

 

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

 

Intangible Assets

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

Property and Equipment

 

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

 

Computer equipment

3 years
Machinery and equipment5 years
Furniture and fixtures5 years

 

The Company's property and equipment consisted of the following at SeptemberJune 30, 2018,2019, and December 31, 2017:2018:

 

 September 30,
2018		 December 31,
2017		 June 30,
2019		 December 31,
2018
Computer equipment $2,651  $2,651  $4,272  $2,651 
Machinery and equipment  27,490   —     52,102   31,122 
Furniture and fixtures  2,160   —     21,840   2,160 
Leasehold improvements  8,750   —     16,206   12,222 
Accumulated depreciation  (2,379)  (1,068)  (12,587)  (4,705)
Balance $38,672  $1,583  $81,833  $43,450 

 

Depreciation expense of $869$5,032 and $1,311$7,882 was recorded for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively, and $221 and $663$442, for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively.

 

9

Investment in Undivided Interest in Real Estate

 

The Company accounts for its’ investment in undivided interest in real estate using the equity method, as the Company is severally liable only for the indebtedness incurred with its interest in the property. The Company includes its allocated portion of net income or loss in Other income (expense) in its Statement of Operations, with the offset to the equity investment account on the balance sheet. For the ninesix months ended SeptemberJune 30, 2019 and 2018, the Company recognized a lossgain of $1,390.$4,816 and $741, respectively. As of SeptemberJune 30, 2018,2019, and December 31, 2017,2018, the carrying value of the Company’s investment in undivided interest in real estate was $1,223,513$1,231,779 and $1,224,903,$1,226,963 respectively (see Note 9)11).

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 SeptemberJune 30, 2018,2019 and December 31, 2017,2018, for each fair value hierarchy level:

 

September 30, 2018  Derivative Liabilities   Total 
June 30, 2019  Derivative Liabilities   Total 
Level I $—    $—    $—    $—   
Level II $—    $—    $—    $—   
Level III $1,350,231  $1,350,231  $3,082,068  $3,082,068 
                
December 31, 2017        
December 31, 2018        
Level I $—    $—    $—    $—   
Level II $—    $—    $—    $—   
Level III $540,965  $540,965  $1,807,404  $1,807,404 

  

10

Embedded Conversion Features

 

The Company evaluates embedded conversion features within convertible debt under ASC 815 "Derivatives and Hedging" to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 "Debt with Conversion and Other Options" for consideration of any beneficial conversion feature. 

 

Derivative Financial Instruments

 

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of it financial instruments, including stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. 

8

 

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 wouldwould 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 effectiveEffective January 1, 2018, the Company adopted ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) and determinedall the related amendments.  The Company elected to adopt this guidance using the modified retrospective method. The adoption of this guidance did not have a material effect on the Company’s financial position, results of operations or cash flows.

The core principle of ASC 606 requires that there was no significant impact on itsan entity recognize revenue recognition.  to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. 

The Company’s contracts with customers are generally on a purchase order basis and represent obligations that are satisfied at a point in time, as defined in the new guidance.  guidance, generally upon delivery or has services are provided. Accordingly, revenue for each sale is recognized when each sale is complete, and anythe Company has completed its performance obligations. Any costs incurred before this point in time, are recorded as assets to be expensed during the period the related revenue is recognized. The Company accepts prepayments on hearing aids and records the mountamount received as customer deposits on its’ balance sheet. When the Company delivers the hearing aid to the customer, revenue is recognized as well as the corresponding cost of sales.

11

As of SeptemberJune 30, 2018,2019, the Company had received $48,814$71,409 of customer deposits, that will be recognized in October 2018, the monthas revenue after June 30, 2019, when the hearing aids wereare delivered to the customer. For the nine months ended September 30, 2017, the Company received and recognized $100,000 of revenue related to the Store Expansion agreement, and $30,000 of income from the cancellation of the Marketing and Store Expansion Agreements.

 

Income Taxes

 

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

 

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

 

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

 

Advertising and Marketing Expenses

9

 

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

Leases

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

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

Earnings (Loss) Per Share

 

The Company reports earnings (loss) per share in accordance with ASC 260, "Earnings per Share." Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net loss by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding during the period. As of SeptemberJune 30, 2019, and 2018, the Company’s outstanding convertible debt is convertible into approximately 16,998,883155,394,444 and 90,570,304 shares of common stock, subject to adjustment based on changes in the Company’s stock price, at the actual time of conversion.respectively. This amount is not included in the computation of dilutive loss per share because their impact is antidilutive. As of September 30, 2017, the Company did not have any outstanding common stock equivalents or any other potentially dilutive securities.

 

12

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, 2018 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,July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “LeasesASU 2017-11 “Earnings Per Share (Topic 842)260)”. Under this guidance, an entity is requiredThe amendments in the update change the classification of certain equity-linked financial instruments (or embedded features) with down round features. The amendments also clarify existing disclosure requirements for equity-classified instruments. For freestanding equity-classified financial instruments, the amendments require entities that present earnings per share (“EPS”) in accordance with Topic 260, Earnings Per Share, to recognize right-of-use assetsthe effect of the down round feature when it is triggered. That effect is treated as a dividend and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific accountingas a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features would be subject to the specialized guidance for a lessee, a lessorcontingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and sale and leaseback transactions. Lessees and lessorsOther Options), including related EPS guidance (in Topic 260). For public business entities, the amendments in Part I of this update 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 reportingfiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company adopted this pronouncement as of fiscal 2017.

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

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

 

With the exception of the new standard discussed above, thereOther accounting standards that have been no otherissued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 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 not anticipated to have an impact on or are unrelated to its financial condition, results of significanceoperations, cash flows or potential significance to the Company.disclosures.

 

 

NOTE 4 – GOING CONCERN AND MANAGEMENT’S PLANS

 

The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. which assumes the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The Company experienced a net loss of $2,341,296$3,508,499 for the ninesix months ended SeptemberJune 30, 2018.2019. At SeptemberJune 30, 2018,2019, the Company had a working capital deficit of $2,024,076,$5,343,093, and an accumulated deficit of $4,128,308.$9,880,578. These factors raise substantial doubt aboutthe 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. 

 

10

Management’s Plans

 

The Company continues to implement an industry encompassing revenue strategy, including the current revenue model to other major sectors of the global hearing industry. The Company plans include generating revenues from 7 separate revenue streams. On July 5, 2018, the Company signed a supplier agreement as a direct shipped vendor for Walmart.com. The Company has been accepted as a Walmart.com USA, LLC (a wholly-owned subsidiary of Wal-Mart Stores, Inc.) supplier and is selling its FDA-Registered Hearing Aids and its Personal Sound Amplification Products (“PSAP’s”) to Walmart.com as the retailer for their Direct-To-Consumer online retail sale. On September 10, 2018, the Company acquired all of the assets and assumed certain liabilities of Amos Audiology (see Note 2). This transaction is part of management’s plans to expand the Company’sCompany’s retail clinic business by opening up to 22multiple clinics in the next 12 months. During the six months ended June 30, 2019, the Company opened 5 more retail clinics, and opened another clinic in July 2019. The Company currently owns and operates 9 clinics.

 

 

13

NOTE 5 – ADVANCES PAYABLE, SHAREHOLDERSINTANGIBLE ASSETS, NET (OTHER THAN GOODWILL)

 

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

Customer list

2 years
Non-compete2 years
Technology access fee10 years

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

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

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

NOTE 6 – ADVANCES PAYABLE, STOCKHOLDER

Chief Executive Officer

 

A summary of the activity for the ninesix months ended SeptemberJune 30, 2018,2019, and the year ended December 31, 2017,2018, representing amounts paid by the Company’s CEO (stockholder) on behalf of the Company and amounts reimbursed is as follows.

 

 

September 30,

2018

 

December 31,

2017

 June 30, 2019 December 31, 2018
Beginning Balance $138,637  $-0-  $57,526  $138,637 
Amounts paid on Company’s behalf  304,056   149,370   367,831   589,524 
Amount applied to accrued officer salaries  17,228   —   
Reimbursements  (328,685)  (10,733)  (378,943)  (625,635)
Cancelled in exchange for Series B preferred stock  (45,000)  —     —     (45,000)
Ending Balance $69,008  $138,637  $63,642  $57,526 

 

The ending balances as of SeptemberJune 30, 2018,2019, and December 31, 2017,2018, are included in Advances payable, stockholdersstockholder on the condensed consolidated balance sheets included herein.

Director

A summary of the activity for the nine months ended September 30, 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.

  

September 30,

2018

 

December 31,

2017

Beginning Balance $38,201  $-0- 
Amounts paid on Company’s behalf  24,335   39,201 
Reimbursements  (62,500)  (1,000)
Ending Balance $36  $38,201 

The ending balances as of September 30, 2018, and December 31, 2017, are included in Advances payable, stockholders on the condensed consolidated balance sheets included herein.

 

 

NOTE 67 – NOTE PAYABLE, STOCKHOLDER

 

A summary of the activity for the ninethree months ended SeptemberJune 30, 2018,2019, and the year ended December 31, 2017,2018, of amounts the Company’s CEO (stockholder) loaned the Company and amounts repaid is as follows:

 

 September 30, 2018 December 31,
2017		 June 30,
2019		 December 31,
2018
Beginning Balance $65,000  $-0-  $95,800  $65,000 
Amounts loaned to the Company  36,800   65,000   —     36,800 
Repaid  (6,000)  -0-   —     —   
Ending Balance $95,800  $65,000  $95,800  $95,800 

 

11

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 sheetsheets included herein.

14

 

NOTE 78 – NOTE PAYABLE

 

On February 27,October 8, 2018, the Company entered into a Business Loan Agreement (the “February“October BLA”) for $43,358$47,215 with a third- party, whereby the Company received $32,600$35,500 on March 1,October 10, 2018. The FebruaryOctober BLA requires the Company to make the first six monthly payments of principal and interest of $4,102$4,467 per month, and then $3,124$3,402 for months seven through twelve. The Company paid the note in full on August 28, 2018. The note carriedcarries a 33% interest rate and matures on March 1,October 28, 2019. As of June 30, 2019, and December 31, 2018, there was a balance of $17,010 and $38,280, respectively, on the October BLA, with carrying values of $13,641 and $29,270, respectively, net of unamortized discounts of $3,379 and $9,011, respectively.

 

On July 30, 2018,February 4, 2019, the Company entered into a Business Loan Agreement (the “July“Feb 2019 BLA”) for $11,020$8,584 with a third- party, whereby the Company received $9,500$7,400 on July 30, 2018.February 5, 2019. The JulyFeb 2019 BLA requires the Company to make the first two monthly payments of principal and interest of $2,106$1,640 per month, and then $1,702$1,326 for months three through six. The Company paid the note in full on August 28, 2018. The note carriedcarries a 16% interest rate and matures on February 16,August 4, 2019. As of June 30, 2019, there was a balance of $2,653, with a carrying value of $2,455, net of unamortized discounts of $198.

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

 

 

NOTE 89 – 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 nine months ended September 30, 2017.

 

During the ninesix months ended SeptemberJune 30, 20182019, and the year ended December 31, 2017,2018, our CEO (stockholder) paid expenses of the Company and accounts payable on behalf of the Company (see Note 5)6). As of SeptemberJune 30, 2018,2019, and December 31, 2017,2018, the Company owed the CEO $69,008$63,642 and $138,637,$57,526, respectively, which is included in Advances payable, stockholdersstockholder on the condensed consolidated balance sheets included herein.

 

During the nine months ended September 30, 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 5). As of September 30, 2018, and December 31, 2017, the Company owed the Chairman $36 and $38,201, respectively, which is included in Advances payable, stockholders on the condensed consolidated balance sheets included herein.

Pursuant to a Marketing Agreement (cancelled August 5, 2016), the Company provided marketing programs to promote and sell hearing aid instruments and related devices to Moore Family Hearing Company (“MFHC”). MFHC owned and operated retail hearing aid stores. Based on common control of MFHC and the Company, all transactions with MFHC are classified as related party transactions. 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 these services with expenses of the Company that have been paid by MFHC. As a result of these payments, in addition to MFHC’s payments to the Company through December 31, 2016, the balance due to MFHC as of SeptemberJune 30, 2018,2019, and December 31, 2017,2018, was $22,548, which is included in Accounts payable, related party, on the condensed consolidated balance sheetsheets 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 nine months ended September 30, 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 and ninesix months ended SeptemberJune 30, 2018,2019, and 2017,2018, the Company recorded expenses to its officers in the following amounts:

 

  

Three months ended

September 30,

 

Nine months ended

September 30,

 Description 2018 2017 2018 2017
 CEO  $59,134  $56,250  $171,634  $168,750 
 CFO   30,449   31,250   91,989   93,750 
 Total  $89,583  $87,500  $263,623  $262,500 
  Three months ended June 30, Six months ended June 30,
 Description 2019 2018 2019 2018
 CEO  $56,250  $56,250  $112,500  $112,500 
 CFO   31,250   31,251   62,500   61,540 
 Total  $87,500  $87,501  $175,000  $174,040 

 

As of SeptemberJune 30, 2019, and December 31, 2018, the Company in the aggregate owes the CEO and CFO $6,593$156,201 and $116,163, respectively, and as of December 31, 2017, the Company owed the CEO and CFO $4,327 and $40,385,$188,942, respectively, for accrued and unpaid wages. These amounts are included in Officer salaries payable on the balance sheets included herein.

 

15

In September 2016, the officers and directors of the Company formed a California Limited Liability Company (“LLC1”), for the purpose of acquiring commercial real estate and other business activities. On December 24, 2016, LLC1 acquired two retail stores from the buyer of the MFHC stores. On March 1, 2017, the Company entered into a twelve-month Marketing Agreement with each of the stores to provide telemarketing and design and marketing services for $2,500 per month per store, resulting in related party revenues of $15,000 for the three months ended June 30, 2019, and $15,000 and $45,000, respectively$30,000 for the three and ninesix months ended SeptemberJune 30, 2018, and $15,000 for the nine months ended September 30, 2017.respectively. Additionally, for the three and six months ended June 30, 2018, the Company invoiced LLC1 $20,226$8,323 and $50,744, respectively, for the Company’s production, printing and mailing services and $1,793$1,275 for the six months ended June 30, 2018, for sale of products. As of SeptemberJune 30, 2018,2019, and December 31, 2017,2018, LLC1 owes the Company $109,121$283,064 and $73,996, respectively. On May 9, 2017,$203,325, respectively, for the Companyconsulting fees and mailing services as well as expenses of LLC1 purchased certain real property from an unaffiliated party (see Note 9). paid by the Company.

On June 14, 2017, the Company entered into a five-year lease with LLC1 for approximately 6,944 square feet and a monthly rent of $12,000. For the three and ninesix months ended SeptemberJune 30, 2019, and 2018, the Company expensed $36,000 and $108,000,$72,000, respectively, 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 As of providing consulting services to the Company. The Company entered into an agreement with LLC2,June 30, 2019, and paid LLC2 $375,000 during the year ended December 31, 2016, for services performed and to be performed. Of the $375,000 amount paid, $241,667 was recognized as consulting fees- stockholder for the year ended December 31, 2016, and the remaining $133,334 was recorded as deferred commissions- stockholder as of December 31, 2016. For the nine months ended September 30, 2017,2018, the Company paid LLC2 an additional $771,000 ($96,000 of which reduced previous amounts owed)owed LLC1 $50,300 and expensed $808,334 ($60,000 as commissions$30,500, respectively, for services performed and $748,334 as other expense). As of September 30, 2017, the deferred commissions-stockholder is $-0-.unpaid rent.

  

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

 

 

NOTE 9–10– INVESTMENT IN UNDIVIDED INTEREST IN REAL ESTATE

 

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

 

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 condensed consolidated statements of operations. For the three and ninesix months ended SeptemberJune 30, 2018,2019, a gain of $5,856 and $4,816, respectively, and a net lossgain of $2,132$3,046 and $1,390,$741, for the three and six months ended June 30, 2018, respectively, is included in “Other income (expense), net”. As of SeptemberJune 30, 2019, and December 31, 2018, the carrying value of the Company’s investment in undivided interest in real estate was $1,223,513.$1,231,779 and $1,226,963, respectively.

 

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

 

Current assets:  
Cash and cash equivalents $13,938 
Accounts receivable, net  11,361 
Prepaid expenses and other current assets  70,462 
Total current assets  95,761 
 Land and Building, net  2,365,173 
Other assets, net  53,323 
Total assets $2,514,257 
     
Current portion of mortgage payable $39,528 
Other current liabilities  61,254 
Total current liabilities  100,782 
Mortgage payable, long-term  1,977,766 
Total liabilities  2,078,548 
Total equity  435,709 
Total liabilities and equity $2,514,257 
16

 

  (Unaudited) (Unaudited)
Current assets: 

June 30,

2019

 

December 31,

2018

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

 

 2019 2018
Rental income $210,696  $149,029  $63,211 
Expenses:            
Property taxes  19,938   4,430   6,646 
Depreciation and amortization  32,675   21,780   11,446 
Insurance  2,033   14,130   2,033 
Repairs and maintenance  20,860   13,916   3,549 
Other  24,707 
Utilities and other  20,703   10,087 
Interest expense  103,319   64,242   32,355 
Total expenses  213,532   139,201   67,916 
Net loss $(2,836)
Net income (loss) $9,828  $(4,705)

 

 

NOTE 10–11– NOTE PAYABLE - UNDIVIDED INTEREST IN REAL ESTATE

 

On May 9, 2017, the Company and LLC1 purchased certain real property from an unaffiliated party. The Company and LLC1 have agreed that the Company purchased and owns 49% of the building and LLC1 purchased and owns 51% of the building. The contracted purchase price for the building was $2,420,000 and the total amount paid at closing was $2,501,783 including, fees, insurance, interest and real estate taxes. The Company is a co-borrower on a $2,057,000 Small Business Administration Note (the “SBA Note”). The SBA Note carries a 25-year term, with an initial interest rate of 6% per annum, adjustable to the Prime interest rate plus 2%, and is secured by a first position Deed of Trust and business assets located at the property. The Company initially recorded a liability of $1,007,930 for its portion of the SBA Note, with the offset being to Investment in undivided interest in real estate on the balance sheet presented herein. As of SeptemberJune 30, 2018,2019, the current and long-term portion of the SBA Note is $19,369$20,096 and $969,105,$956,542, respectively. Future principal payments for the Company’s portion are:

 

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

 1417 

 

Twelve months ending September 30, Amount
 2019  $19,369 
 2020   20,401 
 2021   21,782 
 2022   23,168 
 2023   24,596 
 Thereafter   879,158 
 Total  $988,474 

NOTE 11–12– 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 was due and payable July 15, 2018, and the Note was 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 nine months ended September 30, 2018, amortization of the debt discount of $27,739 was charged to interest expense. The Company also recorded a discount for debt issuance costs of $3,000 and has amortized $2,065 to interest expense for the nine months ended September 30, 2018. During the nine months ended September 30, 2018, the investor converted $48,000 of principal and $2,880 of accrued interest into 4,330,984 shares of common stock. As of September 30, 2018, and December 31, 2017, the note balance is $-0- and $48,000, respectively.

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 was 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 required 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 nine months ended September 30, 2018, amortization of the debt discount of $208,583 was charged to interest expense. The Company also recorded an original issue discount and debt issue discount of $49,000 and amortized $40,883 to interest expense for the nine months ended September 30, 2018. During the nine months ended September 30, 2018, the Company made principal payments of $81,900, and the investor converted $123,250 of principal and $21,843 of interest into 21,887,432 shares of common stock. On August 10, 2018, the investor sold $40,000 of the Note to a third party, and the investor also forgave $35,650 of principal. As of September 30, 2018, and December 31, 2017, the note balance is $-0- and $280,800, respectively.

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 nine months ended September 30, 2018, amortization of the debt discount of $9,905 was charged to interest expense. As of September 30, 2018, and December 31, 2017, the note balance is $50,000, with a carrying value as of September 30, 2018, of $47,102, net of unamortized discounts of $2,898.

15

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 nine months ended September 30, 2018, amortization of the debt discount of $9,554 was charged to interest expense. During the nine months ended September 30, 2018, the investor converted $35,000 of principal and $1,750 of interest into 2,085,106 shares of common stock. As of September 30, 2018, the note balance is $-0-

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 was due and payable November 8, 2018, and the Note was 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 nine months ended September 30, 2018, amortization of the debt discount of $50,000 was charged to interest expense. The Company also recorded a debt issue discount of $8,300 and has amortized $8,300 to interest expense for the nine months ended September 30, 2018. During the nine months ended September 30, 2018, the Company made principal payments of $46,121, and the investor converted $12,179 of principal into 2,925,932 shares of common stock. As of September 30, 2018, the note balance is $-0-.

 

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 iswas 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.$13,399. For the ninesix months ended SeptemberJune 30, 2018,2019, amortization of the debt discount of $7,816 was charged to interest expense. As of September 30, 2018, the note balance is $50,000, with a carrying value of $44,417, net of unamortized discounts of $5,583.

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 carried a 10% annual interest rate and is in the principal amount of $50,000. Principal and interest was due and payable March 26, 2019, and the Note was 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 nine months ended September 30, 2018, amortization of the debt discount of $13,420$2,233 was charged to interest expense. During the ninesix months ended SeptemberJune 30, 2018,2019, the investor converted $50,000 of principal and $1,205$2,514 of interest into 844,8702,236,291 shares of common stock. As of SeptemberJune 30, 2019, and December 31, 2018, the note balance is $-0-.was $-0- and $50,000, respectively, with a carrying value of $47,767 at December 31, 2018, net of unamortized discounts of $2,333.

 

On March 27, 2018, the Company completed the closing of a private placement financing transaction (the “Transaction”) when a third-party investor purchased a convertible note (the “Convertible Note”). The Convertible Note carries a 10% annual interest rate and is in the principal amount of $25,000. Principal and interest iswas 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 ninesix months ended SeptemberJune 30, 2018,2019, amortization of the debt discount of $3,424$1,628 was charged to interest expense. On April 29, 2019 the Note was sold to a third party investor (see below). As of SeptemberJune 30 2019, and December 31, 2018, the note balance is $-0- and $25,000, respectively, with a carrying value of $21,688,$23,372, net of unamortized discounts of $3,312.

16

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. The embedded conversion feature included in the note resulted in an initial debt discount of $75,000, an initial derivative expense$1,628 as of $77,108 and an initial derivative liability of $152,108. For the nine months ended September 30, 2018, amortization of the debt discount of $45,049 was charged to interest expense. The Company also recorded an original issue discount and debt issue discount of $20,450 and amortized $12,262 to interest expense for the nine months ended September 30,December 31, 2018. During the nine months ended September 30, 2018, the Company made principal payments of $20,625. As of September 30, 2018, the note balance is $76,700, with a carrying value of $38,561, net of unamortized discounts of $38,139.

 

On May 11, 2018, the Company issued a convertible promissory note (the “Note”), with a face value of $100,000, maturing on May 11, 2019, and stated interest of 10% to a third-party investor. The note is convertible at any time after the funding of the note into a variable number of the Company's common stock, based on a conversion ratio of 62% of the lowest trading price for the 20 days prior to conversion. The note was funded on May 16, 2018, when the Company received proceeds of $75,825, after disbursements to vendors and for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $95,000, an initial derivative expense of $60,635 and an initial derivative liability of $155,635. For the ninesix months ended SeptemberJune 30, 2018,2019, amortization of the debt discount of $50,271$17,020 was charged to interest expense. The Company also recorded a debt issue discount of $5,000 and amortized $1,946$895 to interest expense for the ninesix months ended SeptemberJune 30, 2018.2019. During the ninesix months ended SeptemberJune 30, 2018,2019, the investor converted $14,000$50,000 of principal and $322$3,564 of interest into 4,125,0555,539,273 shares of common stock. As of SeptemberJune 30, 2019, and December 31, 2018, the note balance is $86,000,$-0- and $50,000, respectively, with a December 31, 2018, carrying value of $38,217,$32,085, net of unamortized discounts of $47,783.$17,915.

 

On May 23, 2018, the Company issued a convertible promissory note (the “Note”), with a face value of $60,000, maturing onwith a maturity date of February 22, 2019, and stated interest of 12% to a third-party investor. The note is convertible at any time after the funding of the note into a variable number of the Company's common stock, based on a conversion ratio of 65% of the lowest trading price for the 20 days prior to conversion. The note was funded on May 30, 2018, when the Company received proceeds of $57,000, after the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $57,000, an initial derivative expense of $48,033 and an initial derivative liability of $105,033. For the ninethree months ended SeptemberJune 30, 2018,2019, amortization of the debt discount of $26,794$11,292 was charged to interest expense. The Company also recorded a debt issue discount of $3,000 and amortized $1,410$594 to interest expense for the ninesix months ended SeptemberJune 30, 2018.2019. During the six months ended June 30, 2019, the investor converted $51,275 of principal and $9,838 of interest into 7,909,037 shares of common stock. As of SeptemberJune 30, 2019, and December 31, 2018, the note balance is $60,000,was $-0- and $51,275, respectively, with a carrying value of $28,204,$39,389, net of unamortized discounts of $31,796.$11,886 at December 31, 2018.

 

On June 12, 2018, the Company issued a convertible promissory note (the “Note”), with a face value of $88,000, maturing on March 12, 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 65% of the lowest trading price for the 25 days prior to conversion. The note was funded on June 14, 2018, when the Company received proceeds of $80,250, after the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $80,250, an initial derivative expense of $93,150 and an initial derivative liability of $173,400. For the nine months ended Sept 30, 2018, amortization of the debt discount of $32,188 was charged to interest expense. The Company also recorded a debt issue discount of $7,750 and amortized $3,109 to interest expense for the nine months ended September 30, 2018. As of September 30, 2018, the note balance is $88,000, with a carrying value of $35,297, net of unamortized discounts of $52,703.

 1718 

 

On June 26,October 23, 2018, an investor funded the Company issued$50,000 remaining of a convertible promissory note (the “Note”), issued on June 26, 2018, with aan original face value of $92,000, maturing on September 26, 2019, and stated interest of 10% to a third-party investor. The note is convertible at any time after ninety (90) days of the funding of the note into a variable number of the Company's common stock, based on a conversion ratio of 65% of the lowest trading price for the 20 days prior to conversion. TheOn October 23, 2018, the Company recorded an initiala note balance of $42,000$50,000 when the Company received proceeds of $50,000. The embedded conversion feature included in the funding of October 23, 2018, resulted in an initial debt discount of $50,000, an initial derivative expense of $45,291 and an initial derivative liability of $95,291. For the six months ended June 30, 2019, amortization of the debt discount of $25,230 was charged to interest expense. During the six months ended June 30, 2019, the investor converted $50,000 of principal and $2,397 of interest into 2,495,107 shares of common stock. As of June 30, 2019, and December 31, 2018, the note balance is $-0- and $50,000, respectively, with a carrying value of $12,014, net of unamortized discounts of $37,986, at December 31, 2018.

On November 2, 2018, the Company issued a convertible redeemable note with a face value of $280,500 and a back-end convertible redeemable note for $280,500 (the “Notes”), maturing on June 27,November 2, 2019, and a stated interest of 8% to a third-party investor. The notes are convertible at any time after funding of the note into a variable number of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The first note was funded on November 2, 2018, when the Company received proceeds of $25,000,$255,000, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the first note resulted in an initial debt discount of $250,000, an initial derivative expense of $148,544 and an initial derivative liability of $398,544. For the six months ended June 30, 2019, amortization of the debt discount of $125,000 was charged to interest expense. The Company also recorded a debt issue discount of $30,500 and amortized $15,250 to interest expense for the six months ended June 30, 2019. During the six months ended June 30, 2019, the investor converted $87,400 of principal and $2,822 of interest into 7,837,442 shares of common stock. As of June 30, 2019, and December 31, 2018, the first note balance is $193,100 and $280,500, respectively, with a carrying value of $99,600 and $46,750, respectively, net of unamortized discounts of $93,500 and $233,750, respectively. On December 26, 2018, the investor partially funded $187,000 of the back-end note, when the Company received proceeds of $166,667, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the partial funding of the back-end note resulted in an initial debt discount of $166,667, an initial derivative expense of $100,081 and an initial derivative liability of $266,748. For the six months ended June 30, 2019, amortization of the debt discount of $97,803 was charged to interest expense. The Company also recorded a debt issue discount of $20,333 and amortized $11,932 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, and December 31, 2018, the partial back-end note balance is $187,000, with carrying values of $112,661 and $2,926, respectively, net of unamortized discounts of $74,339 and $184,074, respectively. On January 29, 2019, the investor funded $93,500, of and completing the back-end note, when the Company received proceeds of $75,000, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the partial funding of the back-end note resulted in an initial debt discount of $75,000, an initial derivative expense of $63,924 and an initial derivative liability of $138,924. For the six months ended June 30, 2019, amortization of the debt discount of $41,178 was charged to interest expense. The Company also recorded a debt issue discount of $10,167 and amortized $5,582 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the second partial back-end note balance is $93,500, with carrying values of $55,093, net of unamortized discounts of $38,407.

On December 4, 2018, the Company issued a convertible redeemable note (the “Note”) with a face value of $158,333 maturing on December 4, 2019, and a stated interest of 8% to a third-party investor. The note is convertible at any time after funding of the note into a variable number of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The note was funded on December 4, 2018, when the Company received proceeds of $137,250, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $25,000,$137,500, an initial derivative expense of $31,685$87,293 and an initial derivative liability of $56,685.$224,793. For the ninesix months ended SeptemberJune 30, 2018,2019, amortization of the debt discount of $5,158$68,750 was charged to interest expense. The Company also recorded an original issue discount anda debt issue discount of $17,000$20,833 and amortized $3,508$10,417 to interest expense for the ninesix months ended SeptemberJune 30, 2018. During the nine months ended September 30, 2018, the Company made principal payments of $900.2019. As of SeptemberJune 30, 2019, and December 31, 2018, the note balance is $41,100,$158,333, with a carrying valuevalues of $7,766,$92,361 and $13,194, respectively, net of unamortized discounts of $33,334.$65,972 and $145,139, respectively.

 

On June 26, 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”). Pursuant to the Purchase Agreement, the investor purchased a 12% Convertible Promissory Note (the “Note”), in the principal amount of $58,300, maturing on April 15, 2019. On June 29, 2018, the Company received proceeds of $50,000 which excluded transaction costs, fees, and expenses of $8,300. The Note is convertible into shares of the Company’s common stock at any time after one hundred eighty (180) days, at the average of the two lowest closing bid prices during the twenty (20) prior trading days from which a notice of conversion is received by the Company multiplied by seventy-five percent (75%), representing a twenty-five percent (25%) discount. The embedded conversion feature included in the note resulted in an initial debt discount of $50,000, an initial derivative liability of $116,550 and an initial derivative expense of $66,550. For the nine months ended September 30, 2018, amortization of the debt discount of $16,091 was charged to interest expense. The Company also recorded an original issue discount and debt issue discount of $8,300 and amortized $2,671 to interest expense for the nine months ended September 30, 2018. As of September 30, 2018, the note balance is $58,300, with a carrying value of $18,762, net of unamortized discounts of $39,538.

19

 

On August 7,December 4, 2018, the Company issued to a third-party investor a convertible promissoryredeemable note (the “Note”), with a face value of $88,250, maturing$230,000 and two back-end convertible redeemable notes for $115,000 each. The notes mature on November 7,December 4, 2019, andhave a stated interest of 10% to a third-party investor. The8% and each note is convertible at any time after ninety (90) days offollowing the funding of thesuch note into a variable number of the Company's common stock, based on a conversion ratio of 65%70% of the lowest tradingclosing bid price for the 2015 days prior to conversion. The initial note was funded on August 7,December 4, 2018, when the Company received proceeds of $80,250,$210,000, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $80,250,$210,000, an initial derivative expense of $86,207$108,922 and an initial derivative liability of $166,457.$318,292. For the ninesix months ended SeptemberJune 30, 2018,2019, amortization of the debt discount of $16,558$105,000 was charged to interest expense. The Company also recorded a debt issue discount of $8,000$20,000 and amortized $1,651$10,000 to interest expense for the ninesix months ended SeptemberJune 30, 2018.2019. During the six months ended JUne 30, 2019, the investor converted $52,500 of principal and $1,167 of interest into 3,699,862 shares of common stock. As of SeptemberJune 30, 2019, and December 31, 2018, the initial note balance is $88,250,$177,500 and $230,000, respectively, with carrying values of $81,667 and $19,167, respectively, net of unamortized discounts of $95,833 and $210,833, respectively. On February 12, 2019, the investor funded the first back-end note, when the Company received proceeds of $94,100, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the first back-end note resulted in an initial debt discount of $94,100, an initial derivative expense of $64,364 and an initial derivative liability of $158,464. For the six months ended June 30, 2019, amortization of the debt discount of $35,288 was charged to interest expense. The Company also recorded a debt issue discount of $10,000 and amortized $3,750 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the first back-end note balance is $115,000, with a carrying value of $18,209,$49,937 net of unamortized discounts of $70,441.$65,063. On March 1, 2019, the investor funded the second back-end note, when the Company received proceeds of $98,175, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the funding of the second back-end note resulted in an initial debt discount of $98,175, an initial derivative expense of $62,254 and an initial derivative liability of $160,429. For the six months ended June 30, 2019, amortization of the debt discount of $31,013 was charged to interest expense. The Company also recorded a debt issue discount of $10,000 and amortized $3,159 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the second back-end note balance is $15,000, with carrying values of $40,997, net of unamortized discounts of $74,003.

 

On August 10,December 24, 2018, the Company issued to a third-party investor a convertible promissoryredeemable note (the “Note”), with a face value of $110,000, maturing$195,000 and two back-end convertible redeemable notes for $97,500 each. The notes mature on November 10,December 24, 2019, andhave a stated interest of 10% to a third-party investor. The8% and each note is convertible at any time after ninety (90) days offollowing the funding of thesuch note into a variable number of the Company's common stock, based on a conversion ratio of 65%70% of the lowest tradingclosing bid price for the 15 days prior to conversion. The initial note was funded on December 26, 2018, when the Company received proceeds of $177,000, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $177,000, an initial derivative expense of $92,464 and an initial derivative liability of $269,464. For the six months ended June 30, 2019, amortization of the debt discount of $88,500 was charged to interest expense. The Company also recorded a debt issue discount of $18,000 and amortized $9,000 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, and December 31, 2018, the initial note balance is $195,000, with carrying values of $100,100 and $2,600, respectively, net of unamortized discounts of $94,900 and $192,400, respectively.

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

20

On February 22, 2019, the Company issued to a third-party investor a convertible redeemable note (the “Note”) with a face value of $116,667. The note matures on February 22, 2020, has a stated interest of 8% and is convertible at any time following the funding of such note into a variable number of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The note was funded on August 10, 2018,February 22, 2019, when the Company received proceeds of $90,000, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $90,000, an initial derivative expense of $36,138 and an initial derivative liability of $126,138. For the six months ended June 30, 2019, amortization of the debt discount of $31,875 was charged to interest expense. The Company also recorded a debt issue discount of $16,667, and amortized $5,903 to interest expense for the six months ended June 30, 2019. As of June 30, 2019, the note balance is $116,667, with a carrying value of $47,778, net of unamortized discounts of 68,889.

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

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

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

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

21

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

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

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

On June 13, 2019, the Company issued to a third-party investor a convertible redeemable note (the “Note”) with a face value of $119,000. The note matures on June 13, 2020, has a stated interest of 8% and is convertible at any time following the funding of such note into a variable number of the Company's common stock, based on a conversion ratio of 70% of the lowest closing bid price for the 15 days prior to conversion. The note was funded on June 13, 2019, when the Company received proceeds of $100,000, after disbursements for the lender’s transaction costs, fees and expenses. The embedded conversion feature included in the note resulted in an initial debt discount of $100,000, an initial derivative expense of $113,173$49,779 and an initial derivative liability of $213,173.$149,779. For the ninesix months ended SeptemberJune 30, 2018,2019, amortization of the debt discount of $20,633$4,155 was charged to interest expense. The Company also recorded a debt issue discount of $10,000$12,500, and amortized $2,063$520 to interest expense for the ninesix months ended SeptemberJune 30, 2018.2019. As of SeptemberJune 30, 2018,2019, the note balance is $110,000,$119,000, with a carrying value of $22,696,$11,175, net of unamortized discounts of $87,304.$107,825.

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

22

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

 

  

June 30,

2019

 

December 31,

2018

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

The following is a summary of the Company’s convertible notes and related discounts as of SeptemberJune 30, 2018:2019:

 

Convertible notes $733,350 
Unamortized note discounts  (416,145)
Balance at September 30, 2018 $317,205 

18

The following is a roll-forward of the Company’s convertible notes and related discounts for the nine months ended September 30, 2018:

  Principal Balance Debt Discounts Total
Balance at January 1, 2018 $378,800  $(292,073) $86,727 
New issuances  860,300   (743,409)  116,891 
Cash payments  (149,546)  —     (149,546)
Conversions  (322,429)  —     (322,429)
Debt forgiveness  (33,775)  —     (33,775)
Amortization  —     619,337   619,337 
Balance at September 30, 2018 $733,350  $(416,145) $317,205 
  Principal Balance Debt Discounts Total
Balance at January 1, 2019 $1,277,108  $(1,125,942) $151,166 
New issuances  2,026,022   (2,026,022)  —   
Conversions  (366,175)  —     (366,175)
Amortization  —     1,173,836   1,173,836 
Balance at June 30, 2019 $2,936,955  $(1,978,128) $958,827 

        

 

NOTE 1213 – 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 11.12.

 

The Company valued the derivative liabilities at issuance, September 30, 2018, and December 31, 2017, at $1,350,231 and $540,965, respectively. The Company used the Monte Carlo simulation valuation model with the following assumptions for new notes issued during the ninesix months ended SeptemberJune 30, 2019, risk-free interest rates from 2.00% to 2.59% and volatility of 319% to 387%, and as of December 31, 2018, risk-free interest rates from 1.82%2.56% to 2.51%2.62% and volatility of 303%355% to 432%, and as of September 30, 2018, risk-free interest rates from 2.36% to 2.61% and volatility of 412% to 444%391%.

 

A summary of the activity related to derivative liabilities for the ninesix months ended on SeptemberJune 30, 2018,2019, is as follows:

 

 September 30, 2018 June 30, 2019
Beginning Balance $540,965  $1,807,404 
Initial Derivative Liability  1,247,675   2,717,846 
Fair Value Change  348,753   (696,761)
Reclassification for principal payments and conversions  (787,162)
Reclassification for conversions  (746,421)
Ending Balance $1,350,231  $3,082,068 

 

Derivative liability expense of $940,819$342,360 for the ninesix months ended SeptemberJune 30, 2018,2019, consisted of the initial derivative expense of $592,066$1,039,121 and the above decrease in the fair value change of $348,753.$696,761.

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

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

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

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

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

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

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

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

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

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

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

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

Right-of- use assets are summarized below:

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

Operating lease liabilities are summarized as follows:

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

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Maturity of lease liabilities are as follows:

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

 

 

NOTE 13–15– 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.

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Future principal payments for the Company’s portion are:

 For the twelve months ending September 30, Amount
 2019  $144,000 
 2020   144,000 
 2021   144,000 
 2022   108,000 
 Total  $540,000 

Rent expense, related party, for the three and nine months ended September 30, 2018, was $47,937 ($36,000 related) and $119,937 ($108,000 related), respectively and $36,000 (all related) and $75,377 ($73,500 related) for the three and nine months ended September 30, 2017, 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 nine months ending September 30, 2017, the Company has received and recognized $400,000 in other income for payments received for the cancellation of the Expansion Agreement.

Also on August 5, 2016, the Company and the Moores entered into a Consulting Agreement (the “Consulting Agreement”) with the same party as the store Expansion Agreement. Under the Consulting Agreement, including the Non-Compete provision covering a ten- mile radius of any retail store, the Company and the Moores 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 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 had not recognized revenue from the Consulting Agreement, and accordingly, $847,223 was classified as deferred revenue on the December 31, 2017, consolidated balance sheets presented herein. On August 13, 2018, Helix, the Company and the Moores signed a Settlement Agreement, whereby, the Company received $450,000 and both parties dismissing all claims against the other party with prejudice. Accordingly, the Company recognized Other income of $1,297,223 comprised of the deferred revenues for amounts previously received and the $450,000 settlement amount.

Effective December 1, 2017, the Company entered into a one-year Marketing Services Agreement (the “MSA”). Pursuant to the terms of the MSA, the Company will receive consulting and advisory services regarding the implementation of marketing programs, including the design and creation of commercial websites and commercialization of products through social media or other marketing methods. The Company will pay consideration for the services of $5,000 cash and $5,000 of common stock each month. The Company will issue the number of shares of common stock equal to a twenty-five percent (25%) discount to the lowest closing price of the common stock for the five (5) last trading days of the common stock for that month. The parties agreed to terminate the services and contract effective June 30, 2018. For the nine months ended September 30, 2018, the Company recorded $30,000 of consulting expense and recorded $38,512 of stock-based compensation expense (pursuant to the terms of the MSA) from the issuance of 925,130 shares of common stock. 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.

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

On August 10, 2018, For the six months ended June 30, 2019, the Company entered into a one- year Consulting, Public Relations and Marketing Agreement (the “CPRM Agreement”), which can be cancelled by either party with a 30- day notice to the other party. Pursuant to the terms of the CPRM Agreement the Company is to issue 100,000issued 515,818 shares of restricted common stock each month. Theunder the CSMA and the parties agreed to terminate the CPRM Agreement on October 23, 2018.CSMA.

 

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

 

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

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

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

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

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

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

Legal Matters

 

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

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NOTE 1316 – STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

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

 

Series A Preferred Stock

 

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

 

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Series B Preferred Stock

 

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

 

Common Stock

 

The Company has 490,000,000 authorized shares of $0.0001 common stock. As of SeptemberJune 30, 2018,2019, and December 31, 2017,2018, there are 103,951,750161,826,468 and 61,539,334,120,425,344, respectively, shares of common stock outstanding.

 

On February 23, 2018,January 24, 2019, 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.

On February 28, 2018, the Company recorded 133,067 shares of common stock to be issued to a marketing consultant (see Note 13) and recorded $8,117 of stock-based compensation expense (based on the market price of the common stock on that date). The shares were certificated on September 5,2018.

On March 31, 2018, the Company recorded 133,333 shares of common stock to be issued to the same marketing consultant (See Note 13) and recorded $9,067 of stock-based compensation expense (based on the market price of the common stock on that date). The shares were certificated on September 5, 2018.

On April 30, 2018, the Company recorded 166,667 shares of common stock to be issued to a marketing consultant (see Note 13) and recorded $6,883 of stock-based compensation expense (based on the market price of the common stock on that date). The shares were certificated on September 5, 2018.

On May 31, 2018, the Company recorded 380,952 shares of common stock to be issued to the same marketing consultant (See Note 13) and recorded $6,667 of stock-based compensation expense (based on the market price of the common stock on that date). The shares were certificated on September 5, 2018.

On June 4, 2018, Matthew, Mark and Kimberly, each cancelled and returned to treasury 6,340,000 shares of common stock, in exchange for the issuance of 3,170,000 shares of Series A Preferred Stock to each. On August 8, 2018, Matthew, Mark and Kim each converted 3,170,000 shares of Series A Preferred Stock for 6,340,000 shares of common stock. The common stock issued replaced the 19,010,000 shares in the aggregate that the Moore’s cancelled in June 2018.

On August 27, 2018, the Company issued 100,000 shares of restricted common stock to a consultant pursuant to the CPRM Agreement (See Note 13). The shares were valued at $8,430 of stock-based compensation expense (based on the market price of the common stock on that date).

22

On August 27, 2018, the Company issued 129,534515,818 shares of restricted common stock pursuant to the CSMA (See Note 13)15). The shares were valued at $12,500 based on the average closing price for the three days prior to the effective date of the CSMA.

 

On August 27, 2018,During the six months ended June 30, 2019, the Company issued 2,500,0003,961,177 shares of common stock that were classified as common stock to be issued as of December 31, 2018.

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

.

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

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

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

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

On April 1, 2019, the Company issued the to a consultant 2,000,000 shares of restricted common stock. The Company valued the common stock pursuant to the CA (See Note 13). The shares were valued at $175,000$128,000 based on the market price of the common stock and were recorded as deferred stock compensation on the condensed consolidated balance sheet presented herein, and willdate of the agreement, to be amortized to stock compensation expense over the term of the CA. Foragreement.

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

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

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

On May 22, 2019, the Company issued 666,666 shares of restricted common stock to a consultant for financial services provided. The Company valued the common stock at $32,000 based on the market price of the common stock on the date of the agreement, and is included in stock-based compensation expense for the three and ninesix months ended SeptemberJune 30, 2018, the Company amortized $29,167 to stock compensation expense.2019.

 

During the ninesix months ended SeptemberJune 30, 2018,2019, the Company issued 38,644,79131,163,818 shares of common stock for conversion of $272,429$366,175 of principal and $27,596$52,790 of accrued interest and fees, for a total of $350,430.$418,965.

 

Common Stock to be issued

 

On September 5, 2018,During the six months ended June 30, 2019, the Company issued 3,961,177 shares of common stock that were classified as common stock to be issued as of December 31, 2018.

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During the six months ended June 30, 2019, the Company recorded 340,352468,645 shares of common stock to be issued pursuant to employees as part of their compensation. The Company agreed to issue stock, over a twelve- month period based on continual employment, based on their offer of employment, and, accordingly, recorded $25,000 for the APA related to Amos Audiology (See Note 2).

On September 7, 2018,three and six months ended June 30, 2019, for the Company recorded 186,289 shares of restricted common stock to be issued to a consultant pursuant to the CSMA. The shares were valued at $12,500 based(issued on the average closing price for the three days prior to the monthly effective date of the CSMA.

On September 28, 2018, the Company recorded 844,870 shares of common stock to be issued for the conversion of $50,000 of principal and $1,205 of accrued interest, for a total of $51,205.July 5, 2019).

 

As of SeptemberJune 30, 2018,2019, there were 1,371,5112,881,316 shares of common stock to be issued.

 

 

NOTE 1417 – SUBSEQUENT EVENTS

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

On October 3, 2018,May 31, 2019, the Company entered into a Manufacturing Designlease beginning July 1, 2019, to operate a retail hearing aid clinic in Greenhaven, California expiring June 30, 2022. Initial lease payments of $1,450 begin on July 1, 2019, and Marketing Agreement (the “Agreement”) with Zounds Hearing, Inc. a Delaware corporation (“Zounds”), whereby, Zounds as the Subcontractor will provide design, technology, manufacturing and supply chain services to the Company, to enable the Company to manufacture comparable hearing aids and related components and accessories to be sold under the Company’s exclusive brand names (the “Manufacturer’s Products”) through the Company’s various marketing and distribution channels. The Company will pay Zounds One Million USD ($1,000,000) (the “Technology Access Fee”). The Technology Access Fee, as amended will be paid in eight (8) installments of $75,000 each, in four week intervals until $600,000 is paid and $400,000 to be paid as Product Surcharges basedincrease by approximately 5% annually beginning on $200 per unit manufactured for up to the first 2,000 units. Once $400,000 of Product Surcharges are paid said per unit surcharge will be discontinued.July 1, 2020.

 

On October 31, 2018,July 1, 2019, the Company entered intoissued to a Joint Development Agreementthird-party investor a convertible redeemable note (the “JD Agreement”) and an Exclusive Distribution Agreement (the “ED Agreement”) with Erchonia Corporation (“Erchonia”). As part of the JD Agreement, the Company and Erchonia will conduct FDA clinical research and trials for the purposes of obtaining 510k FDA Clearances for devices, technologies, methods and techniques used in the treatment of hearing relating conditions and disorders such as Tinnitus, Sensorineural hearing Loss, dizziness and other disorders. The agreements give the Company the exclusive worldwide rights for all designs and any newly developed Erchonia 3LT lasers and related technologies and gives the Company the rights to license and distribute such products worldwide.

On November 2, 2018, the Company entered into a Securities Purchase Agreement (the “SPA”“Note”) with a third- party investor pursuant to which the Company issued two $280,500 face amountsvalue of $183,975. The note matures on July 1, 2020, has a stated interest of 8% Convertible Redeemable Notes (the “Notes”) for an aggregate face amountand is convertible at any time following the funding of $561,000 (the “Note Financing”). The Notes were issued with an original issue discount of $51,000, for an aggregate purchase price of $510,000. The proceeds to the Company from the salesuch note into a variable number of the Notes was $510,000 which was paid for by (i) payment of $255,000 in cash and (ii) the issuance by the investor to the Company ofCompany's common stock, based on a $255,000 principal amount of Collateralized Secured Promissory Note (the “Investor Note”). The Investor Note is secured and collateralized by one of the above two reference Notes issued by the Company.

23

The Notes issued by the Company accrue interest at a rate of 8% per annum with an increase to 24% in the event of a default and, mature on November 2, 2019 subject to acceleration in the event of default. Principal and interest on the Notes are convertible into Common Stock of the Company at a priceconversion ratio of 70% of the lowest closing bid price offor the common stock as reported on the OTCQB exchange or any exchange upon which the Common Stock may be traded in the future, as calculated during the 15- trading day period just15 days prior to the date of notice of conversion.

From October The note was funded on July 1, 2018, through November 15, 2018,2019, when the Company received conversion noticesproceeds of $150,000, after disbursements for the issuancelender’s transaction costs, fees and expenses.

On July 5, 2019, the Company issued 468,645 shares of 13,180,436restricted common stock to employees (see note 16).

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

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

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

On August 26, 2019, the Company filed Amended and Restated Articles of Incorporation (the “Amendment”) with the Nevada Secretary of State, pursuant to which the Company increased the authorized shares of capital stock of the Company to 1,000,000,000, consisting of 975,000,000 shares of common stock, for conversionpar value $0.0001, and 25,000,000 shares of $394,233preferred stock, par value $0.0001 (the “Preferred Stock”), with the Preferred Stock issuable in such series, and with such designations, rights and preferences, as the Board of principal and $14,659 of accrued interest on convertible notes. As a result of the new note issued above and the conversions since October 1, 2018, the convertible note balance as of November 15, 2018 is approximately $620,000.Directors may determine from time to time.

  

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

 

 

 2429 

 

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, 20172018 and 20162017 and filed by the Company on Form 10-K with the Securities and Exchange Commission on April 17, 2018.16, 2019.

 

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

 

While our financial statements are presented on the basis that we are a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time, our independent auditor’s report on our financial statements for the years ended December 31, 20172018 and 20162017 includes a “going concern” explanatory paragraph that describes substantial doubt about our ability to continue as a going concern. Management’s plans in regard to the factors prompting the explanatory paragraph are discussed below and also in Note 3 to the unaudited condensed consolidated financial statements.

 

Corporate History and Current Business

 

InnerScope Hearing Technologies, Inc. (“Company”, “InnerScope”) is a Nevada Corporation incorporated on June 15, 2012, with its principal place of business in Roseville, California. The Company was originally named InnerScope Advertising Agency, Inc. and was formed to provide advertising and marketing services to retail establishments in the hearing device industry. On August 25, 2017, the Company changed its name to InnerScope Hearing Technologies, Inc.to better reflect the Company’s current direction as a technology driven company with a scalable business to business (B2B)(BTB) solution and business to consumer (and B2C)BTC) solution. Recently,The Company also competes in the Company began offeringDTC (Direct-to-Consumer) markets with its own line of FDA (Food and Drug Administration)registered Hearing Aids and its “Hearable”“Hearables”, and “Wearable” Personal Sound Amplifier Products (PSAPs). “Wearables”, including APPs on the iOS and Android markets.On July 5,September 10, 2018, the Company signed a supplier agreement as a direct shipped vendor ("DSV"acquired all of the assets and assumed certain liabilities of Kathy L Amos Audiology (“Amos Audiology”) in exchange for Walmart.com. The Company has been accepted as a Walmart.com USA, LLC (a wholly-owned subsidiary340,352 shares of Wal-Mart Stores, Inc.) supplier and will sell its FDA-Registered Hearing Aids and its PSAP to Walmart.com as the retailer for their Direct-To-Consumer online retail sale.

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 Agreementcommon stock (the “Expansion Agreement”“Acquisition”). Mark, MatthewAmos Audiologyprovides retail hearing aid sales and Kim are herein referred to collectively asaudiological services in 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 termEast Bay area of six-months. The Expansion Agreement was cancelled on January 6, 2017. The Company’s client has decided to do their own marketing in-house and eliminate this out-sourced contract, and has decided to delay the opening of any new stores.  For the nine months ending September 30, 2017,San Francisco. Additionally, the Company has receivedopened 9 retail hearing device clinics, manages two clinics owned by a related party and recognized $400,000 in other income for payments received for the cancellation of the Expansion Agreement.

Also,plans on August 5, 2016, the Companyusing management’s unique 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 Companysuccessful talents on acquiring and the Moores wereopening additional audiological brick and mortar clinics 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 storesbe owned 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 filedoperated by the Client, that included a demand that all monies paid pursuant to the Consulting Agreement be returned. On August 13, 2018, the Client, InnerScope and the Moores executed a Settlement Agreement (See Note 13).

25

Results of OperationsCompany. 

 

Results of Operations

For the three and ninesix months ended SeptemberJune 30, 20182019 compared to the three and ninesix months ended SeptemberJune 30, 20172018

 

Revenues

 

Revenues for the three and ninesix months ended SeptemberJune 30, 20182019 were $59,724$219,673 and $165,715,$406,202, respectively, compared to $104,781$50,014 and $390,391$105,991 for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively. The revenue decreaseincrease was primarily the result of the cancellations ofsales from retail clinics during the third-party Consultingthree and Marketing Agreementssix month periods ending June 30, 2019, partially offset by a decrease in January 2017, as well as reduced revenues from direct print and mail services. Forservices for the three and ninesix months ended Septemberending June 30, 2018, a related customer accounted for 25.1% and 40.4%, respectively,2019. The Company is focusing on the higher margins associated with the sales of our revenues and another customer accounted for approximately 16.3% for the nine months ended September 30, 2018. Beginning in the second quarter of 2018, the Company began to market and sell Personal Sound Amplifier Products (“PSAP’s”) online on a direct to consumer basis and beginning in the third quarter of 2018 began selling hearing aids on Walmart.com website.and hearing aid products. A breakdown of the net decreaseincrease in sales is as follows:

 

  

Three months ended

September 30,

 

Nine months ended

September 30,

  2018 2017 2018 

2017

Online sales $44,724  $—    $63,247  $—   
Consulting fees  —     15,500   —     147,500 
Direct print, mail services and product  —     63,333   35,449   180,001 
Sub total  44,724   78,833   98,696   327,501 
                 
Related party - direct print and mail services  —     10,948   22,019   27,890 
Related party - Marketing and consulting fee  15,000   15,000   45,000   35,000 
Sub total  15,000   25,948   67,019   62,890 
Total revenues $59,724  $104,781  $165,715  $390,391 
30

 

  

Three months ended

June 30,

 

Six months ended

June 30,

  2019 2018 

2019

 

2018

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

Retail clinic sales

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

Online sales

 

Beginning in the second quarter of 2018, the Company began to market a line of PSAP hearables and wearables and during the third quarter of 2018, expanded their line of products to include FDA registered hearing aid devices. The Company has introduced the products through new marketing campaigns, to bring awareness to the products and anticipates sales of these products to increase during the remainder of 20182019 and after.

Consultingbeyond.

 

For the nine months ended September 30, 2017, the Company recorded $100,000 of income related to the Store Expansion Agreement, $30,000 of income from the cancellation of the Marketing and Store Expansion Agreements and for the three and nine months ended September 30, 2017, $15,500 and $7,500 of consulting income from new clients.

Direct print and mail service

During the nine months ended September 30, 2018, the Company developed marketing materials, including printing and mailing services, for direct marketing campaigns and recorded revenues of $35,449, compared to $63,333 and $180,001 for the three and nine months ended September 30, 2017, respectively.

26

Related Party

 

On December 24, 2016, Moore Holdings, LLC. (“Moore Holdings”) acquired two retail stores from the buyer of the MFHC stores. On March 1, 2017, the Company entered into a twelve- month Marketing Agreement with six (6) month renewals, thereafter, 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 $45,000, respectively, of revenues for the three and ninesix months ended SeptemberJune 30, 2018,2019, and $15,000 and $35,000$30,000 for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively. The Marketing Agreement is currently on a month to month basis. As of April 1, 2019, the Company stopped recording the marketing income and will ony record such income going forward based on payments received from the related party. For the ninethree and six months ended SeptemberJune 30, 2018, the Company also provided direct print and mailing services for the two retail storessales and recognized revenue of $8,323, and $22,019, respectively, for the services, compared to $10,048 and $27,890 for the three and nine months ended September 30, 2017.services.

Cost of sales

 

The Company records cost of sales on products sold in the retail clinics on delivery to the customer and for online sales, when shipped. We recognize the costs of designing, producing, printing and mailing advertisements for our client’s direct mail marketing campaigns in cost of sales in the month of the mailing as well as the licensing of telemarketing software and records cost of sales on products sold online, when shipped.software. Cost of sales for the three and ninesix months ended SeptemberJune 30, 20182019, was $29,085$99,463 and $99,751,$181,827, respectively, compared to $80,904$31,802 and $231,223$70,666 for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively.

 

Operating Expenses

 

Operating expenses were $482,705$1,138,958 and $2,085,980, respectively,$2,115,689 for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively, compared to $303,418$1,173,044 and $995,216, respectively,$1,603,274 for the three and ninesix months ended SeptemberJune 30, 2017.2018, respectively. The increase in expenses in the current periods was as follows:

 

31

 

Three months ended

September 30,

 

Nine months ended

September 30,

 

Three months ended

June 30,

 

Six months ended

June 30,

Description 2018 2017 2018 2017 2019 2018 2019 2018
Compensation and benefits $177,778  $159,114  $490,484  $482,382  $399,170  $153,167  $748,823  $312,705 
Stock compensation  62,597   25,000   899,437   140,000   233,793   772,600   358,292   836,840 
Professional fees  112,355   56,226   279,021   162,122   42,047   115,419   69,026   166,666 
Commissions, stockholder  —     —     —     60,000 
Advertising and promotion  46,408   —     137,736   —     143,800   66,007   311,584   91,328 
Investor relations  11,482   10,022   87,901   22,927   89,528   23,778   164,776   76,419 
Rent, related party  36,000   36,000   108,000   73,500 
Rent, other  9,062   —     11,937   1,877 
General and other administrative  27,023   17,056   71,464   55,785 
Rent, including related party of $36,000 for three months (2018 and 2019) and $72,000 for six months (2018 and 2019)  98,133   36,000   194,062   72,000 
Other general and administrative  132,487   6,073   269,126   47,316 
Total $482,705  $303,418  $2,085,980  $995,216  $1,138,958  $1,173,044  $2,115,689  $1,603,274 

 

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

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

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

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

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

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

 

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

 

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

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

 

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

 

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

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

 2732 

 

 

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

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

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

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

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

Professional fees for the three and six months ended June 30, 2018.

On April2019, were $42,047 and $69,026, respectively, compared to $115,419 and $166,666 for the three and six months ended June 30, 2018, the Company recorded 166,667 shares of common stock to be issued to the samerespectively. Professional fees consisted of: 

  

Three months ended

June 30,

 

Six months ended

June 30,

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

Advertising and marketing consultant and recorded $6,883 of stock-based compensation expense (based on the market price of the common stock on that date) and is included in the nine months ended September 30, 2018.

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

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

On August 27, 2018, the Company issued 100,000 shares of restricted common stock to a consultant pursuant to the CPRM Agreement (See Note 13). The shares were valued at $8,430 of stock-based compensation expense (based on the market price of the common stock on that date) and is includedincreased in the three and ninesix months ended SeptemberJune 30, 2018.

On August 27, 2018, the Company issued 129,534 shares of restricted common stock pursuant to the CSMA (See Note 13). The shares were valued at $12,500 based on the average closing price for the three days prior to the effective date of the CSMA and is included in the three and nine months ended September 30, 2018.

On August 27, 2018, the Company issued 2,500,000 shares of restricted common stock pursuant to the CA (See Note 13). The shares were valued at $175,000 based on the market price of the common stock, and were recorded as deferred stock compensation on the condensed consolidated balance sheet presented herein, and will be amortized to stock compensation expense over the term of the CA. For the three and nine months ended September 30, 2018, the Company amortized $29,167 to stock compensation expense.

On September 7, 2018, the Company recorded 129,534 shares of restricted common stock to be issued pursuant to the CSMA (See Note 13). The shares were valued at $12,500 based on the average closing price for the three days prior to the effective date of the CSMA and is included in the three and nine months ended September 30, 2018. The shares were certificated om October 9, 2018.

Stock based compensation expense for 2017 was2019, as a result of on April 3, 2017, the Company issued 333,334 shares of restricted common stock to a third party, pursuant to a one-year consulting agreement.heavily promoting their retail clinics. The Company valued the shares at $0.30 per share (the market price of the common stock on the date of the agreement). The Company amortized the $100,000 cost over the term of the agreement, and accordingly has included $25,000 and $50,000, respectively, in stock-based compensation for the three and nine months ended September 30, 2017. Additionally, on April 7, 2017, the Company issued 300,000 shares of restricted common stock to a third party, pursuant to a consulting agreement. The Company valued the shares at $0.30 per share (the market price of the common stock on the date of the agreement), and recorded an expense of $90,000 for the nine months ended September 30, 2017.

Professional fees, excluding stock-based compensation for the three and nine months ended September 30, 2018 were $112,355 and $279,021 for the three and nine months ended September 30, 2018, respectively, and $56,226 and $162,122, for the three and nine months ended September 30, 2017, respectively. Professional fees, excluding stock-based compensation, consisted of: 

28

  

Three months ended

September 30,

 

Nine months ended

September 30,

Description 2018 2017 2018 2017
Legal fees $38,893  $17,840  $106,061  $42,520 
Business consulting  51,250   7,500   95,374   22,500 
Accounting and auditing fees  18,500   21,900   65,500   68,803 
Information technology  3,712   8,986   12,086   28,299 
Total $112,355  $56,226  $279,021  $162,122 

Commissions, stockholder, are the result of the Company recording commission due on all amounts recognizedcosts include direct mail advertising as revenue in the period related to the Consulting Agreement and Store Expansion Agreement.well as newspaper print advertising.

 

Rent, including related party, increased for the three and ninesix months ended SeptemberJune 30, 2018,2019, compared to the three and ninesix months ended SeptemberJune 30, 20172018 as a result of the Company on June 14, 2017, entered into a five-year lease with LLC1 for approximately 6,944 square feeteight new leases related to the Company’s retail clinics in the 2019 periods, none of which were open during the 2018 periods.

Other income (expense), net

Other expenses, net, were $486,664 and a monthly rent of $12,000.

General and administrative costs were $27,024 and $71,464, respectively,$1,617,136 for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively, compared to $17,056$698,193 and $52,408, respectively,$983,020 for the three and ninesix months ended September 30, 2017, respectively.

Other income (expense), net

Other income, was $661,739 for the three months ended September 30, 2018, and was an expense of $321,281 for the nine months ended September 30, 2018, compared to other income of $138 and other expense of $353,587 for the three and nine months ended September 30, 2017, respectively. Included in other income (expense) for the three and nine months ended September 30, 2018 was $1,297,223 as a result of the Helix settlement, whereby the Company recognized $847,223 previously classified as deferred revenues and $450,000 of cash received from the settlement. There was also a gain on debt extinguishment of $33,775 for the three and nine months ended SeptemberJune 30, 2018. For the three and ninesix months ended SeptemberJune 30, 2018,2019, a credit to derivative expenses of $235,478 and an expense was $270,849 and $940,81,of $342,360, respectively, related to convertible notes. For the threenotes and nine months ended September 30, 2018, interest expense of $728,456 and $1,235,198, respectively, including amortization of debt discounts increased significantly compared to the same periods in 2018, as a result of more issuances of convertible notes. For the three and six months ended June 30, 2018, the derivative expenses of $518,711 and $669,970, respectively. Interest expense also increased as a result of the convertible notes. The 2017 periods included a loss recorded on the Consulting Agreement, due to the uncertaintynotes, and interest expense of future services being provided, based on the Complaint (see Note 13). The increase for the nine-month period was partially offset by the Company recognizing a gain $160,000 on the cancellation of Store Expansion Agreement. The Company received $400,000 during the nine months ended September 30, 2017$182,528 and also paid $240,000 to a stockholder for services provided related to the income received$313,792, respectively, pursuant to the Cancellation Agreement.terms and conditions of the convertible notes issued by the Company.

 

Net income (loss)loss

 

Net income for the three months ended September 30,2018 was $209,673 and the net loss for the nine months ended September 30, 2018, was $2,341,296, compared to net losses of $279,403 and $1,189,635 for the three and ninesix months ended SeptemberJune 30,2019, was $1,505,411 and $3,508,449, respectively, compared to $1,853,025 and $2,550,969 for the three and six months ended June 30, 2017.2018, respectively, as a result of the increases in operating and other expenses as described above.

 

33

Capital Resources and Liquidity

 

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs to pay ongoing obligations. As of SeptemberJune 30, 2018,2019, we had cash and cash equivalents of $64,884,$5,017, a decrease of $19,836,$82,809, from $84,720$87,826 as of December 31, 2017.2018. As of SeptemberJune 30, 2018,2019, we had current liabilities of $2,385,046$5,939,297 (including derivative liabilities of $1,350,231)$3,082,068) compared to current assets of $360,970$596,204 which resulted in working capital deficit of $2,024,076.$5,343,093. The current liabilities are comprised of accounts payable, accrued expenses, notes payable, convertible notes payable, operating lease liabilities, customer deposits, salaries and taxes payable, and derivative liabilities.

 

29

Our ability to operate over the next twelve months, is contingent upon continuing to realize sales revenue sufficient to fund our ongoing expenses. If we are unable to sustain our ongoing operations through sales revenue, we intend to fund operations through debt and/or equity financing arrangements, which may be insufficient to fund our working capital, or other cash requirements. There can be no assurance that such additional financing will be available to us on acceptable terms, or at all.  Our ability to operate beyond September,Since June 30, 2019, is contingent upon continuing to realize sales revenue sufficient to fund our ongoing expenses. If we are unable to sustain our ongoing operations through sales revenue, we intend to fund operations through debt and/or equity financing arrangements, which may be insufficient to fund our working capital, or othergenerated cash requirements. Since September 30, 2018, we have received $310,500,flows of $483,500, from the issuance of $330,500$518,210 of convertible notes and $47,215 note.$60,000 note payable and approximately $196,000 received from the sales of hearing aid products. We do not have any formal commitments or arrangements for the sales of stock or the advancement or loan of funds at this time. 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 operating activities was $628,362$1,682,111 for the ninesix months ended SeptemberJune 30, 20182019 compared to $281,652$572,621 for the ninesix months ended SeptemberJune 30, 2017.2018. For the ninesix months ended SeptemberJune 30, 2019, the cash used in operations was a result of the net loss of $3,508,449 and the changes in operating assets and liabilities of $310,084, partially offset by the non- cash expense items of depreciation, amortization and amortization of debt discounts of $1,393.694, derivative expense of $342,360 and stock- based compensation of $358,292. For the six months ended June 30, 2018, the cash used in operations was a result of the net loss of $2,341,296, the recognition of $847,223 of deferred revenue$2,550,969 and increases in assets of $66,063,$7,518, offset by increases in liabilities of $200,161$283,572 and the non- cash expense items of depreciation and amortization of $621,189,$274,147, derivative expense of $940,819$669,970 and stock- based compensation of $899,437.$836,840.

 

Cash used in operating activities was $281,652 for the nine months ended September 30, 2017. For the nine months ended September 30, 2017, the cash used in operations was a result of the net loss of $1,189,635 and increases in accounts receivable $74,164 and prepaid assets of $68,621 and a decrease of $96,000 of commissions payable, stockholder. These were partially offset by the non- cash expenses of $140,000 of stock-based compensation and $983 for the loss on equity investment (related party), decrease of deferred commissions, stockholder of $133,334 and an increase of deferred revenue of $625,000.

Investing Activities

 

Cash used in investing activities was $215,196$69,755 for the ninesix months ended SeptemberJune 30, 2017,2019, and consisted of purchases of fixed assets of $46,274 and payments of $23,481 for security deposits. There was materially comprised of the investmentno investing activity for the purchase of a 49% interest in a building. The Company also received $5,125 as a payment on a note receivable from an officer and paid $3,000 to acquire the web address innd.com.six months ended June 30, 2018.

 

Financing Activities

 

For the ninesix months ended SeptemberJune 30, 2019, cash provided by financing activities was $1,669,057 compared to $534,654 for the six months ended June 30, 2018. For the six months ended June 30, 2019, the Company has received $1,678,725 from the issuance of $2,026,022 of convertible notes and cash of $21,000 from the issuance of a note payable of $26,672 and net payments of $6.116 were made from a related party. For the six months ended June 30, 2019, the Company made payments of $36,784 on notes payable. For the six months ended June 30, 2018, the Company has received $772,500$592,250 from the issuance of $860,300$654,050 of convertible notes, cash of $32,600 from the issuance of a note of $43,358, and related party notes payable issued of in the aggregate of $36,800.$31,200. For the ninesix months ended SeptemberJune 30, 2018, the Company made principal payments of $149,546$94,725 on convertible notes, $55,578$20,671 on notes payable and $6,000 was paid on related party notes payable. The Company also advanced $22,250 to a shareholder.

 

OFF BALANCE SHEET ARRANGEMENTS

 

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

 

34

Critical Accounting Policies

 

Basis of presentation

 

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

 

30

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 effectiveEffective January 1, 2018, the Company adopted ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) and determinedall the related amendments.  The Company elected to adopt this guidance using the modified retrospective method. The adoption of this guidance did not have a material effect on the Company’s financial position, results of operations or cash flows.

The core principle of ASC 606 requires that there was no significant impact on itsan entity recognize revenue recognition.  to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. 

The Company’s contracts with customers are generally on a purchase order basis and represent obligations that are satisfied at a point in time, as defined in the new guidance.  guidance, generally upon delivery or has services are provided. Accordingly, revenue for each projectsale is recognized when each project is complete, and anythe Company has completed its performance obligations. Any costs incurred before this point in time, are recorded as assets to be expensed during the period the related revenue is recognized. The Company accepts prepayments on hearing aids and records the amount received as customer deposits on its’ balance sheet. When the Company delivers the hearing aid to the customer, revenue is recognized as well as the corresponding cost of sales.

 

Income taxes

 

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

  

Net loss per common share

 

The Company reports earnings (loss) per share in accordance with ASC 260, "Earnings per Share." Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net loss by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding during the period. As of SeptemberJune 30, 2019, and 2018, the Company’s outstanding convertible debt is convertible into approximately 16,998,883155,394,444 and 90,570,304 shares of common stock, subject to adjustment based on changes in the Company’s stock price.price, respectively. This amount is not included in the computation of dilutive loss per share because their impact is antidilutive. As of September 30, 2017, the Company did not have any outstanding common stock equivalents or any other potentially dilutive securities.

35

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable.

 

Item 4. Evaluation of Disclosure Controls and Procedures

 

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

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act that occurred during the quarter ended SeptemberJune 30, 2018,2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

 3136 

 

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 InnerScopeand the Moores,in the Circuit Court of the 11th Judicial Circuit in and for Miami-Dade County, Florida, that includes a rescission of the Consulting Agreement, on the basis that an injunction against certain Officers and Directors renders the Consulting Agreement impossible to perform. InnerScope was not named as an enjoined party in such previous litigation, and the services contemplated under the Consulting Agreement are not within the scope of the injunction, thus InnerScope believes the accusation by the third party is frivolous and without merit, as well as not providing sufficient cause for the Agreement to be terminated.

 

InnerScope and the Moores filed their Answer and Affirmative Defenses to the Complaint on June 27, 2017.  On the same date, InnerScope, the Moores, and MFHC filed a counterclaim. On February 27, 2018, the Counterclaim was amended to include four claims for breach of contract, one claim for anticipatory breach of contract, one claim for negligent misrepresentation, and one claim for account stated.On August 13, 2018, Helix, InnerScope and the Moores executed a Settlement Agreement.

 

Item 1A. Risk Factors

 

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

 

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

 

On July 2, 2018,April 1, 2019, the Company issued 113,637 shares of common stock to an employee as part of their compensation. The Company agreed to issue $20,000 of stock, over a six- month period based on continual employment, based on the average closing price of the Company’s common stock for the 5 days prior to employment, and accordingly recorded stock-based compensation of $5,000, included in Compensation and benefits in the consolidated statement of operations, included herein.

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

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

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

On April 3, 2019, the Company recorded 410,284 shares of restricted common stock to be issued pursuant to a consulting agreement. The shares were valued at $12,500 based on the average closing price for the three days prior to the month of service pursuant to the consultant’s agreement.

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

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

37

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

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

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

On June 25, 2019, the Company issued 1.048.726 shares of restricted common stock to Eagle Equities, LLC (“Eagle”) in partial satisfaction of its obligations under, and the holder's election to convert a $7,350$18,000 principal portion of, the Company's convertible promissory note issued to Carebourn on November 10, 2017.

On July 6, 2018, the Company issued 1,000,000 shares of common stock to Carebourn in partial satisfaction of its obligations under, and the holder's election to convert a $5,200 principal portion, of, the Company's convertible promissory note issued to Carebourn on November 10, 2017.

On July 16, 2018, the Company issued 2,496,890 shares of common stock to Carebourn in partial satisfaction of its obligations under, and the holder's election to convert a $9,089 interest portion, of, the Company's convertible promissory note issued to Carebourn on November 10, 2017.

On July 19, 2018, the Company issued 2,443,135 shares of common stock to Carebourn in partial satisfaction of its obligations under, and the holder's election to convert a $8,893 interest portion, of, the Company's convertible promissory note issued to Carebourn on November 10, 2017.

On July 26, 2018, the Company issued 2,738,951 shares of common stock to Carebourn in partial satisfaction of its obligations under, and the holder's election to convert a $9,970 principal portion, of, the Company's convertible promissory note issued to Carebourn on November 10, 2017.

On August 2, 2018, the Company issued 2,738,950 shares of common stock to Carebourn in partial satisfaction of its obligations under, and the holder's election to convert a $9,970 principal portion, of, the Company's convertible promissory note issued to Carebourn on November 10, 2017.

On August 5, 2018, the Company issued 2,085,106 shares of common stock to Gary Moore in satisfaction of its obligations under, and the holder's election to convert $35,000 principal and $1,750$940 of interest, of, the Company's convertible promissory note issued to Gary MooreEagle on February 1, 2017.November 2, 2018.

 

On August 9, 2018,June 26, 2019, the Company issued 2,925,9322,162,541 shares of restricted common stock to Power Up Lending Group LTDGS Capital Partners, LLC (“Power Up”GS Capital”) in partial satisfaction of its obligations under, and the holder's election to convert a $12,179 principal portion, of, the Company's convertible promissory note issued to Power Up on February 8, 2018.

32

On August 10, 2018, the Company issued 2,315,896 shares of common stock to Carebourn Partners LLC (“Carebourn Partners”) in partial satisfaction of its obligations under, and the holder's election to convert a $8,430 principal portion, of, the Company's convertible promissory note issued to Carebourn on November 10, 2017. Carebourn Partners acquired $40,000 of the Carebourn Capital note.

On August 23, 2018, the Company issued 1,968,961 shares of common stock to Carebourn in partial satisfaction of its obligations under, and the holder's election to convert a $9,097 principal portion, of, the Company's convertible promissory note issued to Carebourn on November 10, 2017.

On August 27, 2018, the Company issued 4,500,496 shares of common stock to Carebourn in partial satisfaction of its obligations under, and the holder's election to convert a $30,828 principal portion, of, the Company's convertible promissory note issued to Carebourn on November 10, 2017.

On September 20, 2018, the Company issued 974,387 shares of common stock to Carebourn Partners in partial satisfaction of its obligations under, and the holder's election to convert a $31,570 principal portion, of, the Company's convertible promissory note issued to Carebourn on November 10, 2017. Carebourn Partners acquired $40,000 of the Carebourn Capital note.

On September 20, 2018, the Company issued 1,117,495 shares of common stock to Carebourn in partial satisfaction of its obligations under, and the holder's election to convert a $32,345$37,500 principal portion and $3,861$1,101 of interest, of, the Company's convertible promissory note issued to CarebournGS Capital on November 10, 2017.December 4, 2018.

 

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

On August 9, 2018, the Company issued 4,125,055 shares of restricted common stock to One44 Capital LLC (“One44”) in partial satisfaction of its obligations under, and the holder's election to convert a $14,000 principal portion and $322 of interest, of, the Company's convertible promissory note issued to One44 on February 8, 2018.

On August 27, 2018, the Company issued 100,000 shares of restricted common stock to StockVest pursuant to the CPRM Agreement (See Note 13). The shares were valued at $8,430 of stock-based compensation expense (based on the market price of the common stock on that date).

On August 27, 2018, the Company issued 129,534 shares of restricted common stock pursuant to Adam Baker pursuant to the CSMA (See Note 13). The shares were valued at $12,500 based on the average closing price for the three days prior to the effective date of the CSMA.

On August 27, 2018, the Company issued 2,500,000 shares of restricted common stock pursuant to LP Funding pursuant to the CA (See Note 13). The shares were valued at $175,000 based on the market price of the common stock, and were recorded as deferred stock compensation on the condensed consolidated balance sheet presented herein, and will be amortized to stock compensation expense over the term of the CA. For the three and nine months ended September 30, 2018, the Company amortized $29,167 to stock compensation expense.

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

33

Item 3. Defaults upon Senior Securities

 

None.

 

Item4.Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Item 6. Exhibits

 

Exhibit

Number

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

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

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

10.16* 

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

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

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

10.19* 

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

10.20* 

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

10.21* 

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

34

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

10.26* 

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

10.27* 

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

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

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

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

31.1** Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
31.2** Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
3332.1*32.1** Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
101.INS** XBRL Instance
101.SCH** XBRL Taxonomy Extension Schema
101.CAL** XBRL Taxonomy Extension Calculation Linkbase
101.DEF** XBRL Taxonomy Extension Definition Linkbase
101.LAB** XBRL Taxonomy Extension Labels Linkbase
101.PRE** XBRL Taxonomy Extension Presentation Linkbase

 

*Previously filed.

 

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

 

**Filed Herewith

 

#Denotes management contract or compensatory plan or arrangement.

 

35

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: November 19, 2018August 30, 2019

 

INNERSCOPE HEARING TECHNOLOGIES, INC.

 

By:/s/ Matthew Moore                      

Matthew Moore

Chief Executive Officer (principal executive officer)

 

By:/s/ Kimberly Moore                       

Kimberly Moore

Chief Financial Officer (principal financial and accounting officer)

 

 

 

40