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 year ended December 31, 2019 and filed by the Company on Form 10-K with the Securities and Exchange Commission on September 14, 2022.

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, 2020 and 2019 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 4 to the unaudited condensed consolidated financial statements.

Corporate History and Current Business

InnerScope Hearing Technologies, Inc. ("Company", "InnerScope") is a Nevada Corporation incorporated on June 15, 2012, with its principal place of business in Roseville, California. The Company was originally named InnerScope Advertising Agency, Inc. and was formed to provide advertising and marketing services to retail establishments in the hearing device industry. On August 25, 2017, the Company changed its name to InnerScope Hearing Technologies, Inc. to better reflect the Company's current direction as a technology driven company with a scalable business to business (BTB) solution and business to consumer (and BTC) solution. The Company also competes in the DTC (Direct-to-Consumer) markets with its own line of "Hearables", and "Wearables", including APPs on the iOS and Android markets. On September 10, 2018, the Company acquired all of the assets and assumed certain liabilities of Kathy L Amos Audiology ("Amos Audiology") in exchange for 340,352 shares of common stock (the "Acquisition"). Amos Audiology provides retail hearing aid sales and audiological services in the East Bay area of San Francisco. Additionally, the Company has opened 9 retail hearing device clinics, manages two clinics owned by a related party and plans on using management's unique and successful talents on acquiring and opening additional audiological brick and mortar clinics to be owned and operated by the Company.




Results of Operations

For the three months ended March 31, 2020 compared to the three months ended March 31, 2019 revenues. Revenues for the three months ended March 31, 2020 were $81,139 compared to $186,529 for the three months ended March 31, 2019. The revenue decrease was primarily due to COVID-19.




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. Online sales are down in the current periods due to the marketing resources being reallocated to the Retail Centers sales operations. Online marketing platforms are ready to go with the potential of revenue increases, once the company has the proper capital resources to be allocated to online marketing. Online sales will be a major part and focus of management once the company is properly capitalized.





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Related Party

On December 24, 2016, Moore Holdings, LLC. ("Moore Holdings") acquired two retail stores from the buyer of the MFHC stores. On March 1, 2017, the Company entered into a twelve-month Marketing Agreement with each of the stores to provide telemarketing and design and marketing services for $2,500 per month per store, resulting in $0 and $15,000 of revenues for the three months ended March 31, 2020 and 2019. The Marketing Agreement was terminated during year ending December 31, 2019.



Cost of sales

The Company records cost of sales on products sold in the retail clinics on delivery to the customer and for online sales, when shipped. We recognize the costs of designing, producing, printing and mailing advertisements for our client's direct mail marketing campaigns in cost of sales in the month of the mailing as well as the licensing of telemarketing software. Cost of sales for the three months ended March 31, 2020 and 2019, was $48,852 and $82,364.

Operating Expenses

Operating expenses were $473,854 and $976,731 for the three months ended March 31, 2020 and 2019. The increase in expenses in the current periods was as follows:



Operating Expenses:                                  March 31, 2020       March 31, 2019
Compensation and benefits (including stock-based
fees of $0 and $14,084, respectively)                       210,769              363,737
Advertising and promotion                                     9,689              167,784
Professional fees (including stock-based fees of
$0 and $110,416, respectively)                               67,037              137,394
Rent, including related party                                80,963               95,929
Investor relations                                           12,797               75,248
Depreciation and Amortization expense                        31,302                   -
Other general and administrative                             60,737              136,639
Total operating expenses                                    473,294              976,731

Overall decrease in operating expenses across the board was mainly due to shutdowns related to COVID-19.

Increase in depreciation and amortization is mainly related amortization of the Technology Fee Access.





Other income (expense), net

Other expenses, net, were $5,758,943 for the three months ended March 31, 2020, compared to other expenses of $1,130,472 for the three months ended March 31, 2019. Interest expense of $747,007, including amortization of debt discounts increased significantly compared to interest expense of $506,742 for the three months ended March 31, 2019. For the three months ended March 31, 2020, a derivative loss of $5,027,581 compared to derivative expenses of $577,838 for the three months ended March 31, 2019. Also included in other expenses for the threemonths ended March 31, 2019, was a loss on extinguishment of debt of

$44,852. There was a gain on equity investment in the amount of $15,645 during three months ended March 31, 2020 and a loss of $1,040 during three months ended March 31, 2019.




Net loss

Net loss for the three months ended March 31, 2020, was $6,200,510 compared to net loss of $2,003,038 for the three months ended March 31, 2019, as a result of the changes in operating and other expenses as described above.

Capital Resources and Liquidity

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs to pay ongoing obligations. As of March 31, 2020, we had cash of $11,868, an increase of $7,409, from $4,459 as of December 31, 2019. As of March 31, 2020, we had current liabilities of $13,354,401 (including derivative liabilities of $8,204,211) compared to current assets of $168,375 which resulted in working capital deficit of $13,186,026. 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.





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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. We do not have any formal commitments or arrangements for the sales of stock or the advancement or loan of funds at this time.



Operating Activities

Cash used in operating activities was $194,019 for the three months ended March 31, 2020 compared to $785,106 for the three months ended March 31, 2019. For the three months ended March 31, 2020, the cash used in operations was a result of the net loss of $6,200,510, a loss on fair value of derivatives of $5,027,582, amortization of debt discount in the amount of $628,163, depreciation and amortization in the amount of $31,300, gain on equity investment in the amount of $15,645 and the changes in operating assets and liabilities of $335,091. For the three months ended March 31, 2019, the cash used in operations was a result of the net loss of $2,003,038, a loss on fair value of derivatives of $577,838, amortization of debt discount in the amount of $456,030, depreciation and amortization in the amount of $111,226, loss on equity investment in the amount of $1,040, loss on debt extinguishment in the amount of $44,852, non-cash interest expense of $2,500, stock-based compensation of $124,500 and the changes in operating assets and liabilities of $100,054.





Investing Activities

Cash used in investing activities was $2,672 for the three months ended March 31, 2020 and consisted of purchases of equipment of $2,672. Cash used in investing activities was $26,503 for the three months ended March 31, 2019 and consisted of purchases of equipment of $17,322 and payment of security deposit of $9,181.




Financing Activities

For the three months ended March 31, 2020, cash provided by financing activities was $204,100 compared to $758,697 for the three months ended March 31, 2019. For the three months ended March 31, 2020, the Company has received $199,650, net of debt issuance costs, from the issuance of convertible notes. Further a $4,450 change in bank overdraft occurred during three months ending March 31, 2020. For the three months ended March 31, 2019, the Company has received $813,475 from the issuance of $996,670 of convertible notes and cash of $7,400 from the issuance of a note payable of $8,584. For the three months ended March 31, 2019, the Company made payments of $20,784 on notes payable, and net repayments of $41,394 to a related party resulting in net cash provided by financing activities of $758,697.

OFF BALANCE SHEET ARRANGEMENTS

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



Critical Accounting Policies


Basis of presentation

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





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.





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Revenue Recognition

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

The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.

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




Income taxes

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

Net loss per common share

The Company reports earnings (loss) per share in accordance with ASC 260, "Earnings per Share." Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net loss by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding during the period. As of March 31, 2020 and 2019, the Company's outstanding convertible debt is convertible into approximately 19,095,107,143 and 79,395,431 shares of common stock, subject to adjustment based on changes in the Company's stock price, respectively. This amount is not included in the computation of dilutive loss per share because their impact is antidilutive.

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