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 and nine months ended September 30, 2020 compared to the three and
nine months ended September 30, 2019 revenues.
Revenues for the three months ended September 30, 2020 were $47,331 compared to
$250,781 for the three months ended September 30, 2019. The revenue decrease was
primarily due to COVID-19. Revenues for the nine months ended September 30, 2020
were $144,318 compared to $656,983 for the nine months ended September 30, 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 nine months ended
September 30, 2020 and 2019. There was no such revenue during three months ended
September 30, 2020 and 2019. The Marketing Agreement was terminated.
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 September 30, 2020 and 2019, was $5,687and $103,010. Cost
of sales for the nine months ended September 30, 2020 and 2019, was $63,049 and
$284,837.
Operating Expenses
Operating expenses were $349,607 and $1,002,985 for the three months ended
September 30, 2020 and 2019, respectively, and $1,161,773 and $3,118,674 for the
nine months ended September 30, 2020 and 2019, respectively. The increase in
expenses in the current periods was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
Operating Expenses: 2020 2019 2020 2019
Compensation and benefits 202,511 462,770 559,792 1,261,594
Advertising and promotion 3,703 197,733 19,775 575,050
Professional fees 7,527 92,966 102,885 404,550
Rent, including related party 91,549 100,240 255,427 294,302
Investor relations - 11,297 14,795 176,073
Depreciation and Amortization expense 30,760 - 93,364 -
Other general and administrative 13,557 137,979 115,735 407,105
Total operating expenses $ 349,607 $ 1,002,985 $ 1,161,773 $ 3,118,674Overall 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 $143,050 for the three months ended September 30,
2020, compared to $616,833 for the three months ended September 30, 2019.
Interest expense of $100,539 significantly decreased compared to interest
expense of $1,109,565 for the three months ended September 30, 2019.
Amortization of debt discount of $184,552 decreased compared to amortization of
$1,002,192 for the three months ended September 30, 2019. For the three months
ended September 30, 2020, derivative income of $126,561 decreased compared to
derivative income of $501,977 for the three months ended September 30, 2019.
There was a gain on equity investment in the amount of $15,450 during three
months ended September 30, 2020 and a loss of $9,245 during three months ended
September 30, 2019.
Other expenses, net, were $3,127,859 for the nine months ended September 30,
2020, compared to $2,233,968 of other expenses, net, for the nine months ended
September 30, 2019. Interest expense of $445,858 significantly decreased
compared to interest expense of $2,344,763 for the nine months ended September
30, 2019. Amortization of debt discount of $1,143,973 decreased compared to
amortization of $2,183,394 for the nine months ended September 30, 2019. For the
nine months ended September 30, 2020, a derivative loss of $1,561,010 increased
compared to derivative income of $159,617 for the nine months ended September
30, 2019. Also included in other expenses, net, for the ninemonths ended
September 30, 2019, was a loss on extinguishment of debt of $44,393. There was a
gain on equity investment in the amount of $22,982 during nine months ended
September 30, 2020 and a loss of $4,429 during nine months ended September 30,
2019.
22
Net Income/Loss
Net loss for the three months ended September 30, 2020, was $451,013 compared to
net loss of $1,472,047 for the three months ended September 30, 2019, as a
result of the changes in operating and other expenses as described above. Net
loss for the nine months ended September 30, 2020, was $4,208,363 compared to
net loss of $4,980,496 for the nine months ended September 30, 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 September 30, 2020, we had
cash of $4,736, an increase of $277, from $4,459 as of December 31, 2019. As of
September 30, 2020, we had current liabilities of $10,816,207 (including
derivative liabilities of $4,596,530) compared to current assets of
$130,372which resulted in working capital deficit of $10,685,835. 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.
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 $461,329 for the nine months ended
September 30, 2020 compared to $2,282,037 for the nine months ended September
30, 2019. For the nine months ended September 30, 2020, the cash used in
operations was a result of the net loss of $4,208,363, a loss on fair value of
derivatives of $1,561,011, amortization of debt discount in the amount of
$1,143,973, depreciation and amortization in the amount of $93,364, gain on
equity investment in the amount of $9,543 and the changes in operating assets
and liabilities of $888,272. For the three months ended September 30, 2019, the
cash used in operations was a result of the net loss of $4,980,496 a gain on
fair value of derivatives of $159,617, amortization of debt discount in the
amount of $1,181,202, depreciation and amortization in the amount of $317,388, a
loss on equity investment in the amount of $4,429, loss on debt extinguishment
in the amount of $44,393, non-cash interest expense of $2,500, stock-based
compensation of $554,791, and the changes in operating assets and liabilities of
$248,819.
Investing Activities
Cash used in investing activities was $18,789 for the nine months ended
September 30, 2020 and consisted of purchases of equipment of $5,349 and changes
in equity investment of $13,440. Cash used in investing activities was $73,095
for the nine months ended September 30, 2019 and consisted of purchases of
equipment of $49,614 and payment of security deposit of $23,481.
Financing Activities
For the nine months ended September 30, 2020, cash provided by financing
activities was $480,395 compared to $2,277,783 for the nine months ended
September 30, 2019. For the nine months ended September 30, 2020, the Company
has received $199,650, net of debt issuance costs, from the issuance of
convertible notes and $262,445 proceeds from Paycheck Protection Program loan.
Further a $18,300 change in bank overdraft occurred during nine months ending
September 30, 2020. For the nine months ended September 30, 2019, the Company
has received $2,308,775 from the issuance of convertible notes and cash of
$89,100 from the issuance of a note payable. For the nine months ended September
30, 2019, the Company made payments of $102,530 on notes payable, and net
advances of $17,562 to a related party resulting in net cash provided by
financing activities of $2,277,783.
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.
23
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.
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 September 30, 2020 and 2019, the Company's outstanding
convertible debt is convertible into approximately 4,707,741,429 and 393,621,118
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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INNERSCOPE HEARING TECHNOLOGIES, INC. 
