INNERSCOPE HEARING TECHNOLOGIES, INC. 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
The independent auditors' reports on our financial statements for the years
ended
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 auditors have raised a substantial doubt about our ability to continue as a going concern.
Results of Operations
For the year ended
Revenues
Revenues for the year ended
Online sales
Beginning in the second quarter of 2018, the Company began to market a line of PSAPs 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, which resulted in increase in sales in 2019.
Retail clinic sales
Retail clinic sales significantly decreased in 2020 as a number of retail locations were closed due to COVID-19. As a result, the Company experienced a negative impact to its operating results.
Cost of sales
The Company records the costs of designing, producing, printing and mailing
advertisements for our client's direct mail marketing campaigns in cost of sales
in the month of the mailing as well as the licensing of telemarketing software
and records cost of sales on products sold online or it its retail locations,
when shipped and delivered to the customer, respectively. Cost of sales for the
year ended
Operating Expenses
Operating expenses were
Year ended December 31,
Description 2020 2019
Compensation and benefits $ 661,840 $ 1,575,395
Advertising and promotion 19,762 485,406
Professional fees 114,476 763,157
Rent, including related party 322,879 424,613
Investor relations 14,796 193,696
Depreciation and Amortization expense 123,646 150,024 Other general and administrative
69,188 502,908
$ 1,326,587 $ 4,095,200 Compensation and benefits decreased in the current period due to overall decrease in operations due to COVID-19.
18 Professional fees, for the year endedDecember 31, 2020 were$114,476 compared to$763,157 for the year endedDecember 31, 2019 . Professional fees, consisted of: Year ended December 31, Description 2020 2019 Accounting and auditing fees$ 45,383 $ 100,747 Legal fees 3,228 10,362 Consulting 65,865 652,048 Total$ 114,476 $ 763,157
Rent, including related party, decreased for the year ended
General and administrative costs were
Other income (expense), net
Other expense, net was
Net loss
Net loss for the year ended
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
Our ability to operate over the next 12 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
Operating Activities
Cash used in operating activities was
The Company used
Investing Activities
Cash used in investing activities was
19 Financing Activities
For the year ended
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 consolidated financial statements are prepared in accordance
with Generally Accepted Accounting Principles in
Emerging Growth Companies
The Company qualifies as an "emerging growth company" under the 2012 JOBS Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to take advantage of the benefits of this extended transition period.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original term of three months or less to be cash equivalents. These investments are carried at cost, which approximates fair value. Cash and cash equivalent balances may, at certain times, exceed federally insured limits. If the amount of a deposit at any time exceeds the federally insured amount at a bank, the uninsured portion of the deposit could be lost, in whole or in part, if the bank were to fail.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to significant risk on its cash due to the financial position of the depository institution in which those deposits are held.
Revenue Recognition
The Company has adopted ASU 2014-09, as amended effective
I. Identify the contract with a customer
II. Identify the performance obligations in the contract
III. Determine the transaction price
IV. Allocate the transaction price to the performance obligations in the contract
V. Recognize revenue when (or as) the entity satisfies a performance obligation.
20
The Company's contracts with customers are generally on a purchase order basis
and represent obligations that are satisfied at a point in time as defined in
the new guidance. Accordingly, revenue for each sale is recognized when each
sale is complete, which is when the customer receives the goods and 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. All goods are
delivered to the customer using public carriers. Company bears any loss during
transit. As of
Deferred Revenue
The Company records deferred revenues from the Consulting Agreement when cash has been received, but the related services have not been provided. Deferred revenue will be recognized when the services are provided, and the terms of the agreements have been fulfilled.
Advertising and Marketing Expenses
The Company expenses advertising and marketing costs as incurred. For the years
ended
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 years ended
Fair Value of Financial Instruments
The Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.
The following are the hierarchical levels of inputs to measure fair value:
• Level 1 - Observable inputs that reflect quoted market prices in active markets
for identical assets or liabilities.
• Level 2 - Inputs reflect quoted prices for identical assets or liabilities in
markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
• Level 3 - Unobservable inputs reflecting the Company's assumptions incorporated
in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
The carrying amounts of the Company's financial assets and liabilities, such as cash, prepaid expenses, accounts receivable, accounts payable and accrued expenses, certain notes payable and notes payable - related party, approximate their fair values because of the short maturity of these instruments.
The following table represents the Company's financial instruments that are
measured at fair value on a recurring basis as of
December 31, 2019
Level 1 Level 2 Level 3 Total
Derivative liabilities $ - $ - $ 3,515,055 $ 3,515,055
$ - $ - $ 3,515,055 $ 3,515,055
December 31, 2020
Level 1 Level 2 Level 3 Total
Derivative liabilities $ - $ - $ 4,046,401 $ 4,046,401
$ - $ - $ 4,046,401 $ 4,046,401
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IncomeTaxes
The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes. Deferred tax assets and liabilities are recognized to reflect the estimated future tax effects, calculated at the tax rate expected to be in effect at the time of realization. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. Interest and penalties are classified as a component of interest and other expenses. To date, the Company has not been assessed, nor paid, any interest or penalties.
Uncertain tax positions are measured and recorded by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized.
Earnings (loss) Per Share
The Company reports earnings (loss) per share in accordance with ASC 260,
"Earnings per Share." Basic earnings (loss) per share is computed by dividing
net income (loss) by the weighted-average number of shares of common stock
outstanding during each period. Diluted earnings per share is computed by
dividing net loss by the weighted-average number of shares of common stock,
common stock equivalents and other potentially dilutive securities outstanding
during the period. As of
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