10-K: INNERSCOPE ADVERTISING AGENCY, INC.
Published: Mar 31, 2017 4:35 p.m. ET
(EDGAR Online via COMTEX) -- ITEM 7. 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 independent auditors' reports on our financial statements for the years ended December 31, 2016 and 2015 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 9 to the consolidated financial statements filed herein.
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 December 31, 2016 compared to the year ended December 31, 2015
Revenues
Revenues for the year ended December 31, 2016 were $1,897,688 compared to $872,329 for the year ended December 31, 2015. The revenue increase was primarily the result of the Marketing and Consulting agreements as well as the direct print and mail advertising services. For the year ended December 31, 2016, one customer accounted for 52% of our revenues and a related party customer accounted for the remaining 48%. For the year ended December 31, 2015, the related party customer accounted for approximately 83% of our revenues. A breakdown of the net increase in sales is as follows:
For the year ended December 31, 2016 2015 Related party-Marketing and consulting fee $ 586,667 $ 720,000 Related party-Direct print and mail services 330,353 - Total related party 917,020 720,000 Consulting and design and marketing fees 596,325 44,000 Direct print, mail services and misc. 384,343 108,329 Sub total 980,668 152,329 Total revenues $ 1,897,668 $ 872,329
Related Party
On August 5, 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. Prior to the sale, MFHC stores increased from 18 as of January 1, 2015 to 20 as August 5, 2016. The Company charged MHFC $3,200 per store per month effective January 1, 2014. Beginning April 1, 2016, through August 5, 2016, the Company also provided direct print and mail advertising services to MFHC.
Other
Consulting and design and marketing
For the year ended December 31, 2016, pursuant to the Consulting Agreement, the Company recorded consulting income of $402,777. Pursuant to the Consulting Agreement, the Company anticipates it will recognize $1,000,000 in consulting income for the year ended December 31, 2017. During the year ended December 31, 2016, the Company recorded design and marketing consulting income of $193,548 related to the Marketing Agreement. The Marketing Agreement was cancelled on January 2, 2017.
Direct print, mail service and miscellaneous
During the year ended December 31, 2016, the Company developed marketing materials including printing and mailing services for direct marketing campaigns and the sale of accessory products and recorded revenues of $384,343. The services were provided to the same client that was a party to the Consulting and Marketing Agreements. That client will not be utilizing our services in 2017, and the Company is currently seeking new customers to which to provide marketing materials, printing and mailing services.
Cost of sales
The Company records the costs of designing, producing, printing and mailing advertisements for our client's direct mail marketing campaigns in cost of sales as well as the licensing of telemarketing software. Cost of sales for the year ended December 31, 2016 and 2015 was as follows:
For the year ended December 31, 2016 2015 Related party $ 326,987 $ - Other 449,620 143,484 Total cost of sales $ 776,607 $ 143,484
The increase in related party cost of sales occurred beginning April 1, 2016, through August 5, 2016, when the Company incurred the costs pursuant to the direct print and mail advertising services provided to MFHC. Other increases were incurred pursuant to the direct print and mail advertising services provided to the same client that was a party to the Consulting and Marketing Agreements.
Operating Expenses Operating expenses increased to $1,076,454 for the year ended December 31, 2016 from $641,235 for the year ended December 31, 2015. The increase in expenses in the current period was as follows: For the year ended December 31, Description 2016 2015 Compensation and benefits $ 612,114 $ 484,846 Professional fees 136,828 77,838 Consulting fees, stockholder 241,666 - Rent, related party 33,078 54,000 General and other administrative 52,768 24,551 Total $ 1,076,454 $ 641,235
Compensation and benefits increased in the current year as a result of the Company, effective August 1, 2016, compensating the CEO and CFO at an annual rate of $225,000 and $125,000, respectively, as well as increased personnel costs related to telemarketing services on behalf of our customers. At the end of 2016, we reduced our staff and will increase personnel as necessary in 2017.
Professional fees for the year ended December 31, 2016, were $136,828 compared to $77,838 for the year ended December 31, 2015. Professional fees consisted of:
For the year ended December 31, 2016 2015 Legal fees $ 15,225 $ 2,500 Business consulting 30,695 30,000 Accounting and auditing fees 78,799 39,473 Information technology 12,109 5,865 Total $ 136,828 $ 77,838
Consulting fees, stockholder, were the result of the Company recording fees due on all amounts recognized as revenue in the period related to the Consulting Agreement and Store Expansion Agreement.
Rent, related party, decreased for the year ended December 31, 2016 compared to the year ended December 31, 2015 as a result of the sublease agreement with MFHC entered into on February 1, 2016 being terminated on April 30, 2016, which effectively decreased the monthly rent cost by $4,026. The Company expects monthly rent to increase effective February 1, 2017 to $8,436 per month on a month to month basis.
General and administrative costs increased to $52,768 for the year ended December 31, 2016, compared to $24,551 for the year ended December 31, 2015, respectively, and is comprised of the following:
For the year ended December 31, Description 2016 2015 Moving costs $ 4,596 $ - Transfer agent and filing fees 19,303 1,338 Bad debt expense 1,144 14,474 Investor relations 6,748 - Insurance 2,759 3,010 Other general and other administrative 18,218 5,729 Total $ 52,768 $ 24,551
Transfer agent and filing fees and investor relations costs increased for the year ended December 31, 2016, for expenses related to the Company's common stock to begin trading as a Depository Trust Company (DTC) eligible entity.
Other income, net
Other income increased to $62,169 for the year ended December 31, 2016 from $308 for the year ended December 31, 2015. The increase was primarily a result of the Company's gain on the cancellation of the Store Expansion Agreement with an unrelated party.
Net Income
Net income for the year ended December 31, 2016, was $69,744 compared to $70,853 for the year ended December 31, 2015, as a result of the above descriptions.
For the year ended December 31, 2015 compared to the year ended December 31, 2014
Revenues
Revenues for the year ended December 31, 2015 were $872,329 compared to $678,399 for the year ended December 31, 2014, of which $720,000 and $624,000 was from a related party, respectively. The increase for the year ended December 31, 2015 was primarily a result of an increase of approximately $98,000 from one customer and $96,000 of revenue related to the marketing agreement with Moore Family Hearing Company ("MFHC"), a related party. The Company anticipates revenue from non-related parties will decrease during the first and second quarters of 2016 compared to the same periods of 2015. Pursuant to the Marketing Agreement between the Company and MFHC, the Company develops and implements marketing programs to promote and sell hearing aid instruments and related services on a per store basis to MFHC. MFHC stores have increased from 18 as of January 1, 2014 to 20 by December 31, 2015. The Company charges MHFC $3,200 per store per month effective January 1, 2014. A summary of the net increase in sales is as follows:
For the years ended December 31, Description 2015 2014 Revenues from related party $ 720,000 $ 624,000 Other revenues 152,349 54,399 Total $ 872,329 $ 678,399
Operating Expenses
Operating expenses increased to $641,235 for the year ended December 31, 2015 from $638,321 for the year ended December 31, 2014. The increase in expenses in the current period was as follows:
For the years ended December 31, Description 2015 2014 Salaries, taxes and management fees $ 484,846 $ 526,328 Professional fees 77,838 50,100 Rent, related party 54,000 48,000 Other general and administrative 24,551 13,983 Total $ 641,235 $ 638,321
Salaries and management fees decreased in the current period as a result of the Company managing personnel costs related to telemarketing services.
Professional fees for the year ended December 31, 2015, included outside accounting and auditor fees of $39,473, business consulting fees of $30,000, $5,865 of fees paid to IT consultant and $2,500 of legal fees. Professional fees for the for the year ended December 31, 2014 included $40,000 paid to business and investor relations consultants, $2,255 auditing fees and $7,419 of fees paid to an IT consultant.
Rent increased for the year ended December 31, 2015 as a result of the sublease agreement with a third party. The Company expects monthly rent to increase to $5,526 per month beginning February 1, 2016.
General and administrative costs increased to $24,551 for the year ended December 31, 2015, compared to the year ended December 31, 2014 and is comprised of the following:
For the years ended December 31, Description 2015 2014 Payroll processing expenses $ 1,552 $ 4,248 Merchant processing fees 3,010 2,166 Bad debt expense 14,474 - Other General & Administrative 5.515 7,569 Total $ 24,551 $ 13,983
Net Income
Net income for the year ended December 31, 2015, was $70,853 compared to a net loss of $39,212 for the year ended December 31, 2014, as a result of the increases in revenues exceeding the increases in operating expenses.
Capital Resources and Liquidity
Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. As of December 31, 2016, we had cash and cash equivalents of $493,514, an increase of $425,673, from $67,841 as of December 31, 2015. At December 31, 2016, we had current liabilities of $419,426 compared to current assets of $653,478 which resulted in working capital of $228,928. The current liabilities are comprised of accounts payable, accrued expenses, amounts due to stockholders and related parties, income taxes payable and deferred revenue.
For the next twelve months, we expect to be able to meet our cash needed for our current operations from the cash on hand as well as amounts due under the Consulting Agreement. Our ability to operate beyond this, 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. We do not have any formal commitments or arrangements for the sale 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
The Company provided $425,761 cash from operating activities for the year ended December 31, 2016, compared to $70,895 for the year ended December 31, 2015. The cash was provided in 2016 from net income of $69,744, and an increase in liabilities of $390,526. Increases of $42,382 in assets reduced the net cash provided. The cash was provided in 2015 from net income of $70,853, bad debt expense of $14,473 and an increase in accounts payable of $25,201. Increases of $24,851 in amounts due from related party and an increase of allowances for doubtful accounts of $14,473 reduced the net cash provided.
Investing Activities
Cash used in investing activities was $88 for the year ended December 31, 2016 compared to $4,026 for the year ended December 31, 2015. The 2016 period was comprised of purchases of office equipment and the 2015 period was comprised of a security deposit.
Financing Activities
There was no financing activity for the years ended December 31, 2016 and 2015.
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 the United States of America ("US GAAP"). The 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.
Emerging Growth Companies
The Company qualifies as an "emerging growth company" under the 2012 JOBS Act.
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. Significant estimates relied upon in preparing these financial statements include collectability of accounts receivable, accounts receivable from a related party and notes receivable from an officer, inventory allowances for slow moving or obsolete inventory and the allocation of our President's compensation to the Company. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original term of three months or less to be cash equivalents. These investments are carried at cost, which approximates fair value. Cash and cash equivalent balances may, at certain times, exceed federally insured limits. If the amount of a deposit at any time exceeds the federally insured amount at a bank, the uninsured portion of the deposit could be lost, in whole or in part, if the bank were to fail.
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 recognizes revenue in accordance with FASB ASC 605, Revenue Recognition. ASC 605 requires that four basic criteria are met (1) persuasive evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably assured. The Company recognizes revenue during the period in which the services are performed. For the year ended December 31, 2016, the Company recognized $596,325 into revenue related to the Marketing and Consulting Agreements. During the same periods the Company recognized zero revenue related to the Store Expansion agreement.
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. As of December 31, 2016, the Company has deferred revenue of $222,223 related to the Consulting Agreement.
Advertising and Marketing Expenses
The Company expenses advertising and marketing costs as incurred. For the year ended December 31, 2016 and 2015, the Company did not incur any advertising and marketing expenses.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, amount due from related party (MFHC), notes and interest receivable officer and accounts payable. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities. The estimated fair value is not necessarily indicative of the amounts the Company would realize in a current market exchange or from future earnings or cash flows.
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.
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), after deducting preferred stock dividends accumulated during the period, 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 December 31, 2016 and 2015, the Company did not have any outstanding common stock equivalents or any other potentially dilutive securities.
Mar 31, 2017
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