The statements contained in this report that are not statements of historical
fact, including without limitation, statements containing the words "believes,"
"expects," "anticipates" and similar words, constitute forward-looking
statements that are subject to a number of risks and uncertainties. From time to
time we may make other forward-looking statements. Investors are cautioned that
such forward-looking statements are subject to an inherent risk that actual
results may materially differ as a result of many factors, including the risks
discussed from time to time in this report, including the risks described under
"Risk Factors" in any filings we have made with the SEC.
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
certain assets and liabilities, certain disclosures at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Significant estimates affecting the financial statements have
been prepared on the basis of the most current and best available information.
However, actual results from the resolution of such estimates and assumptions
may vary from those used in the preparation of the financial statements.
Background
The Company was formed in Nevada in August 30, 2002 as IntelSource Group, Inc.
and began operations in 2003. In 2007, IntelSource Group, Inc. merged with
ElectroMedical Technologies, LLC. The Company began acting as Electro Medical
Technologies, LLC, an Arizona limited liability company on November 9, 2010
after the merger with ElectroMedical Technologies, LLC, a Nevada Company. The
Company converted to a corporation in the State of Delaware on August 23, 2017.
Electromedical Technologies is a bioelectronics manufacturing and marketing
company. We offer U.S. Food and Drug Administration (FDA) cleared medical
devices for pain management.
Bioelectronics is a developing field of "electronic" medicine, which uses
electrical impulses over the body's neural circuitry to try to alleviate pain,
without drugs. The human body is controlled by electrical signals sent through
the nervous system, which can become distorted after accidents or as a result of
disease. The field of bioelectronic medicine aims to safely correct
irregularities in the nervous system by modifying the electrical language of the
body related to pain relief.
Our mission is to improve global wellness for people suffering from various
painful conditions by relieving chronic and acute pain using energy, frequency
and vibration as an alternative to pharmaceuticals; and one day, read and
modifies electrical signals passing along nerves in the body, to restore
long-term health.
Additionally, we have a corporate goal to offer the public effective
alternatives to addictive pain -relieving drugs, such as opioids. According to
the Society of Actuaries, opioid overdose deaths are now the single largest
factor slowing the growth in U.S. life expectancy and has led to stagnation or
decreases in life expectancy three years in a row for the first time since
1915-1918, when the country was facing World War I and the Spanish flu pandemic.
The U.S. Centers of Disease Control and Prevention (CDC) has reported that, from
1999 through 2017, nearly 400,000 have died from overdoses from prescription or
illicit opioids. It is our aim to offer effective alternatives to pain
management.
Results of Operations
Overview and Financial Condition
Going Concern
Since inception, the Company has incurred approximately $20.2 million of
accumulated net losses. In addition, during the nine months ended September 30,
2022, the Company used $740,238 in operations and had a working capital deficit
of $1,784,690. These factors raise substantial doubt regarding the Company's
ability to continue as a going concern. The Company expects to obtain funding
through additional debt and equity placement offerings until it consistently
achieves positive cash flows from operations. If the Company is unable to obtain
additional funding, it may not be able to meet all of its obligations as they
come due for the next twelve months. The continuing viability of the entity and
its ability to continue as a going concern is dependent upon the entity being
successful in its continuing efforts in growing its revenue base and/or
accessing additional sources of capital, and/or selling assets.
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As a result, there is significant uncertainty whether the entity will continue
as a going concern and, therefore, whether it will realize its assets and settle
its liabilities and commitments in the normal course of business and at the
amounts stated in the financial statements.
Accordingly, no adjustments have been made to the financial statements relating
to the recoverability and classification of the asset carrying amounts or the
amount and classification of liabilities that might be necessary should the
entity not continue as a going concern. At this time, management is of the
opinion that no asset is likely to be realized for an amount less than the
amount at which it is recorded in the financial statements at September 30,
2022.
While priority is on generating cash from operations through the sale of the
Company's products, management is also seeking to raise additional working
capital through various financing sources, including the sale of the Company's
equity and/or debt securities, which may not be available on commercially
reasonable terms, if at all. If such financing is not available on satisfactory
terms, we may be unable to continue our business as desired and our operating
results will be adversely affected. In addition, any financing arrangement may
have potentially adverse effects on us and/or our shareholders. Debt financing
(if available and undertaken) will increase expenses, must be repaid regardless
of operating results and may involve restrictions limiting our operating
flexibility. If we issue equity securities to raise additional funds, the
percentage ownership of our existing shareholders will be reduced and the new
equity securities may have rights, preferences or privileges senior to those of
the current holders of our shares of Common Stock.
The following table sets forth the unaudited results of our operations for the
three months ended September 30,
2022 2021
Net Sales $ 279,551 $ 301,157
Cost of goods sold: 58,008 66,733
Gross profit 221,543 234,424
Operating Expenses 558,919 454,997
Loss from operations (337,376) (220,573)
Other expense (620,570) (3,079,233)
Net Loss $ (957,946) $ (3,299,806)
Operating Results
July 1, 2022 through September 30, 2022 Compared to July 1, 2021 through
September 30, 2021
Our sales totaled $279,551 for the three months ended September 30, 2022 and
$301,157 for the three months ended September 30, 2021, a decrease of $21,606 or
7%. The decrease was due to fewer unit sales.
Cost of sales and gross margins for the three months ended September 30, 2022
and for the three months ended September 30, 2021 were $58,008 and 79% and
$66,733 and 78%, respectively. Our cost of sales consists of the cost of
materials and distribution expenses. Cost of sales and gross margins are
affected by product mix as well as the mix in the level of sales between
commissioned agents and distributors.
The following table sets forth the operating expenses for the three months ended
September 30:
2022 2021 Change
Sales and marketing $ 19,221 $ 8,309 $ 10,912
Commissions 56,020 61,663 (5,643)
Payroll related 229,748 203,215 26,533
Consulting and professional fees 159,676 130,343 29,333
Research and development 15,000 9,843 5,157
Other operating expenses 79,254 41,624 37,630
$ 558,919 $ 454,997 $ 103,922
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The following table sets forth the stock- based compensation expense included in
the above operating expenses for the three months ended September 30:
2022 2021 Change
Sales and marketing $ 8,000 - 8,000
Commissions - - -
Payroll related 10,000 - 10,000
Consulting and professional fees 35,000 - 35,000
Research and development - - -
Other operating expenses - - -
53,000 $ - $ 53,000Selling, general and administrative expenses consist primarily of payroll
related expenses, commissions, consulting and professional fees, sales and
marketing, research and development and other operating expenses. Selling,
general and administrative expenses totaled $558,919 for the three months ended
September 30, 2022 and $454,997 for the three months ended September 30,2021 an
increase of $103,922 or about 23%. The change is primarily due to increases in
sales and marketing, payroll related, consulting and professional fees and other
operating expenses. The increase in sales and marketing is primarily related to
trade show costs as the Company resumes attendance. The increase in payroll
related costs reflects the hiring of a new sales director, stock issued to the
Company's CEO, partially offset by a decrease in cash bonus paid to the
Company's CEO. The increase in consulting in professional fees reflects stock
issued to a member of the Company's board of directors under a consulting
agreement. Other operating expenses in the three months ended September 30, 2022
include increased public company insurance premiums and increased travel for
sales and marketing efforts.
Other expense decreased by $2,458,663 primarily due to the change in fair market
value of derivative liabilities and a decrease in interest expense, partially
offset by a loss on extinguishment of debt The decrease in interest expense
reflects a decrease in the amortization of debt discount related to debt
conversions and maturities that occurred since June 2021 as well as no day 1
derivative loss for newly incurred debt in the 2022 period, as compared to the
2021 period. All derivative liabilities were settled as of December 31, 2021.
The loss on extinguishment of debt of $460,000 is the result of additional
shares to be issued in conjunction with previously settled convertible notes
payable and a consulting agreement.
As a result of the foregoing, we recorded a net loss of $957,946 for the three
months ended September 30, 2022, compared to a net loss of $3,299,806 for the
three months ended September 30, 2021. The decrease in net loss is primarily
attributed to the decrease in interest expense and change in fair market value
of derivative liabilities, partially offset by the loss on extinguishment of
debt and increased operating expenses.
The following table sets forth the unaudited results of our operations for the
nine months ended September 30:
2022 2021
Net Sales $ 726,696 $ 670,551
Cost of goods sold: 170,984 158,065
Gross profit 555,712 512,486
Operating Expenses 1,901,908 2,822,251
Loss from operations (1,346,196) (2,309,765)
Other expense (1,292,217) (4,324,957)
Net Loss $ (2,638,413) $ (6,634,722)January 1, 2022 through September 30, 2022 Compared to January 1, 2021 through
September 30, 2021
Our sales totaled $726,696 for the nine months ended September 30, 2022 and
$670,551 for the nine months ended September 30, 2021. The increase is primarily
related to an increase in units sold.
Cost of sales and gross margins for the nine months ended September 30, 2022 and
for the nine months ended September 30, 2021 were $170,984 and 76% and $158,065
and 76%, respectively. Our cost of sales consists of the cost of materials and
distribution expenses. Cost of sales and gross margins are affected by product
mix as well as the mix in the level of sales between commissioned agents and
distributors.
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The following table sets forth the operating expenses for the nine months ended
September 30:
2022 2021 Change
Sales and marketing $ 25,319 $ 82,676 $ (57,357)
Commissions 143,267 150,303 (7,036)
Payroll related 691,501 1,161,132 (469,631)
Consulting and professional fees 831,601 1,161,082 (329,481)
Research and development 45,000 152,064 (107,064)
Other operating expenses 165,220 114,994 50,226
$ 1,901,908 $ 2,822,251 $ (920,343)The following table sets forth the stock- based compensation expense included in
the above operating expenses for nine months ended September 30:
2022 2021 Change
Sales and marketing $ 8,000 $ - $ 8,000
Commissions - - -
Payroll related 14,703 604,890 (590,187)
Consulting and professional fees 461,900 804,237 (342,337)
Research and development - - -
Other operating expenses - - -
$ 484,603 $ 1,409,127 $ (924,524)Selling, general and administrative expenses consist primarily of payroll
related expenses, commissions, consulting and professional fees, sales and
marketing, research and development and other operating expenses. Selling,
general and administrative expenses totaled $1,901,908 for the nine months ended
September 30, 2022 and $2,822,251 for the nine months ended September 30, 2021,
a decrease of $920,343 or about 33%. The change is primarily due to decreases in
stock-based compensation expense of $924,524, research and development costs of
$107,064 and marketing costs of $49,357, partially offset by non -stock-based
compensation related increases in payroll related costs of $120,556 and other
operating expenses of $50,226. Stock-based compensation expense for the nine
months ended September 30, 2021, includes $804,237 related to third party
agreements for financial and strategic advisory services and $604,890 related to
shares of common stock issued to the Company's CEO as compensation. Stock-based
compensation expense for the nine months ended September 30, 2022, includes
$461,900 related to third party agreements for financial and strategic advisory
services and $10,000 for shares of Series A preferred stock issued to the
Company's CEO as compensation.
The decrease in research and development costs reflects the initial development
payment of approximately $122,000 made under contract in the 2021 period.
Ongoing payments are made upon achievement of certain contractual milestones.
The decrease in consulting and professional fees is the result of stock-based
compensation recorded in conjunction with shares issued for investor relations
and financial advisory services. The decrease in marketing expenses is due to
the termination of various third- party arrangements.
The non -stock-based compensation increase in payroll related costs consists
primarily of additional employee headcount and an increase in bonus paid to the
Company's CEO of approximately $29,000. The non-stock-based compensation
increase in other operating expenses relates primarily to costs associated
public company insurance premiums and increased travel for sales and marketing
efforts.
Other expense decreased by $3,032,740 primarily due to a decrease in interest
expense of $2,427,434, and a decrease in gain in the change in fair market value
of derivative liabilities of $1,436,756, partially offset by a loss on
extinguishment of debt of $781,800. The decrease in interest expense reflects a
decrease in the amortization of debt discount related to debt conversions and
maturities that occurred since June 2021 as well as no day 1 derivative loss for
newly incurred debt in the 2022 period, as compared to the 2021 period. All
derivative liabilities were settled as of December 31, 2021.
As a result of the foregoing, we recorded a net loss of $2,638,413 for the nine
months ended September 30, 2022, compared to a net loss of $6,634,722 for the
nine months ended September 30, 2021. The decrease in net loss is primarily
attributed to the decrease in other expense, the decrease in selling, general
and administrative expenses and increased gross profit.
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COVID-19 may impact our business.
On January 30, 2020, the World Health Organization declared the COVID-19
outbreak a "Public Health Emergency of International Concern" and on March 11,
2020, declared it to be a pandemic. Actions taken around the world to help
mitigate the spread of the COVID-19 include restrictions on travel, and
quarantines in certain areas, and forced closures for certain types of public
places and businesses. COVID-19, and actions taken to mitigate it, have had and
are expected to continue to have an adverse impact on the economies and
financial markets of many countries, including the geographical areas in which
we operate. While it is unknown how long these conditions will last and what the
complete financial effect will be to the Company, COVID-19 may have an adverse
effect on our business. While we are taking diligent steps to mitigate any
possible disruptions to our business, we are unable to predict the extent or
nature of these impacts, at this time, to our future financial condition and
results of operations.
Liquidity and Capital Resources
During the nine months ended September 30, 2022 our cash and cash equivalents
increased by $75,745 reflecting cash used in operations of $740,238, offset by
net proceeds from financing activities of $815,983. At September 30, 2022, the
Company had a working capital deficit of $1,784,690 and cash on hand of
$458,915. During the nine months ended September 30, 2021, our cash and cash
equivalents decreased by $100,103, reflecting cash provided by financing
activities of $805,970, offset by cash used in operations of $906,073.
Operating Activities
Cash flows used in operating activities totaled $740,238 for the nine months
ended September 30,2022 as compared to cash flows used of $906,073 for the nine
months ended September 30, 2021. The change in cash flows used in operating
activities is primarily the result of a decrease in inventory purchases,
increases in accounts payable and accrued liabilities as well as a decrease in
the loss from operations.
Financing Activities
Cash flows provided by financing activities totaled $815,983 for the nine months
ended September 30, 2022 as compared to $805,970 for the nine months ended
September 30, 2021. The cash flows provided in the 2022 period reflect
$1,545,140 in net proceeds from convertible promissory notes and $42,766 from
the sale of common stock, partially offset by repayment of convertible
promissory notes and related party notes payable totaling $751,223. The cash
flows provided in the 2021 period are primarily the result of $937,500 in net
proceeds from convertible promissory notes partially offset by related party
notes payable repayments totaling $99,000.
During the nine months ended September 30, 2022, the Company issued convertible
promissory notes to certain investors totaling $1,859,480 with net proceeds of
$1,545,140. Original issue discount totaling $185,580, loan costs totaling
$128,760 and the fair value of warrants issued or to be issued to third party
advisors of $110,602 have been recorded as a discount on the notes. The notes
accrue interest at 12% per annum and have initial conversion prices of
$0.015-$0.025 subject to adjustment and mature nine months to one year from
issuance. As additional consideration for the financings, the Company issued the
lenders three to five-year warrants to purchase a total of 21,000,000 shares of
common stock at an initial price of $0.025 per share, and three to five-year
trigger warrants to purchase a total of 173,000,000 shares of common stock at
$0.015- $0.025 per share, subject to price adjustments for certain actions,
including dilutive issuances. The relative fair value of the warrants totaling
$385,422 has been recorded as a discount on the notes. The trigger warrants may
only be exercised if the convertible promissory notes are not paid in full at
the maturity dates. The warrants do not provide for registration rights.
In January and February 2022, the Company sold 1,500,000 shares of common stock
at prices ranging from $0.0259- $0.0353 under a stock purchase agreement with
net proceeds totaling $42,766.
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ELECTROMEDICAL TECHNOLOGIES, INC. 
