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 $17.8 million of
accumulated net losses. In addition, during the three months ended March 31,
2022, the Company used $317,845 in operations and had a working capital deficit
of $1,746,298. 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
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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.
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 March 31, 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 March 31,
2022 2021
Net Sales $ 221,894 $ 166,440
Cost of goods sold: 67,641 41,951
Gross profit 154,253 124,849
Operating Expenses 879,810 1,689,383
Loss from operations (725,557) (1,564,534)
Other expense (418,979) (995,850)
Net Loss $ (1,144,536) $ (2,560,384)
Operating Results
January 1, 2022 through March 31, 2022 Compared to January 1, 2021 through March
31, 2021
Our sales totaled $221,894 for the three months ended March 31,2022 and $166,440
for the three months ended March 31, 2022, an increase of $55,454 or 33% The
increase is primarily related to an increase in units sold, partially offset by
a decrease in average selling price. In the 2021 period, the COVID -19 pandemic
had an impact on worldwide manufacturing and supply and affected our ability to
replenish inventory. In addition, we were not able to attend trade shows.
Cost of sales and gross margins for the three months ended March 31,2022 and for
the three months ended March 31, 2021 were $67,641 and 70% and $41,951 and 75%,
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. In addition, increased freight costs in the 2022 period impacted
margins.
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The following table sets forth the operating expenses for the three months ended
March 31:
2022 2021 Change
Marketing $ 3,238 $ 17,611 $ (14,373)
Commissions 41,733 40,974 759
Payroll related 254,589 752,008 (497,419)
Consulting and professional fees 529,459 828,648 (299,189)
Research and development 15,000 8,300 6,700
Other operating expenses 35,791 41,842 (6,051)
$ 879,810 $ 1,689,383 $ (809,573)The following table sets forth the stock- based compensation expense included in
the above operating expenses for the three months ended March 31:
2022 2021 Change
Marketing $ - - -
Commissions - - -
Payroll related 4,703 604,890 (600,187)
Consulting and professional fees 356,900 693,837 (336,937)
Research and development - - -
Other operating expenses - - -
$ 361,603 $ 1,298,727 $ (937,124)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 $879,810 for the three months ended
March 31,2022 and $1,689,383 for the three months ended March 31,2021 a decrease
of $809,573 or about 48%. The change is primarily due to a decrease in
stock-based compensation expense of $937,124 and $14,373 in marketing cost,
partially offset by an increase of $102,768 in payroll related costs and $37,748
in consulting and professional fees. Stock-based compensation expense for the
three months ended March 31,2022 includes $356,900 for shares of common stock
issued to a third parties for consulting and financial advisory services.
Stock-based compensation expense for the three months ended March 31, 2021,
includes $693,837 related to third party agreements for financial advisory
services and $604,890 related to shares of common stock issued to the Company's
CEO as compensation.
The increase in payroll related costs consists primarily of additional employee
headcount and a bonus paid to the Company's CEO totaling $58,380. The increase
in consulting and professional fees relates primarily to costs associated with
operating as a public company and recruiting fees.
Other expense decreased by approximately $576,871 primarily due to a decrease in
interest expense of $846,923, partially offset by the loss on debt
extinguishment of $205,600 and no forgiveness of debt in 2022. The decrease in
interest expense reflects a decrease in the amortization of debt discount of
$845,891 related to debt conversions and maturities that occurred since March
2021 as well as no day 1 derivative loss for newly incurred debt in the 2022
period, as compared to the 2021 period.
As a result of the foregoing, we recorded a net loss of $1,144,536 for the three
months ended March 31, 2022, compared to a net loss of $2,560,384 for the three
months ended March 31, 2021. The decrease in net loss is primarily attributed to
the decrease in interest expense, the decrease in selling, general and
administrative expenses and increased gross profit.
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
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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 three months ended March 31,2022 our cash and cash equivalents
decreased by $213,122 reflecting cash used in operations of $317,845, partially
offset by net proceeds from financing activities of $104,723. At March 31, 2022
the Company had a working capital deficit of $1,746,298 and cash on hand of
$170,048. During the three months ended March 31, 2021, our cash and cash
equivalents increased by $315,861, reflecting cash provided by financing
activities of $643,098, partially offset by cash used in operations of $327,237.
Operating Activities
Cash flows used in operating activities totaled $317,845 for the three months
ended March 31,2022 as compared to cash flows used of $327,237 or the three
months ended March 31, 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 an increase in
the loss from operations, excluding stock-based compensation expense.
Financing Activities
Cash flows provided by financing activities totaled $104,723 for the three
months ended March 31,2022 as compared to $643,098 for the three months ended
March 31, 2021. The cash flows provided in the 2022 period reflect $494,220 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 $425,375. The cash flows provided in the
2021 period are primarily the result of $712,500 in net proceeds from
convertible promissory notes partially offset by debt repayments totaling
$62,846.
On September 3, 2021, the Company entered into a forbearance agreement with one
of its lenders. As additional consideration for entering into the forbearance
agreement, the Company has agreed to issue the lender the number of shares equal
to $100,000 on January 15,2022 at a 25% discount based upon the previous 15-day
average closing price. Effective after January 15, 2022, if the Company enters
into an agreement with a third-party investor for consideration per share less
than the $0.50 fixed price per share of the notes, the Company agrees to amend
and restate the notes to reduce the conversion price. On January 20, 2022, the
conversion price was reset to $0.025 for the remaining outstanding notes.
On March 25, 2022, the Company amended its forbearance agreement with one of its
lenders. Under the amendment, the maturity dates of the outstanding notes were
changed to October 1, 2022. In addition, the Company will issue 8,000,000 shares
of its common stock at a share price of $0.025, 4,000,000 which is in lieu of
the discounted shares equal to $100,000 stated in the original agreement. The
Company will also make six monthly payments of $30,000. The Company made a good
faith payment of $30,000 in February 2022 and its first payment under the
amendment in March 2022. On May 9, 2022, the Company issued 8,000,000 shares of
its common stock as per the terms of the forbearance agreement.
In April 2022, investors exercised 4,075,335 cashless warrants issuing 3,550,162
shares.
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ELECTROMEDICAL TECHNOLOGIES, INC. 
