EMED 10-K
Electromedical Technologies, Inc (EMED)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the Fiscal Year Ended
Or
For the Transition Period From to
Commission File Number
(Exact name of registrant as specified in its charter)
(State or Other Jurisdiction of Incorporation) |
| 5047 (Primary Standard Industrial Classification Code Number) |
| (I.R.S. Employer Identification No.) |
(Address of principal executive offices) | (Zip Code) |
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(Registrant's telephone number, including area code)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ◻
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ |
| Accelerated filer ☐ |
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| Smaller reporting company |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The aggregate market value of common equity held by non-affiliates of the Registrant as of December 31, 2021 was approximately $
As at December 31, 2021, and March 31, 2022,
TABLE OF CONTENTS
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PART I.
ITEM 1. BUSINESS
This annual report on Form 10-K (including, but not limited to, the following disclosures regarding our Business) contains forward looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this annual report on Form 10-K. Additionally, statements concerning future matters such as the development of new products, enhancements or technologies, sales levels, expense levels and other statements regarding matters that are not historical are forward-looking statements.
Forward-looking statements in this annual report on Form 10-K reflect our good faith judgment based on facts and factors currently known to us. Forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this annual report on Form 10-K. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this annual report on Form 10-K. Readers are urged to carefully review and consider the various disclosures made in this annual report on Form 10-K, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
Company 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.
We believe that we do this by delivering innovative solutions providing fast and long lasting pain relief across the broadest range of ailments. We engineer simple-to-use bioelectronics therapy devices, which send a proprietary sequence of electrical signals. We believe our devices have proven to be highly effective over the past decade and have the technological capability to be used in medical research.
The Company is publicly traded on the OTCQB Market Tier under the symbol EMED.
Business Overview
Bioelectronics
Electromedical Technologies is a bioelectronics manufacturing and marketing company. We offer U.S. Food and Drug Administration (FDA) cleared medical devices for pain management.
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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. We believe that we do this by delivering innovative solutions providing fast and long lasting pain relief across the broadest range of ailments. We engineer simple-to-use bioelectronics therapy devices, which send a proprietary sequence of electrical signals. We believe our devices have proven to be highly effective over the past decade and have the technological capability to be used in medical research.
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 Centers for Disease Control (CDC) reports that overdose deaths involving prescription opioids have quadrupled since 1999 and that drug overdoses now kill more people every year than gun violence or car accidents. From 1999 to 2017, more than 702,000 people have died from a drug overdose. In 2017, more than 70,000 people died from drug overdoses, making it a leading cause of injury-related death in the United States. It is our aim to offer effective nontoxic, noninvasive alternatives to pain management.
We believe that we can provide an opioid-free solution to over 100 million people suffering from chronic and acute pain just in the US market alone. In recent years, we have also focused on the market for U.S. military service veterans, many of which do not have many options other than powerful drugs that can cause side effects when it comes to treating chronic or acute pain. We intend to include a special program that will offer our new POD devices at no upfront cost for the veterans of U.S. armed forces and their immediate families, which according to the Census Bureau, as of 2014, consists of nearly 22 million individuals.
Industry and Regulatory Overview
Medical devices are regulated by the Food and Drug Administration (the “FDA”) in the United States and can be regulated by foreign governments for devices sold internationally. The Company has medical device certifications in the USA (FDA),
The Federal Food, Drug and Cosmetic Act and regulations issued by the FDA regulate testing, manufacturing, packaging, and marketing of medical devices. Under the current regulations and standards, we believe that our devices are subject to general controls, including compliance with labeling and record-keeping rules. In addition, our medical devices require pre-market approval, which for TENS devices can be achieved through a 510(k) premarket notification submission.
Our manufacturing processes and facilities are also subject to regulations, including the FDA’s QSR requirements (formerly Good Manufacturing Practices). These regulations govern the way we manufacture our products and maintain documentation for our manufacturing, testing and control activities. In addition, to the extent we manufacture and sell products abroad, those products are subject to the relevant laws and regulations of those countries.
The labeling of our devices, our promotional activities and marketing materials are regulated by the FDA and various state agencies. Activities that are constrained by these regulations include the marketing of our products for “off-label” usage; that is, recommendations to use our products for purposes other than what is indicated in the labeling. Violations of this requirement may result in administrative, civil or criminal actions against the manufacturer or seller by the FDA or governing state agencies.
An element of our strategy is to continue to upgrade our products, add new features and expand clearance or approval of our current products to new indications. In the United States, before we can market a new medical device, or a new use of, new claim for or significant modification to an existing product, we must first receive either clearance under Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or the FDCA, or approval of a premarket approval application, or PMA, from the FDA, unless an exemption applies. In the 510(k) clearance process, before a device may be marketed, the FDA must determine that a proposed device is “substantially equivalent” to a legally-marketed “predicate” device, which includes a device that has been previously cleared through the 510(k) process, a device that was legally marketed prior to May 28, 1976 (pre-amendments device), a device that was originally on the U.S. market pursuant to an approved PMA and later down-classified, or a 510(k)-exempt device. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical data are sometimes required to support substantial equivalence. In the PMA process, the FDA must determine
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that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to, technical, pre-clinical, clinical trial, manufacturing and labeling data. Our ability to successfully obtain clearance for any new indications will be dependent on us submitting data as to the successful completion of clinical trials evidencing safety and efficacy. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices. However, some devices are automatically subject to the PMA pathway regardless of the level of risk they pose because they have not previously been classified into a lower risk class by the FDA. Manufacturers of these devices may request that FDA review such devices in accordance with the de novo classification procedure, which allows a manufacturer whose novel device would otherwise require the submission and approval of a PMA prior to marketing to request down-classification of the device on the basis that the device presents low or moderate risk. If the FDA agrees with the down classification, the applicant will then receive authorization to market the device. This device type can then be used as a predicate device for future 510(k) submissions. We initially received marketing authorization of our device through the de novo classification process, and we have made changes to our system through subsequent 510(k) clearances. The process of obtaining regulatory clearances or approvals, or completing the de novo classification process, to market a medical device can be costly and time consuming, and we may not be able to successfully obtain pre-market reviews on a timely basis, if at all.
Modifications to products that are approved through a PMA application generally require FDA approval. Similarly, certain modifications made to products cleared through a 510(k) or authorized through the de novo classification process may require a new 510(k) clearance. Each of the PMA approval, de novo classification and the 510(k) clearance processes can be expensive, lengthy and uncertain. The FDA’s 510(k) clearance process usually takes from three to 12 months, but can last longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k) clearance process and generally takes from one to three years, or even longer, from the time the application is filed with the FDA. In addition, a PMA generally requires the performance of one or more clinical trials.
Despite the time, effort and cost, a device may not be approved or cleared by the FDA. Any delay or failure to obtain necessary regulatory approvals or clearances could harm our business. Furthermore, even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicated uses for the device, which may limit the market for the device.
Any modifications to our existing products may require new 510(k) clearance; however, future modifications may be subject to the substantially more costly, time-consuming and uncertain PMA process. If the FDA requires us to go through a lengthier, more rigorous examination for future products or modifications to existing products than we had expected, product introductions or modifications could be delayed or canceled, which could cause our sales to decline.
The FDA can delay, limit or deny clearance or approval of a device for many reasons, including: we may be unable to demonstrate to the FDA’s satisfaction that the product or modification is substantially equivalent to the proposed predicate device or safe and effective for its intended use; the data from our pre-clinical studies and clinical trials may be insufficient to support clearance or approval, where required; and the manufacturing process or facilities we use may not meet applicable requirements.
Even if granted, a 510(k) clearance, de novo classification, or PMA approval imposes substantial restrictions on how our devices may be marketed or sold, and the FDA continues to place considerable restrictions on our products and operations. For example, the manufacture of medical devices must comply with the FDA’s Quality System Regulation, or QSR. In addition, manufacturers must register their manufacturing facilities, list the products with the FDA, and comply with requirements relating to labeling, marketing, complaint handling, adverse event and medical device reporting, reporting of corrections and removals, and import and export. The FDA monitors compliance with the QSR and these other requirements through periodic inspections. If our facilities or those of our manufacturers or suppliers are found to be in violation of applicable laws and regulations, or if we or our manufacturers or suppliers fail to take satisfactory corrective action in response to an adverse inspection, the regulatory authority could take enforcement action, including any of the following sanctions: untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties; customer notifications or repair, replacement, refunds, detention or seizure of our products; operating restrictions or partial suspension or total shutdown of production; refusing or delaying requests for 510(k) marketing clearance or PMA approvals of new products or modified products; withdrawing 510(k) marketing clearances or PMA approvals that have already been granted; refusing to provide Certificates for Foreign Government; refusing to grant export approval for our products; or pursuing criminal prosecution. Any of these sanctions could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers’ demands, and could have a material adverse effect on our reputation, business, results of operations and financial condition. We may also be required to bear other costs or take other actions that may have a negative impact on our sales and our ability to generate profits.
In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions, which may prevent or delay approval or clearance of our future products under development or impact our ability to modify our currently cleared products on a timely basis. Such policy or regulatory changes could impose additional requirements upon us that could delay our ability to obtain new 510(k) clearances, increase the costs of compliance or restrict our ability to maintain our
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current clearances. We also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action, either in the United States or abroad. For example, certain policies of the Trump administration may impact our business and industry. Namely, the Trump administration has taken several executive actions, including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. It is difficult to predict how these executive actions, including the Executive Orders, will be implemented, and the extent to which they will impact the FDA’s ability to exercise its regulatory authority. If these executive actions impose constraints on FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted.
In order to sell our products in member countries of the EEA our products must comply with the essential requirements of the EU Medical Devices Directive (Council Directive 93/42/EEC). Compliance with these requirements is a prerequisite to be able to affix the CE Mark to our products, without which they cannot be sold or marketed in the EEA. To demonstrate compliance with the essential requirements we must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Except for low-risk medical devices (Class I non-sterile, non-measuring devices), where the manufacturer can issue an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the essential requirements of the EU Medical Devices Directive, a conformity assessment procedure requires the intervention of an organization accredited by a Member State of the EEA to conduct conformity assessments, or a Notified Body. Depending on the relevant conformity assessment procedure, the Notified Body would typically audit and examine the technical file and the quality system for the manufacture, design and final inspection of our devices. The Notified Body issues a certificate of conformity following successful completion of a conformity assessment procedure conducted in relation to the medical device and its manufacturer and their conformity with the essential requirements. This certificate entitles the manufacturer to affix the CE Mark to its medical devices after having prepared and signed a related EC Declaration of Conformity.
Sales and Marketing
Principal Products and Services
WellnessPro Plus
Our principal product, WellnessPro Plus, is an intelligent and effective bioelectronics therapy prescription device; and is used by consumers and health care professionals to relieve chronic and acute pain. Research studies have shown the efficacy of bioelectronics therapy in the treatment of chronic pain from a variety of ailments including: arthritis, chronic low back pain, fibromyalgia, diabetic neuropathy, Lyme disease, osteoarthritis, and neuropathic pain. This medical device is classified in the FDA as a transcutaneous electrical nerve stimulation (“TENS”) device. We believe, based on consumer and professional testimonials from the past decade that our device has been on the market, that the WellnessPro Plus treats pain conditions faster with longer-lasting relief, compared to lower cost conventional TENS devises. We attribute this in part to our proprietary algorithm and technology that we call the “DeepPulse.” With the DeepPulse there are close to one million frequency ranges to choose from to help prevent accommodation. The device can also generate micro-current stimulation to mimic the body’s own electric signals
The device sends a proprietary sequence of electrical signals that change at various times, preventing accommodation (where the body adapts to specific treatments, diminishing treatment effectiveness). Also, our proprietary DeepPulse pre-modulation technology allows signals to penetrate deeper into affected areas, which we believe produces faster, longer-lasting pain relief. Additionally, our micro-current mode delivers signals, which naturally mimic the body’s signals, triggering the body’s own natural ability to relieve pain via "endorphin release" and accelerating the ION pump exchange. This allows for reduction of pain, increased microcirculation and oxygenation of red blood cells, which in turn helps the body de-stress from pain and trigger natural, healthy processes necessary for better health.
WellnessPro POD and Wellness ION Pen
We are planning to bring two new products to market – extending the Wellness Product line: the WellnessPro POD, our first wearable product, and the Wellness ION Pen. We believe that the WellnessPro POD represents an exciting product line expansion as a “clinical-grade” wearable device, that is intended to treat chronic pain, PTSD, anxiety, depression and insomnia. We intend to sell this device over-the-counter; however, some modalities on this device may only be provided with a prescription. Our target market for the WellnessPro POD is chronic pain sufferers, which is estimated to be 100 million individuals in the United States alone. We intend to focus on various segments in this market, including veterans of U.S. armed forces, which according to the Census Bureau, as of 2014, consists of nearly 22 million individuals. Our goal is to educate the medical community of the benefits of "natural", non-invasive, non-
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toxic pain relief and for the WellnessPro POD to be an initial choice for practitioners to prescribe separately or in conjunction with pain medication.
Both of these new products will integrate with the WellnessPro Plus to leverage the engineering breakthroughs and intellectual property found in the WellnessPro Plus, and yet will still function as standalone devices.
WellnessPro POD
| ● | The WellnessPro POD is a compact “clinical-grade” wearable intended to keep pace with the evolution in pain management across practice segments, which will expand the range of treated modalities from chronic and acute pain to include PTSD, anxiety, depression and insomnia. |
Wellness ION Pen
| ● | The Wellness ION Pen is a unique interferential cold laser used to deliver targeted frequency stimulation. This therapeutic laser, which we intend to sell over-the-counter, will deliver expanded wavelengths relative to comparable lasers combined with micro-stimulation. We believe this will improve circulation and tissue healing and reduce inflammation and pain. The Wellness ION Pen will also have cosmetic applications for skin issues |
Market
The Wellness line of products is intended for anyone living with pain caused by various medical conditions or trauma, or who is battling pharmaceutical (e.g., opioid) dependency or addiction. The products can be purchased directly by consumers or used by healthcare practitioners, including:
| ● | Chiropractors; |
| ● | Physiotherapists; |
| ● | Pain management doctors and clinicians; |
| ● | Natural medicine doctors; |
| ● | Sports medicine doctors; and |
| ● | Athletic trainers. |
According to information provided by the American Academy of Pain Medicine, at least 100 million Americans suffer from chronic pain, not including acute pain for children. We believe that Electromedical represents a tested, proven solution for different segments of the population.
We plan to address these individuals directly as well as through their healthcare providers. There are approximately 77,000 chiropractors and 123,000 physiotherapists in the United States. Combined, over 200,000 healthcare practitioners focused on rehabilitation and pain relief – not to mention practitioners involved in sports medicine, natural medicine and pain management.
In additional we believe there are certain niche markets that our products are well suited to address. As discussed above, we expect that veterans will be the first market for the WellnessPro POD as it addresses the various needs our veteran population is suffering from.
Further, we believe that our products can help provide a solution to the opioid problem. Our current product, the WellnessPro Plus, assists with the recovery from opioid addiction. We believe that the WellnessPro POD will also be highly effective for pain management and relief and could be used as an alternative, or can be prescribed in conjunction with pain medication, to reduce the amount of deaths and addictions due to Opioid abuse and misuse.
Strategy
Electromedical Technologies, for the first fifteen years of its existence, has been fortunate to have grown “organically” without formal sales and marketing programs and investments. We believe this is fundamentally because of the product’s ability to deliver uncommon levels of pain relief better quality of life and wellness for thousands of customers (our “raving fans”). These raving fans subsequently shared their miraculous stories of recovery – some of which can be found on our website. We believe that those testimonials influenced thousands of people living with ailments and pain to turn to the WellnessPro Plus for relief. These changes in with the additional capital
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we are planning to raise. In 2021 and beyond, Electromedical will engage in a comprehensive and fully integrated marketing program to increase sales and build the Electromedical brand. The integrated marketing program will include the following elements:
Website marketing.
o | Using sophisticated tools integrated with our website, such as marketing automation, we will automate the process of nurturing web visitors and increasing sales. |
| ● | Digital marketing. |
o | Using advanced approaches for improving Electromedical’s organic and paid search optimization results, we will increase traffic to and sales from our website. |
| ● | Social marketing and advertising. |
o | Using a comprehensive approach to marketing across the primary social channels (twitter, LinkedIn, Facebook, YouTube, Instagram), we will engage consumers and influencers (associations), elevate the brand and increase sales directly and indirectly. |
o | Social marketing will also include the thoughtful use of Facebook ads and LinkedIn sponsored posts to drive web traffic and increase sales. |
| ● | Content marketing. |
o | Using a thoughtful approach to newsletters and blog content, we will elevate the brand and increase sales directly and indirectly. |
| ● | Partner and association marketing. |
o | We will selectively identify associations and partners that can help elevate the brand and increase sales. Examples of associations that we intend to target include the American Chiropractic Association, which may provide an important opportunity to increase awareness, exercise thought leadership and drive sales. |
| ● | Trade show marketing |
o | We will evaluate and participate in selective medical device and wellness trade shows, which elevate the brand and increase sales. |
In addition to a comprehensive marketing program, Electromedical will make strategic investments in sales staff, training and support, all intended to expand distribution and sales.
| ● | Sales Staff: On March 8, 2022, Electromedical retained a Director of Business and Sales Development to further develop its business opportunities on various geographic areas. |
| ● | National Technical Training Manager: Electromedical intends to hire a National Technical Training Manager to develop and implement training programs. |
Research and Development
We are planning to bring two new products to market – extending the Wellness Product line: the WellnessPro POD, our first wearable product, and the Wellness ION Pen. We believe that the WellnessPro POD represents an exciting product line expansion as a “clinical-grade” wearable device, that is intended to treat chronic pain, PTSD, anxiety, depression and insomnia. We intend to sell this device over-the-counter; however, some modalities on this device may only be provided with a prescription. Our target market for the WellnessPro POD is chronic pain sufferers, which is estimated to be 100 million individuals in the United States alone. We intend to focus on various segments in this market, including veterans of U.S. armed forces, which according to the Census Bureau, as of 2014, consists of nearly 22 million individuals. Our goal is to educate the medical community of the benefits of "natural", non-invasive, non-toxic pain relief and for the WellnessPro POD to be an initial choice for practitioners to prescribe separately or in conjunction with pain medication.
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Both of these new products will integrate with the WellnessPro Plus to leverage the engineering breakthroughs and intellectual property found in the WellnessPro Plus, and yet will still function as standalone devices.
WellnessPro POD
| ● | The WellnessPro POD is a compact “clinical-grade” wearable intended to keep pace with the evolution in pain management across practice segments, which will expand the range of treated modalities from chronic and acute pain to include PTSD, anxiety, depression and insomnia. |
Wellness ION Pen
| ● | The Wellness ION Pen is a unique interferential cold laser used to deliver targeted frequency stimulation. This therapeutic laser, which we intend to sell over-the-counter, will deliver expanded wavelengths relative to comparable lasers combined with micro-stimulation. We believe this will improve circulation and tissue healing and reduce inflammation and pain. The Wellness ION Pen will also have cosmetic applications for skin issues |
Significant Customers
For the year ended December 31, 2021, and December 31, 2020, we had no significant customers.
Intellectual Property
Electromedical Technologies has the rights to several trademarks and utility patents concerning Wellness+Plus Pro, WellnessPro POD, IDNA Internative Dynamic Neuro Adaptation, Deep Pulse, WellnessPro, FaceSPA and Electromedical Technologies.
Competition
We operate in the pain management, rehabilitation and physical therapy market. We not only compete with other similar devices that treat pain and other medical ailments, but also with traditional treatment approaches such as drug prescriptions and surgery and rehabilitation therapy and complementary medical practices such as acupuncture. Further, our competitors include several large, diversified companies who have more financial, marketing and other resources, distribution networks and greater name recognition than us. These competitors include: Galvani Bioelectronics, Medtronic and DJOGlobal-Chatanooga. Historically, Electromedical has competed in the “electromedical” and "bio-electrotherapy" device segment, including the crowded TENS market, which now includes inexpensive TENS devices such as the devices produced by “IcyHot.”
Employees
As of December 31, 2021, we have 7 full-time employees, all of whom are U.S based, primarily at our Scottsdale, Arizona headquarters. None of our U.S employees are represented by a labor union.
ITEM 1A. RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company owns the over 5,000 square foot office warehouse unit where its headquarters is located at 16561 N. 92nd Street, Unit D101, Scottsdale, Arizona.
ITEM 3. LEGAL PROCEEDINGS
None.
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ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.MARKET INFORMATION AND HOLDERS
Our common stock trades on the OTC Markets OTCQB Trading Tier under the ticker symbol “EMED.” As of December 31, 2021, there were 90 holders of record of our common stock. The following table sets forth, for the periods indicated, the high and low closing sales prices of our common stock:
low bid prices per share of our shares of Common Stock by both the OTC Bulletin Board and OTC Markets for the periods indicated.
For the Period Ending |
| High |
| Low | ||
Fourth Quarter, 2020 | $ | 1.04 | $ | 0.30 | ||
First Quarter, 2021 | $ | 0.73 | $ | 0.25 | ||
Second Quarter, 2021 | $ | 0.21 | $ | 0.04 | ||
Third Quarter, 2021 | $ | 0.12 | $ | 0.04 | ||
Fourth Quarter, 2021 | $ | 0.13 | $ | 0.05 | ||
DIVIDEND POLICY
We have never declared or paid, and do not anticipate declaring or paying, any cash dividends on our common stock. Instead, we currently anticipate that we will retain all of our future earnings, if any, to fund the operation and expansion of our business and to use as working capital and for other general corporate purposes. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then-existing law, conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects, and other factors our board of directors may deem relevant.
ITEM 6. SELECTED FINANCIAL DATA
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate these estimates, including those related to useful lives of real estate assets, cost reimbursement income, bad debts, impairment, net lease intangibles, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from those estimates.
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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 opiods. 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 opiods. It is our aim to offer effective alternatives to pain management.
Results of Operations
The following table sets forth the audited results of our operations for the years ended December 31,
| 2021 |
| 2020 | |||
Net Sales | $ | 907,362 | $ | 737,958 | ||
Cost of goods sold: |
| 199,234 |
| 194,384 | ||
Gross profit |
| 708,128 |
| 543,574 | ||
Operating Expenses |
| 4,508,391 |
| 3,710,262 | ||
Loss from operations |
| (3,800,263) |
| (3,166,688) | ||
Other expense |
| (4,679,886) |
| (705,036) | ||
Net Loss | $ | (8,480,149) | $ | (3,871,724) | ||
Operating Results
January 1,2021 through December 31,2021 Compared to January 1,2020 through December 31, 2020
Our sales totaled $907,362 for the year ended December 31,2021 and $737,958 for the year ended December 31, 2020. The increase is primarily related to an increase in units sold.
Cost of sales and gross margins for the year ended December 31,2021 and for the year ended December 31,2020 were $199,234 and 78% and $194,384 and 74%, 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. Higher shipping and distribution costs in 2020 contributed to the decrease in gross margin.
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The following table sets forth the operating expenses for the years ended December 31:
| 2021 |
| 2020 |
| Change | ||||
Marketing | $ | 92,608 | $ | 191,765 | $ | (99,157) | |||
Commissions |
| 207,264 |
| 171,181 |
| 36,083 | |||
Payroll related |
| 2,441,758 |
| 564,387 |
| 1,877,371 | |||
Consulting and professional fees |
| 1,386,758 |
| 2,582,804 |
| (1,196,046) | |||
Research and development |
| 215,320 |
| 31,600 |
| 183,720 | |||
Other operating expenses |
| 164,683 |
| 168,525 |
| (3,842) | |||
$ | 4,508,391 | $ | 3,710,262 | $ | 798,129 | ||||
The following table sets forth the stock- based compensation expense included in the above operating expenses for years ended December 31:
| 2021 |
| 2020 |
| Change | ||||
Marketing | $ | — | $ | — | $ | — | |||
Commissions |
| — |
| — |
| — | |||
Payroll related |
| 1,666,716 |
| 9,728 |
| 1,656,988 | |||
Consulting and professional fees |
| 963,428 |
| 2,213,128 |
| (1,249,700) | |||
Research and development |
| — |
| — |
| — | |||
Other operating expenses |
| — |
| — |
| — | |||
$ | 2,630,144 | $ | 2,222,856 | $ | 407,288 | ||||
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 $4,508,391 for the year ended December 31,2021 and $3,710,262 for the year ended December 31, 2020, an increase of $798,129 or about 22%. The change is primarily due to increases in stock-based compensation expense of $407,288, research and development costs of $183,720, payroll related costs of $220,383, and consulting and professional fees of $53,654, partially offset by a decrease in marketing costs of $99,157. Stock-based compensation expense for the year ended December 31, 2021, includes $963,428 related to third party agreements for financial and strategic advisory services, $604,890 related to shares of common stock issued to the Company’s CEO as compensation and $1,061,826 related to cashless warrants issued to the Company’s CEO and a key employee. Stock-based compensation expense for the year ended December 31, 2020, includes $2,213,128 related to third party agreements for financial and strategic advisory services.
The increase in research and development costs reflects the Company’s ramped up efforts in the development of the POD. The increase in payroll related costs consists primarily of additional employee headcount and a bonus paid to the Company’s CEO totaling $105,042. The increase in consulting and professional fees relates primarily to costs associated with operating as a public company and raising capital. The decrease in marketing costs reflects termination of certain contracts in 2021.
Other expense increased by $3,974,850 primarily due to an increase in interest expense of $2,544,261 and an increase in the value of derivative liabilities of $1,487,098, partially offset by $50,083 of forgiven debt. The increase in interest expense for the year ended December 31, 2021, includes $2,351,189 related to the amortization of debt discount.
As a result of the foregoing, we recorded a net loss of $8,480,149 for the year ended December 31, 2021, compared to a net loss of $3,871,724 for the year ended December 31, 2020. The increase in net loss is primarily attributed to the increase in interest expense, the increase in value of derivative liabilities, and the increase in selling, general and administrative expenses.
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 year ended December 31, 2021, our cash and cash equivalents increased by $118,257 reflecting cash used in operations of $1,193,688, offset by net proceeds from financing activities of $1,311,945. At December 31, 2021 the Company had a working capital deficit of $767,402 and cash on hand of $383,170.
Operating Activities
Cash flows used in operating activities totaled $1,193,688 for the year ended, 2021 as compared to cash flows used of $1,336,660 for the year ended December 31, 2020. The decrease in cash flows used in operating activities is primarily the result of a decrease in inventory purchases and deposits and an increase in accrued expenses and other current liabilities, partially offset by an increase in the loss from operations, excluding stock-based compensation expense.
Financing Activities
Cash flows provided by financing activities totaled $1,311,945 for the year ended December 31,2021 as compared to $1,601,573 for the year ended December 31,2020. The cash flows provided in the 2021 period are primarily the result of $1,510,000 in net proceeds from convertible promissory notes partially offset by debt repayments totaling $198,055. The cash flows provided in the 2020 period are primarily the result of the following cash inflows:
$1,458,200 in net proceeds from convertible promissory notes
$155,900 in net proceeds from government debt
$39,500 in net proceeds from PPP loan
$13,567 for the net issuance of common stock
These 2020 cash inflows were partially offset by debt repayments totaling $65,094
During the year ended December 31, 2020, a lender converted $110,000 plus accrued interest into 339,429 shares of common stock. During the year ended December 31, 2021, lenders converted principal totaling $1,699,800 plus accrued interest into 49,334,051 shares of common stock. The remaining principal outstanding of $1,534,853 includes $734,853 for which a forbearance agreement was entered into on September 3, 2021.
Under the terms of the forbearance agreement, various notes, two of which were in default, were changed to extend the maturity dates by six months. The notes were also amended to delete the prepayment penalty. As consideration for the forbearance, the Company agreed to make cash payments of $12,500 upon execution of the agreement and monthly thereafter until Jan 15,2022 for a total of $75,000. $50,000 has been paid as of December 31, 2021. 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 March 25, 2022, the Company amended the forbearance agreement. 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 March 18, 2022, the Company’s board of directors approved a resolution to amend the Company’s Certificate of Incorporation to increase the Company’s authorized shares to 501,000,001 by increasing common shares authorized from 250,000,000 to 500,000,000.
Liquidity related transactions during the period January 1, 2022 through March 31, 2022 include the following:
The Company made principal payments totaling $367,500 on its convertible notes payable.
The Company sold 1,500,000 shares of common stock at prices ranging from $0.0259- $0.0353 under a stock purchase agreement.
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Certain lenders exercised 5,129,725 of cashless warrants at an exercise price of $0.025.
The Company issued convertible promissory notes to certain investors totaling $615,000 with net proceeds of $494,220. The notes accrue interest at 12% per annum, and have an initial conversion price of $0.025 subject to adjustment and mature one year from issuance. As additional consideration for the financings, the Company issued the lenders 5-year warrants to purchase a total of 6,000,000 shares of common stock at $0.025 per share, and a 5-year trigger warrants to purchase a total of 25,000,000 shares of common stock at $0.025 per share, subject to price adjustments for certain actions, including dilutive issuances. The trigger warrants may only be exercised if the convertible promissory notes are not paid in full at the maturity date. The warrants do not provide for registration rights.
Related Party Transactions
We follow FASB ASC subtopic 850-10, “Related Party Transactions”, for the identification of related parties and disclosure of related party transactions.
Pursuant to ASC 850-10-20, related parties include: a) affiliates of the Company; b) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; c) trusts for the benefit of employees, such as pension and profit sharing trusts that are managed by or under the trusteeship of management; d) principal owners of the Company; e) management of the Company; f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
Material related party transactions are required to be disclosed in the financial statements, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. The disclosures shall include: a) the nature of the relationship(s) involved; b) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which statements of operation are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c) the dollar amounts of transactions for each of the periods for which statements of operations are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Off Balance Sheet Arrangements
As of December 31, 2021, and 2020, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting Company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and
Stockholders of Electromedical Technologies, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Electromedical Technologies, Inc. (the “Company”) as of December 31, 2021 and 2020, and the related statements of operations, stockholders’ deficit, and cash flows, for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a negative working capital balance, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ |
|
PCAOB # | |
We have served as the Company’s auditor since 2018. |
|
| |
March 31, 2022 |
|
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ELECTROMEDICAL TECHNOLOGIES, INC.
BALANCE SHEETS
DECEMBER 31,
| 2021 |
| 2020 | |||
ASSETS | ||||||
Current assets: |
|
|
|
| ||
Cash and cash equivalents | $ | | $ | | ||
Accounts receivable |
| |
| | ||
Inventories |
| |
| | ||
Prepaid expenses and other current assets |
| |
| | ||
Total current assets |
| |
| | ||
Other assets |
| — |
| | ||
Property and equipment, net |
| |
| | ||
Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
|
|
|
| ||
Current liabilities: |
|
|
|
| ||
Accounts payable | $ | | $ | | ||
Credit cards payable |
| |
| | ||
Accrued expenses and other current liabilities |
| |
| | ||
Customer deposits |
| — |
| | ||
Convertible promissory notes, net of discount of $ |
| |
| | ||
Related party notes payable |
| |
| | ||
PPP loan |
| — |
| | ||
Notes payable |
| — |
| | ||
Long term debt, current portion |
| |
| | ||
Derivative liabilities- convertible promissory notes |
| — |
| | ||
Total current liabilities |
| |
| | ||
Long-term liabilities: |
|
|
|
| ||
Bank debt, net of current portion |
| |
| | ||
Government debt, net of current portion |
| |
| | ||
Other liabilities |
| |
| | ||
Total liabilities |
| |
| | ||
Commitments and contingencies (Note 11) |
|
| ||||
Stockholders’ deficit |
|
|
|
| ||
Series A Preferred Stock, |
| |
| | ||
Series B Preferred Stock, | ||||||
Common stock, $ |
| |
| | ||
Additional paid-in-capital |
| |
| | ||
Accumulated deficit |
| ( |
| ( | ||
Total stockholders’ deficit |
| ( |
| ( | ||
Total liabilities and stockholders’ deficit | $ | | $ | | ||
The accompanying notes are an integral part of these financial statements
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ELECTROMEDICAL TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
THE YEARS ENDED DECEMBER 31,
| 2021 |
| 2020 | |||
Net sales |
| $ | | $ | | |
| ||||||
Cost of sales |
| |
| | ||
| ||||||
Gross profit |
| |
| | ||
| ||||||
Selling, general and administrative expenses |
| |
| | ||
| ||||||
Loss from operations |
| ( |
| ( | ||
| ||||||
Other income (expense) |
|
|
| |||
Interest expense |
| ( |
| ( | ||
Change in excess fair value of KISS liability – related party |
| — |
| ( | ||
Change in fair market value of derivative liabilities |
| ( |
| | ||
Other income (expense) |
| ( |
| | ||
Forgiveness of debt | | — | ||||
Total other expense |
| ( |
| ( | ||
Net loss | $ | ( | $ | ( | ||
Deemed dividend related to warrant resets | ( | ( | ||||
Net loss attributable to common stockholders | ( | ( | ||||
Weighted average shares outstanding - basic and diluted |
| |
| | ||
Weighted average loss per share - basic and diluted | ( | ( | ||||
The accompanying notes are an integral part of these financial statements
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ELECTROMEDICAL TECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
Series A Preferred | Series B Preferred | Additional | Total | |||||||||||||||||||||
Stock | Stock | Common Stock | Paid in | Accumulated | Stockholders’ | |||||||||||||||||||
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Capital |
| Deficit |
| Deficit | |||||||
Balance, December 31, 2019 | |
| | — | — | |
| | | $ | ( | ( | ||||||||||||
Shares issued in conjunction with vendor settlement |
| — |
| — | — | — |
| — |
| |
| |
| — |
| | ||||||||
Shares issued for consulting services |
| — |
| — | — | — |
| |
| |
| |
| — |
| | ||||||||
Shares issued in conjunction with convertible promissory note |
| — |
| — | — | — |
| |
| |
| |
| — |
| | ||||||||
Warrant issued for services |
| — |
| — | — | — |
| — |
| — |
| |
| — |
| | ||||||||
Warrants issued in conjunction with convertible promissory notes |
| — |
| — | — | — |
| — |
| — |
| |
| — |
| | ||||||||
Warrants reset in conjunction with convertible promissory notes |
| — |
| — | — | — |
| — |
| — |
| |
| ( |
| — | ||||||||
Issuance of common stock for cash- net of offering costs |
| — |
| — | — | — |
| |
| |
| |
| — |
| | ||||||||
Shares repurchased |
| — |
| — | — | — |
| ( |
| ( |
| ( |
| — |
| ( | ||||||||
Conversion of convertible promissory note |
| — |
| — | — | — |
| |
| |
| |
| — |
| | ||||||||
Stock-based compensation |
| — |
| — | — | — |
| — |
| — |
| |
| — |
| | ||||||||
Beneficial conversion feature in conjunction with convertible promissory notes payable |
| — |
| — | — | — |
| — |
| — |
| |
| — |
| | ||||||||
Conversion of KISS liability- related party shares |
| — |
| — | — | — |
| |
| |
| |
| — |
| | ||||||||
Net loss |
| — |
| — | — | — |
| — |
| — |
| — |
| ( |
| ( | ||||||||
Balance, December 31, 2020 | $ | |
| | — | — | $ | |
| | $ | | $ | ( | $ | ( | ||||||||
Shares issued for consulting services | — | — | — | — | | | | — | | |||||||||||||||
Warrants issued for consulting services | — | — | — | — | — | — | | — | | |||||||||||||||
Warrantissued in conjunction with convertible promissory note | — | — | — | — | — | — | | — | | |||||||||||||||
Warrants reset in conjunction with convertible promissory notes | — | — | — | — | — | — | | ( | — | |||||||||||||||
Conversion of convertible promissory notes | — | — | — | — | | | | — | | |||||||||||||||
Conversion of related party notes payable | — | — | — | — | | | | — | | |||||||||||||||
Shares issued in conjunction with warrant cancellations | — | — | — | — | | | ( | — | — | |||||||||||||||
Stock-based compensation | — | — | — | — | | | | — | | |||||||||||||||
Net loss | — | — | — | — | — | — | — | ( | ( | |||||||||||||||
Balance, December 31, 2021 | $ | | | $ | — | — | $ | | | $ | | $ | ( | $ | ( | |||||||||
The accompanying notes are an integral part of these financial statements
19
ELECTROMEDICAL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
| 2021 |
| 2020 | |||
Cash flows from operating activities: |
|
|
|
| ||
Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
| |||
Provision for allowance for doubtful accounts |
| — |
| | ||
Stock-based compensation expense |
| |
| | ||
Depreciation and amortization |
| |
| | ||
Forgiveness of debt | ( | — | ||||
Change in excess fair value of KISS liability- related party |
| — |
| | ||
Amortization of debt discount and day 1 derivative loss |
| |
| | ||
Change in fair value of derivative liabilities- convertible promissory notes |
| |
| ( | ||
Other | | — | ||||
Change in operating assets and liabilities: |
|
|
| |||
Accounts receivable |
| ( |
| ( | ||
Inventories |
| ( |
| ( | ||
Prepaid expenses and other current assets |
| |
| ( | ||
Other assets |
| ( |
| | ||
Accounts payable |
| ( |
| | ||
Credit cards payable |
| ( |
| ( | ||
Accrued expenses and other current liabilities |
| |
| ( | ||
Customer deposits |
| ( |
| ( | ||
Other liabilities |
| ( |
| | ||
Net cash used in operating activities |
| ( |
| ( | ||
Cash flows from financing activities: |
|
|
|
| ||
Short-term financing |
| — |
| ( | ||
Proceeds from PPP loan |
| — |
| | ||
Proceeds from government debt |
| — |
| | ||
Repayments on bank debt |
| ( |
| ( | ||
Related party notes payable-net |
| ( |
| ( | ||
Issuance of convertible promissory notes |
| |
| | ||
Repayments on notes payable |
| ( |
| ( | ||
Issuance of common stock for cash- net |
| — |
| | ||
Net cash provided by financing activities |
| |
| | ||
Net increase in cash and cash equivalents |
| |
| | ||
Cash and cash equivalents, beginning of year |
| |
| — | ||
Cash and cash equivalents, end of year | $ | | $ | | ||
Supplemental disclosures of cash flow information: |
|
|
| |||
Cash paid during the year for: |
|
|
| |||
Interest | $ | | $ | | ||
Income taxes | $ | — | $ | — | ||
Non-cash investing and financing activities: |
|
|
|
| ||
Inventory deposits converted to related party notes payable | $ | — | $ | | ||
Shares issued in conjunction with vendor settlement | $ | — | $ | | ||
Warrants, common stock and beneficial conversion feature issued in conjunction with convertible promissory notes | $ | | $ | | ||
Derivative liabilities issued in conjunction with convertible promissory notes | $ | | $ | | ||
Conversion of convertible promissory note and accrued interest into shares of common stock | $ | | $ | | ||
Conversion of KISS liability-related party into common stock | $ | — | $ | | ||
The accompanying notes are an integral part of these financial statements
20
ELECTROMEDICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2021 AND 2020
NOTE 1. ORGANIZATION AND NATURE OF BUSINESS
Electro Medical Technologies, LLC (“the Company”), was formed in November 2010 as an Arizona limited liability company. In August 2017, the Company converted to a Delaware C Corporation under Electromedical Technologies, Inc. The Company is a bioelectronic engineering company with medical device certifications in the United States (FDA) and Mexico (Cofepris). The Company engineers simple-to-use portable bioelectronics devices, which provide fast and long -lasting pain relief across a broad range of ailments.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Method
The Company maintains its accounting records on an accrual method in conformity with accounting principles generally accepted in the United States of America (“US GAAP”).
Use of Estimates
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.
Going Concern
Since inception, the Company has incurred approximately $
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 as at December 31, 2021.
Revenue Recognition
The FASB issued Accounting Standards Update (“ASU”) No. 2014-09, codified as ASC 606: Revenue from Contracts with Customers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The Company adopted ASC 606 effective January 1,2019 using modified retrospective basis and the cumulative effect was immaterial to the financial statements.
Revenues are recognized when performance obligations are satisfied through the transfer of promised goods to the Company’s customers. Control transfers upon shipment of product and when the title has been passed to the customers. This includes the transfer of legal title, physical possession, the risks and rewards of ownership, and customer acceptance. Revenue is recorded net of sales taxes collected from customers on behalf of taxing authorities, allowance for estimated returns, chargebacks, and markdowns based upon management’s estimates and the Company’s historical experience. The Company’s liability for sales return refunds is recognized within other current liabilities, and an asset for the value of inventory which is expected to be returned is recognized within other current assets
21
on the balance sheets. The Company generally allows a 30 day right of return to its customers. As of both December 31, 2021 and 2020, the sales returns allowance was $
Certain larger customers pay in advance for future shipments. These advance payments totaled $
At the completion of the initial
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts, and the Company generally does not require collateral. As a general policy, the Company determines an allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
The Company recorded an allowance for doubtful accounts of $
Financial Instruments and Concentrations of Business and Credit Risk
The Company maintains cash balances that can, at times, exceed amounts insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses in these accounts and believes it is not exposed to any significant credit risk.
The Company’s accounts receivable, which are unsecured, expose the Company to credit risks such as collectability and business risks such as customer concentrations. The Company mitigates credit risk by investigating the creditworthiness of all customers prior to establishing relationships with them, performing periodic review of the credit activities of those customers during the course of the business relationship, regularly analyzing the collectability of accounts receivables, and recording allowances for doubtful accounts when these receivables become uncollectible. The Company mitigates business risks by attempting to diversify its customer base.
Significant customer sales as a percentage of total sales are as follows for the years ended December 31:
| 2021 |
| 2020 |
| |
Customer A |
| | % | | % |
Customer B |
| | % | | % |
Customer C |
| | % | — |
|
Amounts due these customers totaled $
The Company’s supplier concentrations expose the Company to business risks, which the Company mitigates by attempting to diversify its supply chain. Significant supplier purchases as a percentage of total inventory purchases are as follows for the years ended December 31:
| 2021 |
| 2020 |
| |
Supplier A |
| | % | | % |
There were
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The estimated fair value of financial instruments has been determined using available market information and appropriate valuation methodologies. However, considerable judgment is often required to interpret market data used to develop the estimates of fair value. Accordingly, the estimates presented may not be indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts.
Disclosure of Fair Value
The disclosure requirements within Accounting Standards Codification (ASC) Topic 820-10, Fair Value Measurement, require disclosure of estimated fair values of certain financial instruments. For financial instruments recognized at fair value in the Company’s statements of operations, the disclosure requirements of ASC Topic 820-10 also apply. The methods and assumptions are set forth below:
| ● | Cash and cash equivalents are carried at cost, which approximates fair value. |
| ● | The carrying amounts of receivables approximate fair value due to their short-term maturities. |
| ● | The carrying amounts of payables approximate fair value due to their short-term maturities. |
| ● | KISS liability-related party is adjusted to fair value based on the value of the Company as a whole using the discounted cash flow method. |
Derivative liabilities are adjusted to fair value utilizing the Lattice method
Asset and liabilities measured and reported at fair value are classified and disclosed in one of the following categories based on inputs:
Level 1 — Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability
Level 3 — Pricing inputs include significant unobservable inputs used in determining the fair value of investments. The types of investments, which would generally be included in this category include equity securities issued by private entities.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given investment is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.
The following table presents changes during the year ended December 31, 2021 in Level 3 liabilities measured at fair value on a recurring basis:
Fair value- December 31, 2020 |
| $ | |
Change in fair value of derivative liabilities |
| | |
Derivative liabilities in conjunction with convertible promissory notes |
| | |
Conversion of convertible promissory notes |
| ( | |
Fair value- December 31, 2021 | $ | — |
The levels of the fair value hierarchy into which the Company’s assets and liabilities fall as of December 31, 2020, are as follows:
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
Liabilities |
|
|
|
|
|
|
|
| ||||
Derivative liabilities – convertible promissory notes | $ | | $ | | $ | | $ | | ||||
Total fair value | $ | | $ | | $ | | $ | | ||||
23
The following table presents changes during the year ended December 31, 2020 in Level 3 liabilities measured at fair value on a recurring basis:
Fair value- December 31, 2019 |
| $ | |
Change in fair value of derivative liabilities |
| ( | |
Derivative liabilities in conjunction with convertible promissory notes |
| | |
Conversion of KISS liability – related party to common shares |
| ( | |
Fair value- December 31, 2020 | $ | |
See Note 5 for discussion of the Company’s valuation of the KISS liability- related party. See Note 7 for discussion of the Company’s valuation of the derivative liabilities.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined based on the first-in, first-out cost flow assumption (“FIFO”) while market is determined based upon the estimated net realizable value less an allowance for selling and distribution expenses and a normal gross profit. The Company evaluates the need for inventory reserves associated with obsolete, slow moving, and non-sellable inventory by reviewing estimated net realizable values on a periodic basis. As of, December 31, 2021, and 2020, the Company believes there are no excess and obsolete inventories and accordingly, did not record an inventory reserve. Inventories consist of purchased finished goods.
Deferred Offering Costs
Incremental costs directly associated with the offering of securities are deferred and charged against the gross proceeds of the offering upon completion. Costs associated with the Company’s pending S-1 filing totaled $
Property and Equipment
Property and equipment are recorded at cost and is comprised of a building and office furniture and equipment. The building is depreciated using the straight-line method over the estimated useful life of
Betterments, renewals, and extraordinary repairs that materially extend the useful life of the asset are capitalized; other repairs and maintenance charges are expensed as incurred. The cost and related accumulated depreciation applicable to assets retired are removed from the accounts, and the gain or loss on disposition, if any, is recognized in the accompanying statements of operations.
Impairment of Long-Lived Assets
In accordance with FASB ASC Topic 360, Property, Plant and Equipment, long-lived assets such as property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized on long-lived assets when indicators of impairment are present and the undiscounted future cash flows estimated to be generated by those assets are less than the carrying amount of the assets. In such cases, the carrying value of these assets are adjusted to their estimated fair values and assets held for sale are adjusted to their estimated fair values less selling expenses.
Income Taxes
The Company, which was formed as a Limited liability Company in Arizona, previously filed an Entity Classification Election, commonly known as a check-the-box-election, to be classified as a corporation for tax purposes. The Company also made an election to be treated for income tax purposes as an S corporation. Under U.S. and Arizona law, the taxable income or loss of an S corporation is included in the shareholder’s income tax returns. In August 2017, the Company converted to a Delaware Corporation. The conversion
24
was tax-free under Internal Revenue Code Section 368(a)(1)(F) and is referred to as an F-reorganization, which is typically defined as a mere change in identity, form or place of organization. Management elected to terminate the S corporation election effective January 1, 2018 and the Company will operate for tax purposes as a C corporation from that date forward.
The Company follows the provisions of uncertain tax positions as addressed in FASB ASC Subtopic 740-10-65-1, Income Taxes. The Company has no such tax positions as of both December 31, 2021 and 2020, for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in selling, general and administrative expenses. No such interest or penalties were recognized during the periods presented. The Company had
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to examination by U.S. federal tax authorities for returns filed for the prior three years and by state and local income tax authorities for returns filed for the prior four years. There are no examinations currently pending.
The Company’s tax provision for 2021 related to deferred tax charges consisting of accrued liabilities and accounts payable, for which the Company will receive the benefit from when paid and the net operating loss incurred during 2021. During the year ended December 31, 2021, the Company evaluated its deferred tax assets of $
The Company’s tax provision for 2020 related to deferred tax charges consisting of accrued liabilities and accounts payable, for which the Company will receive the benefit from when paid and the net operating loss incurred during 2020. During the year ended December 31, 2020, the Company evaluated its deferred tax assets of $
For the years ended December 31, 2021 and 2020 the Company’s net operating loss carry forward was increased by $
Sales Taxes
Sales taxes for the years ended December 31,2021 and 2020 were recorded on a net basis. Included in accrued expenses at, December 31,2021 and 2020 is approximately $
Shipping and Handling Costs
The Company included shipping and handling costs in cost of sales on the accompanying statements of operations for the years ended December 31,2021 and 2020.
Warranty
The Company warranties the sale of most of its products and records an accrual for estimated future claims. The standard warranty is typically for a period of
25
Research and Development Costs
Research and development costs are expensed as incurred. Total research and development costs amounted to $
Net Loss per Share
Net earnings or loss per share is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period, excluding shares subject to redemption or forfeiture. The Company presents basic and diluted net earnings or loss per share. Diluted net earnings or loss per share reflect the actual weighted average of common shares issued and outstanding during the period, adjusted for potentially dilutive securities outstanding. Potentially dilutive securities are excluded from the computation of the diluted net loss per share if their inclusion would be anti-dilutive. As all potentially dilutive securities are anti-dilutive as of December 31, 2021 and 2020, diluted net loss per share is the same as basic net loss per share for each year. Stock options, warrants and convertible promissory notes with underlying shares totaling
COVID-19
On January 30, 2020, the World Health Organization declared the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 10, 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 area in which the Company operates. While it is unknown how long these conditions will last and what the complete financial effect will be to the company, COVID-19 has had an adverse effect on our business, including our supply chains and distribution systems. While we are taking diligent steps to mitigate disruptions to our supply chain, we are unable to predict the extent or nature of these impacts at this time to our future financial condition and results of operations.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability, measured on a discounted basis, on the balance sheet for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statements of operations and comprehensive loss. A modified retrospective transition approach is required for capital and operating leases existing at the date of adoption, with certain practical expedients available. The Company is currently in the process of evaluating the potential impact of this new accounting guidance, which is effective for the Company beginning on January 1, 2022. The impact is not expected to be significant.
Management does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on the Company’s financial statement presentation or disclosures.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31:
| 2021 |
| 2020 | |||
Building | $ | | $ | | ||
Furniture and equipment |
| |
| | ||
| |
| | |||
Less: accumulated depreciation and amortization |
| ( |
| ( | ||
$ | | $ | | |||
Depreciation and amortization expense related to property and equipment was $
26
NOTE 4. NOTES PAYABLE
In May 2018, the Company entered into a note payable with a third-party vendor as payment for an outstanding balance in the amount of $
In April 2020, the Company received $
Related Party Notes Payable
The Company entered into additional promissory notes with a related party and significant shareholder, for $
On December 1, 2021, the Company entered into a settlement agreement with the related party to repay the then remaining balance of $
Convertible Promissory Notes
During the year ended December 31, 2020, a lender converted $
Under the terms of the forbearance agreement, various notes,
On March 25, 2022, the Company amended the forbearance agreement. Under the amendment, the maturity dates of the outstanding notes were changed to October 1, 2022. In addition, the Company will issue
27
The aggregate of convertible promissory notes is as follows:
| December 31, |
| December 31, | |||
Convertible promissory notes | 2021 |
| 2020 | |||
Principal balance | $ | | $ | | ||
Debt discount balance |
| ( |
| ( | ||
Net Notes balance | $ | | $ | | ||
The Net Notes balance at December 31, 2021 is comprised of the following:
| Principal |
| Debt Discount |
| Net | ||||
Pre 2020 | $ | | $ | — | $ | | |||
July 2020 |
| |
| — |
| | |||
August 2020 |
| |
| — |
| | |||
September 2020 |
| |
| — |
| | |||
November 2020 |
| |
| ( |
| | |||
December 2020 |
| |
| ( |
| | |||
October 2021 |
| |
| ( |
| | |||
$ | | $ | ( | $ | | ||||
The Net Notes balance at December 31, 2020 is comprised of the following:
| Principal |
| Debt Discount |
| Net | ||||
Pre 2020 | $ | | $ | — | $ | | |||
July 2020 |
| |
| ( |
| | |||
August 2020 |
| |
| ( |
| | |||
September 2020 |
| |
| ( |
| | |||
October 2020 |
| |
| ( |
| | |||
November 2020 |
| |
| ( |
| | |||
December 2020 |
| |
| ( |
| | |||
$ | | $ | ( | $ | | ||||
In December 2019, the Company borrowed $
In June 2020, the Company borrowed $
In conjunction with the note issued in June 2020, the Company issued
The Common shares were valued at market price on June 4, 2020. Upon valuation of the common shares and the warrants, the Company allocated the values using a relative fair market value approach. The common shares were valued at $
In July 2020, the Company borrowed $
28
share. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest accrues at the rate of eight percent (
In August 2020, the Company borrowed $
In August 2020, the Company borrowed $
In September 2020, the Company borrowed $
In September 2020, the Company borrowed $
29
recorded as a discount on the note (see Note 7). As of December 31, 2021, the lender converted the principal amount plus accrued interest of $
On October 1, 2020, the Company borrowed $
Pursuant to a financing commitment, on October 22, 2020, the Company entered into a Note Purchase Agreement (the “Agreement”) with a third party for the sale of a convertible promissory note in the principal amount of $
Pursuant to a financing commitment, on November 3, 2020, the Company entered into a Note Purchase Agreement (the “Agreement”) with a third party for the sale of a convertible promissory note in the principal amount of $
Pursuant to a financing commitment, on December 1, 2020, the Company entered into a Note Purchase Agreement (the “Agreement”) with a third party for the sale of a convertible promissory note in the principal amount of $
30
In conjunction with the note the Company issued a warrant to purchase
Pursuant to a financing commitment, on December 3, 2020, the Company entered into a Note Purchase Agreement (the “Agreement”) with a third party for the sale of a convertible promissory note in the principal amount of $
Pursuant to a financing commitment, on December 14, 2020, the Company entered into a Note Purchase Agreement (the “Agreement”) with a third party for the sale of a convertible promissory note in the principal amount of $
Pursuant to a financing commitment, on February 8, 2021 the Company entered into a Note Purchase Agreement (the “Agreement”) with a third party for the sale of convertible promissory notes in the principal amount totaling $
In conjunction with the note the Company issued a warrant to purchase
31
On October 13, 2021, the Company entered into two financing contracts: one with Mast Hill Fund, L.P., a Delaware limited partnership (“Mast Hill”), in the principal amount of $
The Mast Hill Agreement
In exchange for a convertible promissory note, Mast Hill agreed to lend the Company $
The Talos Agreement
In exchange for a convertible promissory note, Talos agreed to lend the Company $
The beneficial conversion features, warrants and derivatives are initially recorded as a discount to the debt and amortized using the effective interest method. For the years ended December 31,2021 and 2020, $
NOTE 5. KISS LIABILITY- RELATED PARTY
In November 2018, the Company entered into KISS agreement with a related party for a purchase price of $
On September 23, 2020, the related party converted the remaining shares of
The Company determined the fair value of the KISS liability using the estimated enterprise value of the Company, allocating the percentage of fully diluted pro-rata shares to the value of the KISS liability. Changes in fair market value are recorded as other income in the Company’s statements of operations. The change in fair market value for the year ended December 31, 2020 totaled $
NOTE 6. LONG-TERM DEBT
Government Debt
In June 2020, the Company received a $
32
Bank Debt
In September 2015, the Company entered into a credit agreement for a $
In March 2020, the Company entered into an agreement with the financial institution to defer its monthly payments for
The long-term debt agreements do not contain any financial covenants.
Future aggregate maturities of long-term debt, are as follows:
For the Years Ending December 31: |
|
|
|
2022 | $ | | |
2023 |
|
| |
2024 |
|
| |
2025 |
|
| |
2026 |
|
| |
Thereafter |
|
| |
$ | |
NOTE 7. DERIVATIVE LIABILITIES
The Company issued debts that consist of the issuance of convertible promissory notes with variable conversion provisions. The conversion terms of the convertible notes are variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future price of the Company’s common stock. The number of shares of common stock issuable upon conversion of the promissory note is indeterminate. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion option and shares to be issued were recorded as derivative liabilities on the issuance date.
Based on the various convertible promissory notes described in Note 4, the fair value of applicable derivative liabilities on notes and the change in fair value of derivative liabilities are as follows for the year ended December 31, 2021:
Fair value- December 31, 2020 |
| $ | |
Change in fair value of derivative liabilities |
| | |
Derivative liabilities in conjunction with convertible promissory notes |
| | |
Conversion of convertible promissory notes |
| ( | |
Fair value- December 31, 2021 | $ | — |
Based on the various convertible promissory notes described in Note 4, the fair value of applicable derivative liabilities on notes and the change in fair value of derivative liabilities are as follows for the year ended December 31, 2020:
Fair value-December 31, 2019 | $ | | |
Derivative liabilities in conjunction with convertible promissory notes |
| | |
Change in fair value of derivative liabilities |
| ( | |
Fair value -December 31, 2020 | $ | |
33
The fair value of the derivative liabilities – convertible promissory notes is estimated using a Lattice pricing model with the following assumptions:
| 2021 |
| 2020 | ||||
Market value of common stock |
| $ | $ | ||||
Expected volatility | % |
| % | ||||
Expected term (in years) |
| ||||||
Risk-free interest rate | % |
| % | ||||
NOTE 8. RELATED PARTY TRANSACTIONS
As of December 31, 2019, the Company entered into promissory notes totaling $
On September 23, 2020, the related party converted the remaining shares of
During the year ended December 31, 2020, the Company paid the Company's CEO $
The Company paid the Company’s CEO an additional bonus of $
In February 2021, the Company issued
NOTE 9. STOCKHOLDERS’ DEFICIT
In January 2020, the Company issued
In February 2020, the Company issued
In February 2020, the Company entered into a agreement for financial advisory consulting services with a third party. In conjunction with the agreement, the Company issued the third party
In April 2020, the Company issued
In June 2020, the Company received a total of $
34
In October 2020, the Company received a total of $
In November 2020, the Company issued
In November 2020, the Company purchased, from a third-party prior note holder, and returned to treasury stock
In December 2020, the Company received $
In February 2021, the Company issued
In February 2021, the Company issued
In April 2021, the Company issued
In June 2021, the Company issued
On October 14, 2021, the board of directors approved a resolution to amend the Company’s Certificate of Incorporation to: (1) increase the Company’s authorized shares to
On November 10, 2021, the Company entered into a Common Stock Purchase Agreement with a third party to invest up to $
The Common Stock Purchase Agreement terminates December 31, 2022, or conditioned upon the following events: (i) when investor has purchased an aggregate of $
35
November 10, 2021 in connection with the above agreement, the Company also entered into a non-exclusive agreement with a placement agent (see Note 12)
On November 29, 2021, the Company issued
On December 1, 2021, the Company issued
During the years ended December 31, 2021 and 2020, lenders converted principal totaling $
See Note 10 for activity related to warrants.
NOTE 10. STOCK OPTIONS AND WARRANTS
In 2017, the Company’s Board of Directors approved the 2017 Employee and Consultant Stock Ownership Plan, (the “Plan”). The Plan provides that the Board of Directors may grant stock units, incentive stock options and non-statutory stock options to officers, key employees and certain consultants and advisors to the Company up to a maximum of
No time-based options were granted during the years ended December 31, 2021 and 2020.
36
The Company recorded pretax stock compensation expense of $
Weighted | |||||||
Weighted | Average | ||||||
Average | Contractual | ||||||
Number of | Exercise | term | |||||
| shares |
| Price |
| (years) | ||
Options outstanding at December 31, 2019 |
| |
| $ | |
| |
Granted |
| | |
| — | ||
Exercised |
| |
| |
| — | |
Forfeited |
| | |
| — | ||
Expired |
| |
| |
| — | |
Options outstanding at December 31, 2020 |
| | $ | |
| ||
Granted |
| |
| |
| — | |
Exercised | |
| |
| — | ||
Forfeited | | |
| — | |||
Expired | |
| |
| — | ||
Options outstanding at December 31, 2021 | | $ | |
| |||
Exercisable at December 31, 2021 | | $ | |
| |||
Options exercisable and expected to vest at December 31, 2021 | | $ | |
|
Warrants
On May 1, 2020, the Company issued a warrant to a third party to purchase
Assumptions |
|
| |
Expected volatility rate |
| | % |
Expected dividend yield |
| | % |
Average risk-free interest rate |
| | % |
Expected term years |
|
During the year ended December 31, 2021, the subsequent issuance of convertible promissory notes with certain terms and convertible promissory note conversions triggered the warrant reset feature increasing the number of shares to
On June 4, 2020, the Company issued a warrant to purchase
37
price of $
The warrant qualified for equity accounting as the warrant did not fall within the scope of ASC Topic 480, Distinguishing Liabilities from Equity. The warrant was measured at fair value at the time of issuance and classified as equity.
The Company valued the warrant using the Black-Scholes valuation model and recorded the fair value of the warrant of $
Risk Free Rate |
| | % |
Expected Life (Yrs.) |
| ||
Volatility |
| | % |
If the Company, at any time while this warrant is outstanding, shall sell or grant any option to purchase, or sell or grant any right to re-price, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any common stock or common stock equivalents entitling any person to acquire shares of common stock, at an effective price per share less than the then exercise price (such lower price, the “Base Share Price”), then the exercise price shall be reduced and only reduced to equal the Base Share Price and the number of shares issuable hereunder shall be increased accordingly. In June 2020, subsequent stock issuances triggered the warrant reset feature, resulting in an increase in underlying shares to
On December 1, 2020, the Company issued a warrant to purchase
The warrant qualified for equity accounting as the warrant did not fall within the scope of ASC Topic 480, Distinguishing Liabilities from Equity. The warrant was measured at fair value at the time of issuance and classified as equity.
The Company valued the warrant using the Monte Carlo pricing model and recorded the fair value of the warrant of $
Fair Value of Common Share |
| $ |
| |
Exercise Price | $ | | ||
Risk Free Rate |
| % | ||
Expected Life (Yrs.) |
| |||
Volatility |
| % |
If the Company, at any time while this warrant is outstanding, shall sell or grant any option to purchase, or sell or grant any right to re-price, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any common stock or common stock equivalents entitling any person to acquire shares of common stock, at an effective price per share less than the then exercise price (such lower price, the “New Issuance Price”), then the exercise price shall be reduced and only reduced to equal the New Issuance Price and the number of shares issuable hereunder shall be increased accordingly. In December 2020, the subsequent issuance of convertible promissory notes with certain terms triggered the warrant reset feature, resulting in an increase in underlying shares of common stock to
On October 5, 2021, the Company entered into a warrant cancellation and forfeiture agreement with the lender. Prior to the date of the warrant cancellation, the lender exercised partial warrant conversions and the Company issued
38
On February 8, 2021, the Company issued a warrant to purchase
The warrant qualified for equity accounting as the warrant did not fall within the scope of ASC Topic 480, Distinguishing Liabilities from Equity. The warrant was measured at fair value at the time of issuance and classified as equity.
The Company valued the warrant using the Monte Carlo pricing model and recorded the relative fair value of the warrant of $
Fair Value of Common Share |
| $ |
| |
Exercise Price | $ | | ||
Risk Free Rate |
| % | ||
Expected Life (Yrs.) |
| |||
Volatility |
| % |
During the year ended December 31, 2021, the subsequent issuance of convertible promissory notes with certain terms and convertible promissory note conversions triggered the warrant reset feature reducing the exercise price to $
On October 1, 2021, the Company issued
Compensation expense of $
Assumptions |
|
|
|
Expected volatility rate |
| | % |
Expected dividend yield |
| — | % |
Average risk-free interest rate |
| | % |
Expected term years |
|
On October 13,2021, the Company issued warrants to purchase
The warrants qualified for equity accounting as the warrants did not fall within the scope of ASC Topic 480, Distinguishing Liabilities from Equity. The warrants were measured at fair value at the time of issuance and classified as equity.
The Company valued the warrants using the Monte Carlo pricing model and recorded the fair value of the warrants of $
Fair Value of Common Share |
| $ |
| |
Exercise Price | $ | | ||
Risk Free Rate |
| % | ||
Expected Life (Yrs.) |
| |||
Volatility |
| % |
39
On October 17, 2021, the Company issued a warrant to purchase
Compensation expense of $
Assumptions |
|
|
| |
Fair value of common share | $ | |||
Exercise Price | $ | | ||
Risk Free Rate |
| % | ||
Expected Life (Yrs.) |
| |||
| ||||
Volatility |
| % |
The following table summarizes the information with respect to outstanding warrants to purchase common stock of the Company, all of which were exercisable at December 31, 2021:
Date Issued |
| Exercise Price |
| Number Outstanding |
| Expiration Date | |
December 1, 2018 | $ | |
| | December 1, 2023 | ||
May 1, 2020 | $ | |
| | May 1, 2025 | ||
February 8, 2021 | $ | |
| | February 8, 2026 | ||
October 1, 2021 | $ | |
| | October 1, 2026 | ||
October 13, 2021 | $ | |
| | October 13, 2026 | ||
October 17, 2021 | $ | |
| | October 17, 2024 | ||
| | ||||||
During the year ended December 31, 2021, the subsequent issuance of convertible promissory notes with certain terms and convertible promissory note conversions triggered the warrant reset feature on certain previously issued warrants. The resets for all outstanding warrants were recorded as a reduction to retained earnings and in an increase to additional paid-in-capital of $
NOTE 11. COMMITMENTS AND CONTINGENCIES
Contingencies
The Company is subject to various loss contingencies and assessments arising in the normal course of the business, some of which relate to litigation, claims, property taxes and sales and use tax or goods and services tax assessments. The Company considers the likelihood of the loss or the incurrence of a liability, as well as its ability to reasonably estimate the amount of loss in determining loss contingencies and assessments. An estimated loss contingency or assessment is accrued when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Management regularly evaluates current information available to them to determine whether such accruals should be adjusted. Based on the information presently available, including discussion with counsel and other consultants, management believes that resolution of these matters will not have a material adverse effect on its business, results of operations, financial condition or cash flows.
NOTE 12. SUBSEQUENT EVENTS
The Company has evaluated subsequent events that have occurred through the date of this filing and determined that there were no subsequent events or transactions that required recognition or disclosure in the financial statements, except as disclosed below.
The Company issued convertible promissory notes to certain investors totaling $
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per share, subject to price adjustments for certain actions, including dilutive issuances. The trigger warrants may only be exercised if the convertible promissory notes are not paid in full at the maturity date. The warrants do not provide for registration rights.
On March 18, 2022, the Company’s board of directors approved a resolution to amend the Company’s Certificate of Incorporation to increase the Company’s authorized common shares authorized from
On March 25, 2022, the Company amended the 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 shares of its common stock at a share price of $
The Company made principal payments totaling $
The Company issued
In January and February 2022, the Company sold
In January and February 2022 certain lenders exercised
The Company’s CEO received $
SUPPLEMENTARY DATA
The Company is a smaller reporting Company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
We carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2021, the end of the period covered by this Report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses discussed below.
Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive officer and principal financial officer and effected by the Board, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
o | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets. |
o | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures of are being made only in accordance with authorizations of our management and directors; and, |
o | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. |
Because of our inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management identified the following material weaknesses:
o | we do not have an Audit Committee – While not being legally obligated to have an Audit Committee, it is the management’s view that such a committee, including a financial expert board member, is an utmost important entity level control of the Company’s financial statements. Currently the Board of Directors acts in the capacity of the Audit Committee and does not include a member that is considered to be independent of management to provide the necessary oversight over management’s activities. |
o | we have not performed a risk assessment and mapped our processes to control objectives. |
o | we have not implemented comprehensive entity-level internal controls. |
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o | we have not implemented adequate system and manual controls; and |
o | we do not have sufficient segregation of duties. |
Our management assessed the effectiveness of internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organization of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework (2013). Based on management’s assessment, management concluded that the above material weaknesses have not been remediated and, accordingly, our internal control over financial reporting is not effective as of December 31, 2021.
Remediation of Material Weaknesses
Management understands that in order to remediate the material weaknesses, additional segregation of duties, changes in personnel and technologies are necessary. We will not consider these material weaknesses fully remediated until management has implemented and tested those internal controls and found them to be operating effectively.
This Report does not include an attestation report of our independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to such attestation pursuant to rules of the Securities and Exchange Commission that permits us to provide only management’s report in this Annual Report.
Changes in Internal Control over Financial Reporting
We implemented no changes to our internal control over financial reporting during the year ended December 31, 2021.
ITEM 9B. OTHER INFORMATION
None.
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PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our Board of Directors and Executive Officers
The following table sets forth the names and ages of our current directors and executive officers, the principal offices and positions held by each person, and the date such person became a director or executive officer. Our executive officers are appointed by the Board of Directors. The directors serve one-year terms until their successors are elected. The executive officers serve terms of one year or until their death, resignation or removal by the Board of Directors. Unless described below, there are no family relationships among any of the directors and officers.
The following table presents information with respect to our officers, directors and significant employees as of December 31, 2021:
Name |
| Age |
| Position |
Matthew Wolfson |
| 50 |
| Chief Executive Officer, President, Chief Financial Officer, |
Sole Director |
Biographical Information Regarding Officers and Directors
Mr. Wolfson has been our sole officer and director since inception. Mr. Wolfson is a Phoenix based entrepreneur with a keen interest in technology and design. He is the founder of Electromedical Technologies, Inc. and has been the CEO and has worked full-time for the Company since he began researching and developing the WellnessPro in 2003.
As an entrepreneur he has been involved in several successful companies, in the early 90’s, Matthew Wolfson co-founded Globalcom 2000 and entered into the prepaid phone card business, which at that time was an almost unknown market. Globalcom 2000 became one of the largest phone card companies in the United States.
In 1994, he developed an interest in the telecom “International Callback” business and co-founded One World Communications. He subsequently travelled the world, opening up over 150 training centers and helped create the world’s largest International global sales force selling telecom services.
Term of Office
All of our directors are appointed for a one-year term to hold office until the next annual meeting of stockholders and until their successors are elected and qualified, or until their earlier death, retirement, resignation or removal. Executive officers serve at the discretion of the Board of Directors, and are elected or appointed to serve until the next Board of Directors meeting following the annual meeting of stockholders. Our executive officers are appointed by our Board of Directors and hold office until removed by the Board.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers and directors and persons who beneficially own more than 10% of our common stock to file initial reports of beneficial ownership and reports of changes in beneficial ownership with the SEC. Such persons are required by SEC regulations to furnish us with copies of all Section 16(a) forms filed by such persons.
Based solely on our review of such forms furnished to us, and written representations from certain reporting persons, we believe that all filing requirements applicable to our executive officers, directors and greater than 10% stockholders during the fiscal year ended December 31, 2021 were satisfied.
Involvement in Certain Legal Proceedings
To the best of our knowledge, during the past five years, none of the following occurred with respect to a present director (or person nominated to become director), executive officer, founder, promoter or control person: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities; and (4) being found by a court of competent jurisdiction (in a
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civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
Code of Ethics
We have adopted a corporate code of ethics. We believe our code of ethics is reasonably designed to deter wrongdoing and promote honest and ethical conduct; provide full, fair, accurate, timely and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal reporting of code violations; and provide accountability for adherence to the code. To the knowledge of the Company, there have been no reported violations of the Code of Ethics.
Whistleblower Procedures Policy
In accordance with the requirements of Section 301 of the Sarbanes-Oxley Act of 2002, the Board of Directors of the Company has adopted a Whistleblower Procedures Policy, stating that all employees of the Company are strongly encouraged to report any evidence of financial irregularities which they may become aware of, including those with respect to internal controls, accounting or auditing matters. Under the Whistleblower Procedures Policy, the management of the Company shall promptly and periodically communicate to all employees with access to accounting, payroll and financial information the means by which they may report any such irregularities. In the event an employee is uncomfortable for any reason reporting irregularities to his or her supervisor or other management of the Company, employees may report directly to any member of the Board of Directors of the Company. The identity of any employee reporting under these procedures will be maintained as confidential at the request of the employee, or may be made on an anonymous basis. Notice must be provided to all of the Company’s employees with access to accounting, payroll and financial information in respect of these procedures.
The Company does not have any Committees of the Board
CORPORATE GOVERNANCE
Director Independence
We are not listed on a major U.S. securities exchange and, therefore, are not subject to the corporate governance requirements of any such exchange, including those related to the independence of directors. Upon our listing on any national securities exchange or any inter-dealer quotation system, we will elect such independent directors as is necessary under the rules of any such securities exchange.
Board Leadership Structure
We currently have one executive officer who is also a Director. Our Board has reviewed the Company’s current Board leadership structure. In light of the Company’s size, nature of the Company’s business, regulatory framework under which the Company operates, stockholder base, the Company’s peer group and other relevant factors, the Company has determined that this structure is currently the most appropriate Board leadership structure for our company. Nevertheless, the Board intends to carefully evaluate from time to time whether our current structure should be modified based on what the Board believes is best for the Company and our stockholders.
Board Role in Risk Oversight
Risk is inherent in every business, and how well a business manages risk can ultimately determine its success. We face a number of risks, including strategic risks, enterprise risks, financial risks, and regulatory risks. While our management is responsible for day to day management of various risks we face, the Board, as a whole, is responsible for evaluating our exposure to risk and to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed. The Board reviews and discusses policies with respect to risk assessment and risk management. The Board also has oversight responsibility with respect to the integrity of the Company’s financial reporting process and systems of internal control regarding finance and accounting, as well as its financial statements.
Audit Committee
The Board does not currently have a standing Audit Committee. The full Board performs the principal functions of the Audit Committee. The full Board monitors our financial reporting process and internal control system and reviews and appraises the audit efforts of our independent accountants.
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Compensation Committee
The Board does not currently have a standing Compensation Committee. The full Board establishes our overall compensation policies and reviews recommendations submitted by our management.
Nominating Committee
The Board does not currently have a standing Nominating Committee. We do not maintain a policy for considering nominees. Our Bylaws provides that the number of Directors shall be fixed from time to time by the Board, but in no event shall be less than the minimum required by law. The Board of Directors shall be large enough to maintain our required expertise but not too large to function efficiently. Director nominees are recommended, reviewed and approved by the entire Board. The Board believes that this process is appropriate due to the relatively small number of directors on the Board and the opportunity to benefit from a variety of opinions and perspectives in determining director nominees by involving the full Board.
While the Board is solely responsible for the selection and nomination of directors, the Board may consider nominees recommended by stockholders as it deems appropriate. The Board evaluates each potential nominee in the same manner regardless of the source of the potential nominee’s recommendation. Although we do not have a policy regarding diversity, the Board does take into consideration the value of diversity among Board members in background, experience, education and perspective in considering potential nominees for recommendation to the Board for selection. Stockholders who wish to recommend a nominee should send nominations to our President, Matthew Wolfson, 16561 North 92nd Street, Suite 101, Scottsdale, AZ 85260, that includes all information relating to such person that is required to be disclosed in solicitations of proxies for the election of directors. The recommendation must be accompanied by a written consent of the individual to stand for election if nominated by the Board and to serve if elected.
Compensation Consultants
We have not historically relied upon the advice of compensation consultants in determining Named Executive Officer compensation. Instead, the full Board reviews compensation levels and makes adjustments based on their personal knowledge of competition in the market place, publicly available information and informal surveys of human resource professionals.
Stockholder Communications
Stockholders who wish to communicate with the Board may do so by addressing their correspondence to the Board at Electromedical Technologies, Inc., Attention: Mathew Wolfson, 16561 North 92nd Street, Suite 101, Scottsdale, AZ 85260. The Board shall review and respond to all correspondence received, as appropriate.
ITEM 11. EXECUTIVE COMPENSATION
Our sole director, Matthew Wolfson, who is also our chief executive officer, chief financial officer, receives a base salary of $20,000 per month in compensation, as part of an Executive Compensation Agreement signed with the Company, attached hereto. In addition, Mr. Wolfson is due $500,000 to be paid at a later date on determination of the board of directors, as an initial payment for this Executive Compensation Agreement. Mr. Wolfson’s Employment Contract is attached hereto.
Mr. Wolfson receives no compensation for serving as the Chairman and sole director of the Company. During the Director’s term, the Company reimburses the Director for all reasonable out-of-pocket expenses incurred by the Director in attending any in-person meetings, provided that the Director complies with the generally applicable policies, practices and procedures of the Company for submission of expense reports, receipts or similar documentation of such expenses. Any reimbursements for allocated expenses (as compared to out-of-pocket expenses of the Director in excess of $500.00) must be approved in advance by the Company
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Executive Compensation Table
Nonqualified | |||||||||||||||||||||||||||
Nonequity | deferred | ||||||||||||||||||||||||||
Stock | Option | incentive plan | compensation | All other | |||||||||||||||||||||||
Name and principal | Salary | Bonus | awards | awards | compensation | earnings | compensation | Total | |||||||||||||||||||
position |
| Year |
| ($) |
| ($) |
| ($) |
| ($) |
| ($) |
| ($) |
| ($) |
| ($) |
| ||||||||
Matthew Wolfson |
| 2021 | $ | 240,000 | $ | 105,042 | $ | 604,890 |
| $ | — | $ | 589,903 | $ | — | $ | — | $ | 1,539,835 | (1)(2) | |||||||
Matthew Wolfson |
| 2020 | $ | 240,000 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 240,000 | (1)(2) | ||||||||
| (1) | During the year ended December 31, 2020, the Company paid the Company’s CEO $124,022 towards the balance of the 2019 signing bonus. Total amount outstanding at December 31, 2021 and 2020 is $0 and $20,978, respectively. |
| (2) | On February 16, 2021, the Company issued Matthew Wolfson 1,100,000 shares of common stock registered on Form S-8. as compensation expense for a total of $604,890 or $0.5499 per share. In October 2021, the Company issued the Company’s CEO 5,000,000 cashless warrants at $0.025 per share. The Company paid the Company’s CEO an additional bonus of $105,042 during the year ended December 31, 2021. |
Director Compensation Table
Monthly |
| |||||
Directors |
| Title |
| Compensation |
| |
Matthew Wolfson(1) |
| Chief Executive Officer, Chief Financial Officer and Chairman | $ | 20,000 | (1)(2) | |
| (1) | Mr. Wolfson owns 15,406,250 common shares and 500,000 Series A Preferred Shares. Please see “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT for additional information. |
| (2) | In addition to Mr. Wolfson’s monthly compensation, which is outlined here, he receives additional compensation as part of this Executive Compensation Agreement. This Agreement is attached hereto. |
Retirement Benefits
We do not currently provide our named executive officers with supplemental or other retirement benefits.
Retirement Benefits
We do not currently provide our named executive officers with supplemental or other retirement benefits.
Equity Awards at December 31, 2021
On February 17, 2021, we issued 1,100,000 shares of common stock to Matthew Wolfson pursuant to the Company’s Equity Incentive Plan.
On October 1, 2021, we issued Matthew Wolfson a cashless warrant to purchase 5 million common shares at a price of $0.025 per share.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
As of the date hereof, here is information with respect to the securities holdings of (i) our officers and directors, and (ii) all persons (currently none) which, pursuant to filings with the SEC and our stock transfer records, we have reason to believe may be deemed the beneficial owner of more than five percent (5%) of the shares of Common Stock.
The securities “beneficially owned” by an individual are determined in accordance with the definition of “beneficial ownership” set forth in the regulations promulgated under the Exchange Act and, accordingly, may include securities owned by or for, among others, the spouse and/or minor children of an individual and any other relative who resides in the same home as such individual, as well as other securities as to which the individual has or shares voting or investment power or which each person has the right to acquire within 60 days through the exercise of options or otherwise. Beneficial ownership may be disclaimed as to certain of the securities.
The following table is based on the number of shares outstanding totaling 87,725,842 as of December 31, 2021.
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The following table sets forth certain information as of December 31, 2021 by (i) all persons who are known by us to beneficially own more than 5% of our outstanding shares of common stock; and (ii) each director, director nominee, and Named Executive Officer. The footnotes below pertain to total shares, voting rights and conversion shares, and provide other explanations.
Common | |||||||||||||
Shares | Percent of | Series A | Series A | Voting | Voting | ||||||||
Name of Beneficial Owner |
| Owned |
| Common(1) |
| Owned |
| Votes(2) |
| Shares(3)(4) |
| Power(3) | |
Matthew Wolfson 7460 E Tuckey Ln Scottsdale, AZ 85250 |
| 15,406,250 |
| 17.56 | % | 500,000 |
| 50,000,000 |
| 65,406,250 | (4) | 47.49 | %(4) |
| 1) | Based on 87,725,842 common shares outstanding December 31, 2021. |
| 2) | Based on 100 votes of common share equivalents for each Series A Preferred held. |
| 3) | Based on combined voting power of Mr. Wolfson’s common shares and common shares equivalent rights as a holder of Series A Preferred Shares. |
| 4) | Based on 137,725,842 total possible votes assuming voting of Mr. Wolfson’s Series A Preferred Shares. |
Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has direct ownership, voting power and investment power with respect to the shares of Company preferred stock and common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS, AND DIRECTOR INDEPENDENCE
As of December 31, 2019, the Company entered into various promissory notes totaling $318,000 with a related party, Donald Steinberg the sole member and manager of Blue Ridge Enterprises, LLC (“Blue Ridge”), a California limited liability company. The Company entered into additional promissory notes with the related party for $84,500 and repaid $70,000 of promissory notes during the year ended December 31, 2020, for a total of $332,500 outstanding. On December 1, 2021, the Company entered into a settlement agreement with the related party to repay the then remaining balance of $231,500 plus $18,370 in accrued interest. Under the terms of the agreement, the total is to be settled in cash of $125,620 divided into two payments and 2,000,000 shares of Company stock at a conversion price of $0.062 per share. Cash payments totaling of $158,875, were made in 2021, with the remaining principal balance of $57,875 paid in January 2022. Interest expense totaled $18,590 and $386 for the years ended December 31, 2021 and 2020, respectively.
On September 23, 2020, the related party converted the remaining shares of 7,156,497 under the KISS liability-related party at a value of $1,452,575, which was reclassed to additional paid-in-capital.
In July 2017, the Company entered into a $250,000 promissory note with its CEO, Matthew Wolfson. Mr. Wolfson is considered a Related Party since he is the Company’s Principal Executive Officer. The proceeds were used for operations and Regulation A+ offering costs. The promissory note began accruing interest on the interest commencement date of October 1,2018 at 2% per annum, compounded monthly. The note payable and accrued interest of $3,775 are deemed paid in full as of December 31, 2019.
In October 2019, the Company entered into an employment agreement with the Company’s CEO. The terms of the agreement include an annual base salary of $240,000 and a signing bonus of $500,000, as well as discretionary annual bonuses and participation in long-term incentive plans. The signing bonus may be paid in shares of the Company’s common stock. The agreement remains in effect until the earlier of the discharge or resignation of the CEO. In conjunction with the agreement, the $500,000 signing bonus has been accrued and included in selling, general and administrative expenses in the accompanying statement of operations during the year ended December 31, 2019. On November 1, 2019, the Company’s board of directors and the majority of shareholders awarded CEO, Matthew Wolfson, 500,000 shares of Series A Preferred stock, which was valued at $355,000 or $.71 per share. The shares were issued as partial payment for the $500,000 signing bonus, for which $145,000 remained payable at December 31, 2019. During the year ended December 31,2020, the Company paid the Company’s CEO $124,022 and towards the balance of the 2019 signing bonus. Total amount outstanding at December 31, 2021 and 2020 is $0 and $20,978, respectively.
The Company paid Matthew Wolfson a bonus of $105,042 during the year ended December 31, 2021.
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In February 2021, the Company issued 1,100,000 shares of common stock as registered on Form S-8 to Matthew Wolfson as compensation at $0.5499 per share.
In October 2021, the Company issued Matthew Wolfson 5,000,000 cashless warrants at $0.025 per share.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees billed to us for the fiscal year ended December 31,2021 by dbMckennon:
Year Ended | Year Ended | |||||
December 31, | December 31, | |||||
| 2021 |
| 2020 | |||
Audit fees (1) | $ | 46,750 | $ | 48,400 | ||
Audit-related fees (2) |
| — |
| — | ||
Tax fees (3) |
|
| $ | 4,210 | ||
All other fees (4) | $ | 4,368 | $ | 3,705 | ||
| (1) | Audit fees consist of fees billed for professional services rendered for the audit of our annual financial statements, the review of the interim financial statements included in quarterly reports and services that are normally provided by dbbmckennon in connection with statutory and regulatory filings or engagements, consultations in connection with acquisitions and issuances of auditor consents and comfort letters in connection with SEC registration statements and related SEC and non-SEC securities offerings. |
| (2) | Audit-related fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit fees” by dbbmckennon. |
| (3) | Tax fees consist of fees billed for professional services rendered for tax compliance, tax advice and tax planning (domestic and international). These services include assistance regarding federal, state and international tax compliance, acquisitions and international tax planning. |
| (4) | All other fees consist of fees for products and services other than the services reported above. |
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following consolidated financial statements of Electromedical Technologies, Inc. are included in “Item 8. Financial Statements and Supplementary Data.”
16 | |
17 | |
18 | |
19 | |
20 | |
21 |
(a)(2) Financial Statement Schedules
None.
* In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections.
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101.SCH | XBRL Taxonomy Extension Schema Document | |||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |||
101.DEF | XBRL Taxonomy Extension Definitions Linkbase Document | |||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |||
104 | Cover Page Interactive Data File (formatted as Inline XBRL as contained in Exhibit 101) |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 31, 2022 | ||
By: | /s/Matthew Wolfson | |
Matthew Wolfson | ||
Chief Executive Officer, Chief | ||
Financial Officer |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Matthew Wolfson, with full power of substitution and re-substitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file, any and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their and his or her substitute or substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
| Title |
| Date |
/S/ Matthew Wolfson | Chief Executive Officer, Chief Financial Officer and Director | March 31, 2022 | ||
Matthew Wolfson |
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