ELECTROMEDICAL TECHNOLOGIES, INC MANAGEMENT'S …

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. 10 Table of ContentsOn an on-going basis, we evaluate these estimates, including those related to useful lives of real estate assets, bad debts, impairment, 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.BackgroundElectromedical 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.Critical Accounting PoliciesRevenue RecognitionThe 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 in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, 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 on the balance sheets.Equity Issued with Convertible DebtThe Company is required to issue warrants in conjunction with certain convertible debt. 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 values the warrants using a Black Scholes Merton pricing model and records the warrants as a reduction of the notes included in the debt discount balance. 11 Table of ContentsResults of OperationsThe following table sets forth the audited results of our operations for the years ended December 31: 2022 2021Net Sales £ 1,149,844 £ 907,362Cost of goods sold: 261,203 199,234Gross profit 888,641 708,128Operating Expenses 2,492,169 4,508,391Loss from operations (1,603,528) (3,800,263)Other expense (1,864,972) (4,679,886)Net Loss £ (3,468,500) £ (8,480,149)January 1, 2022 through December 31,2022 Compared to January 1, 2021 through December 31, 2021Our sales totaled £1,149,844 for the year ended December 31, 2022 and £907,362 for the year ended December 31, 2021.

The increase is primarily related to an increase in units sold.Cost of sales and gross margins for the year ended December 31, 2022 and for the year ended December 31, 2021 were £261,203 and 77% and £199,234 and 78%, respectively. Our cost of sales consists of the cost of materials and distribution expenses. Cost of sales and gross margins are affected by product mix as well as the mix in the level of sales between commissioned agents and distributors.The following table sets forth the operating expenses for the years endedDecember 31: 2022 2021 ChangeSales and marketing £ 30,566 92,608 (62,042)Commissions 220,567 207,264 13,303Payroll related 963,177 2,441,758 (1,478,581)Consulting and professional fees 940,954 1,386,758 (445,804)Research and development 92,299 215,320 (123,021)Other operating expenses 244,606 164,683 79,923 £ 2,492,169 £ 4,508,391 £ (2,016,222)The following table sets forth the stock- based compensation expense included in the above operating expenses for the years ended December 31: 2022 2021 ChangeSales and marketing £ 8,000 £ – £ 8,000Payroll related 14,703 1,666,716 (1,652,013)Consulting and professional fees 486,900 963,428 (476,528) £ 509,603 £ 2,630,144 £ (2,120,541)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 £2,492,169 for the year ended December 31, 2022 and £4,508,391 for the year ended December 31, 2021, a decrease of £2,016,222 or about 45%. The change is primarily due to decreases in stock-based compensation expense of £2,120,541, research and development costs of £123,021 and marketing costs of £62,042, partially offset by non -stock-based compensation related increases in payroll related costs of £173,432 and other operating expenses of £79,923. 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, 2022, includes £461,900 related to third party agreements for financial and strategic advisory services, £25,000 for director’s fees and £10,000 for shares of Series A preferred stock issued to the Company’s CEO as compensation. 12Table of ContentsThe decrease in research and development costs reflects the initial development payment of approximately £122,000 made under contract in the 2021 period. Ongoing payments are made upon achievement of certain contractual milestones. The decrease in consulting and professional fees is the result of stock-based compensation recorded in conjunction with shares issued for investor relations and financial advisory services.

The decrease in marketing expenses is due to the termination of various third- party arrangements.The non -stock-based compensation increase in payroll related costs consists primarily of additional employee headcount and an increase in bonus paid to the Company’s CEO of approximately £29,000. The non-stock-based compensation increase in other operating expenses relates primarily to costs associated public company insurance premiums and increased travel for sales and marketing efforts.Other expense decreased by £2,814,914 primarily due to a decrease in interest expense of £2,522,780, and a decrease in gain in the change in fair market value of derivative liabilities of £1,415,685, partially offset by a loss on extinguishment of debt of £1,079,800. The decrease in interest expense reflects a decrease in the amortization of debt discount related to debt conversions and maturities that occurred since June 2021 as well as no day 1 derivative loss for newly incurred debt in the 2022 period, as compared to the 2021 period.

All derivative liabilities were settled as of December 31, 2021.As a result of the foregoing, we recorded a net loss of £3,468,500 for the year ended December 31, 2022, compared to a net loss of £8,480,149 for year ended December 31, 2021. The decrease in net loss is primarily attributed to the decrease in other expense, the decrease in selling, general and administrative expenses and increased gross profit.COVID-19 may impact our business.On January 30, 2020, the World Health Organization declared the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 11, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the COVID-19 include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses.

COVID-19, and actions taken to mitigate it, have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical areas in which we operate. While it is unknown how long these conditions will last and what the complete financial effect will be to the Company, COVID-19 may have an adverse effect on our business. While we are taking diligent steps to mitigate any possible disruptions to our business, we are unable to predict the extent or nature of these impacts, at this time, to our future financial condition and results of operations.Liquidity and Capital ResourcesDuring the year ended December 31, 2022, our cash and cash equivalents decreased by £14,745 reflecting cash used in operations of £773,337, and net proceeds from financing activities of £758,592.

At December 31, 2022, the Company had a working capital deficit of £2,276,373 and cash on hand of £368,425.The Company requires additional capital to service its working capital deficit and fund future operations. The Company expects to obtain funding through additional debt and equity placement offerings until it consistently achieves positive cash flows from operations. If the Company is unable to obtain additional funding, it may not be able to meet all of its obligations as they come due for the next twelve months.

The continuing viability of the entity and its ability to continue as a going concern is dependent upon the entity being successful in its continuing efforts in growing its revenue base and/or accessing additional sources of capital, and/or selling assets. Our Independent Registered Public Accounting Firm included an explanatory paragraph regarding substantial doubt about the Company’s ability to continue as a going concern.As of the date of this filing, the Company is currently in default with one its lenders, for non-payment of two matured convertible promissory notes issued on October 13, 2021, and February 11, 2022, with principal and interest due in the amounts of £78,495 and £95,410, respectively. Further, and as a result of the Company’s sale of its real property on March 15, 2023, the Company is in default with its unmatured convertible promissory note issued to the lender on September 15, 2022.

The convertible promissory notes issued to the lender all contain provisions for default amounts equal to the principal amounts, plus accrued interest, and default interest, through the date of repayment, multiplied by 125%.Separately, and also as a result of the Company’s sale of its real property on March 15, 2023, the Company is in default respecting unmatured convertible promissory notes issued to two lenders on February 11, 2022, and August 8, 2022, in the principal amounts of £307,500 and £176,000, respectively, each not including interest due. One convertible note included a cross-default provision which required the Company to remit full repayment of interest and principal due through the date of full repayment multiplied by 125%. 13Table of ContentsAs of the date of this filing, the note holders have agreed to temporarily waive the respective defaults, including principal, interest, default penalties, and default amounts, and to enter into negotiations to reform the respective outstanding convertible notes payable. Accordingly, no amounts were accrued as a result of the defaults.Operating ActivitiesCash flows used in operating activities totaled £773,337 for the year ended December 31, 2022 as compared to cash flows used of £1,193,688 for the year ended December 31, 2021.

The decrease in cash flows used in operating activities is primarily the result of improved operating results, a decrease in inventory purchases and deposits and increased customer deposits, partially offset by an increase in accrued expenses and other current liabilities.Financing ActivitiesCash flows provided by financing activities totaled £758,592 for the year ended December 31, 2022 as compared to £1,311,945 for the year ended December 31, 2021. The cash flows provided in the 2022 period reflect £1,545,140 in net proceeds from convertible promissory notes and £42,766 from the sale of common stock, partially offset by repayment of convertible promissory notes and related party notes payable totaling £803,959. 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 related party notes payable repayments totaling £158,875.During the year ended December 31, 2022, the Company issued convertible promissory notes to certain investors totaling £1,859,480 with net proceeds of £1,545,140.

Original issue discount totaling £185,580, loan costs totaling £128,760 and the fair value of warrants issued or to be issued to third party advisors of £110,552 have been recorded as a discount on the notes. The notes accrue interest at 12% per annum and have initial conversion prices of £0.015-£0.025, with the exception of one note, subject to adjustment and mature nine months to one year from issuance. One note is only convertible upon default and at a 25% discount to trading prices during the ten days prior to conversion election.

As additional consideration for the financings, the Company issued the lenders three to five-year warrants to purchase a total of 21,000,000 shares of common stock at an initial price of £0.025 per share, and three to five-year trigger warrants to purchase a total of 173,000,000 shares of common stock at £0.015- £0.025 per share, subject to price adjustments for certain actions, including dilutive issuances. The relative fair value of the warrants totaling £385,422 has been recorded as a discount on the notes. The trigger warrants may only be exercised if the convertible promissory notes are not paid in full at the maturity dates.

The warrants do not provide for registration rights.

As of the date of this filing, warrants to purchase 25,000,000 shares of common stock have been triggered.In January and February 2022, the Company sold 1,500,000 shares of common stock at prices ranging from £0.0259- £0.0353 under a stock purchase agreement with net proceeds totaling £42,766.Related Party TransactionsWe 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. 14Table of ContentsOff Balance Sheet ArrangementsAs of December 31, 2022, and 2021, 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.(C) Edgar Online, source Glimpses