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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022.

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______.

Commission File Number 000-56192

Graphic

ELECTROMEDICAL TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

Delaware
(State or Other Jurisdiction of
Incorporation)

5047
(Primary Standard Industrial
Classification Code Number)

82-2619815
(I.R.S. Employer
Identification No.)

16561 N. 92nd Street, Ste. 101

 

Scottsdale, AZ

85260

(Address of principal executive offices)

(Zip Code)

888-880-7888

(Registrant’s telephone number, including area code)

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. Yes No

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 ST (§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). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth 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 No

On November 11, 2022, 172,884,530 shares of common stock were outstanding.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

UNAUDITED FINANCIAL STATEMENTS:

3

 

 

BALANCE SHEETS AS OF SEPTEMBER 30, 2022 AND DECEMBER 31, 2021

3

 

 

STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

4

 

 

STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

5

 

 

STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

7

 

 

NOTES TO THE UNAUDITED FINANCIAL STATEMENTS

8

 

 

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

18

 

 

 

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

22

 

 

 

Item 4.

CONTROLS AND PROCEDURES

23

 

 

 

PART II. OTHER INFORMATION

24

 

 

 

Item 1.

LEGAL PROCEEDINGS

24

 

 

 

Item 1A.

RISK FACTORS

24

 

 

 

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

25

 

 

 

Item 3.

DEFAULTS UPON SENIOR SECURITIES

39

 

 

 

Item 4.

MINE SAFETY DISCLOSURE

39

 

 

 

Item 5.

OTHER INFORMATION

39

 

 

 

Item 6.

EXHIBITS

41

 

 

 

SIGNATURES

46

2

ITEM 1. FINANCIAL STATEMENTS

ELECTROMEDICAL TECHNOLOGIES, INC.

BALANCE SHEETS

(UNAUDITED)

    

September 30, 2022

    

December 31, 2021

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

458,915

$

383,170

Accounts receivable

 

16,681

 

35,085

Inventories

 

117,550

 

218,510

Prepaid expenses and other current assets

 

101,194

 

38,002

Total current assets

 

694,340

 

674,767

Property and equipment, net

 

710,938

 

727,344

Total assets

$

1,405,278

$

1,402,111

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

277,085

$

214,785

Credit cards payable

 

43,031

 

11,283

Accrued expenses and other current liabilities

 

717,628

 

317,037

Customer deposits

 

25,840

 

Convertible promissory notes, net of discount of $592,869 and $723,166, respectively

 

1,384,327

 

811,687

Related party notes payable

 

 

57,875

Long term debt, current portion

 

31,119

 

29,502

Total current liabilities

 

2,479,030

 

1,442,169

Long-term liabilities:

 

  

 

  

Bank debt, net of current portion

 

497,079

 

518,849

Government debt, net of current portion

 

153,882

 

154,429

Other liabilities

 

11,045

 

9,167

Total liabilities

 

3,141,036

 

2,124,614

Commitments and contingencies (Note 9)

 

 

Stockholders’ deficit

 

  

 

  

Series A Preferred Stock, $.00001 par value, 1,000,000 shares authorized and 1,000,000 and 500,000 outstanding at September 30, 2022 and December 31, 2021, respectively

 

365,000

 

355,000

Series B Preferred Stock, $.00001 par value, 1 share authorized and 0 outstanding

Common stock, $.00001 par value, 999,000,000 and 250,000,000 shares authorized; 157,950,530 and 87,725,842 shares outstanding at September 30, 2022 and December 31, 2021, respectively

 

1,577

 

876

Additional paid-in-capital

 

21,867,892

 

20,804,333

Accumulated deficit

 

(23,970,227)

 

(21,882,712)

Total stockholders’ deficit

 

(1,735,758)

 

(722,503)

Total liabilities and stockholders’ deficit

$

1,405,278

$

1,402,111

The accompanying notes are an integral part of these financial statements

3

ELECTROMEDICAL TECHNOLOGIES, INC.

STATEMENTS OF OPERATIONS

(UNAUDITED)

THREE MONTHS ENDED SEPT 30,

NINE MONTHS ENDED SEPT 30,

    

2022

    

2021

    

2022

    

2021

Net sales

$

279,551

$

301,157

$

726,696

$

670,551

Cost of sales

 

58,008

66,733

170,984

 

158,065

Gross profit

 

221,543

234,424

555,712

 

512,486

Selling, general and administrative expenses

 

558,919

454,997

1,901,908

 

2,822,251

Loss from operations

 

(337,376)

(220,573)

(1,346,196)

 

(2,309,765)

Other income (expense)

 

 

Interest expense

 

(160,570)

(1,105,069)

(510,417)

 

(2,937,851)

Change in fair market value of derivative liabilities

(1,974,164)

(1,436,756)

Other income (expense)

(432)

Forgiveness of debt

50,082

Loss on extinguishment of debt

 

(460,000)

(781,800)

 

Total other expense

 

(620,570)

(3,079,233)

(1,292,217)

 

(4,324,957)

Net loss

$

(957,946)

$

(3,299,806)

$

(2,638,413)

$

(6,634,722)

Deemed dividend related to warrant resets

(19,780)

(8,396)

(83,161)

(3,748,695)

Net loss attributable to common stockholders

$

(977,726)

$

(3,308,202)

$

(2,721,574)

$

(10,383,417)

Weighted average shares outstanding - basic and diluted

146,993,139

54,356,854

119,799,025

 

39,670,934

Weighted average loss per share - basic and diluted

$

(0.01)

$

(0.06)

$

(0.02)

$

(0.26)

The accompanying notes are an integral part of these financial statements

4

ELECTROMEDICAL TECHNOLOGIES, INC.

STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022

(UNAUDITED)

Total

Preferred Stock

Common Stock

Paid in

Accumulated

Stockholders’

    

Amount

    

Shares

Amount

    

Shares

Capital

    

Deficit

    

Deficit

Balance, December 31, 2021

$

355,000

 

500,000

$

876

 

87,725,842

$

20,804,333

$

(21,882,712)

$

(722,503)

Adoption of ASU2020-06

 

(1,013,414)

 

634,059

 

(379,355)

 

Shares issued for consulting services

 

 

106

10,600,000

356,794

 

 

356,900

Warrants issued in conjunction with convertible promissory notes

142,996

142,996

Warrants reset in conjunction with convertible promissory notes

63,381

(63,381)

Cashless warrant exercises

51

5,129,725

(51)

Issuance of common stock for cash

15

1,500,000

42,751

42,766

Stock-based compensation

 

 

4,703

 

 

4,703

Net loss

 

 

 

(1,144,536)

 

(1,144,536)

Balance, March 31, 2022

$

355,000

500,000

$

1,048

104,955,567

$

20,401,493

$

(22,456,570)

$

(1,699,029)

Shares issued for consulting services

30

3,000,000

44,970

45,000

Shares issued in conjunction with forbearance of convertible promissory notes

40

4,000,000

142,760

142,800

Convertible promissory notes payable settlement

267

26,734,801

668,103

668,370

Warrants issued in conjunction with debt extinguishment

65,000

65,000

Cashless warrant exercises

35

3,550,162

(35)

Net loss

(535,931)

(535,931)

Balance, June 30, 2022

$

355,000

500,000

$

1,420

142,240,530

$

21,322,291

$

(22,992,501)

$

(1,313,790)

Warrants issued in conjunction with convertible promissory notes

 

 

 

302,978

 

 

302,978

Warrants reset in conjunction with convertible promissory notes

 

 

 

19,780

 

(19,780)

 

Cashless warrant exercises

 

 

27

2,710,000

 

(27)

 

 

Convertible promissory note conversions

 

 

62

6,200,000

 

154,938

 

 

155,000

Shares issued for consulting services

68

6,800,000

67,932

68,000

Stock based compensation

10,000

500,000

10,000

Net loss

(957,946)

(957,946)

Balance, September 30, 2022

$

365,000

1,000,000

$

1,577

157,950,530

$

21,867,892

$

(23,970,227)

$

(1,735,758)

5

ELECTROMEDICAL TECHNOLOGIES, INC.

STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021

(UNAUDITED)

Total

Preferred Stock

Common Stock

Paid in

Accumulated

Stockholders’

    

Amount

    

Shares

    

Amount

    

Shares

    

Capital

    

Deficit

    

Deficit

Balance, December 31, 2020

$

355,000

500,000

$

269

27,175,800

$

7,957,860

$

(9,631,732)

$

(1,318,603)

Shares issued for consulting services

 

 

 

11

 

1,084,120

 

693,815

 

 

693,826

Warrant issued in conjunction with convertible promissory note

 

 

 

 

 

420,096

 

 

420,096

Warrants reset in conjunction with convertible promissory notes

 

 

 

 

 

510,222

 

(510,222)

 

Conversion of convertible promissory notes

 

 

 

10

 

1,019,113

 

380,093

 

 

380,103

Stock-based compensation

 

 

 

11

 

1,100,000

 

604,890

 

 

604,901

Net loss

 

 

 

 

 

 

(2,560,384)

 

(2,560,384)

Balance, March 31, 2021

$

355,000

 

500,000

 

301

 

30,379,033

$

10,566,976

$

(12,702,338)

$

(1,780,061)

Warrants reset in conjunction with convertible promissory notes

 

 

 

 

 

3,230,077

 

(3,230,077)

 

Conversion of convertible promissory notes

 

 

 

122

 

12,161,575

 

974,192

 

 

974,314

Shares issued for consulting services

 

 

 

13

 

1,250,000

 

110,387

 

 

110,400

Net loss

 

 

 

 

 

 

(774,532)

 

(774,532)

Balance, June 30, 2021

$

355,000

 

500,000

$

436

 

43,790,608

$

14,881,632

$

(16,706,947)

$

(1,469,879)

Warrants reset in conjunction with convertible promissory notes

 

 

 

 

 

8,396

 

(8,396)

 

Conversion of convertible promissory notes

 

 

 

301

 

30,136,103

 

2,938,776

 

 

2,939,077

Shares issued in conjunction with warrant cancellation

 

 

 

10

 

1,000,000

 

(10)

 

 

Net loss

 

 

 

 

 

 

(3,299,806)

 

(3,299,806)

Balance, September 30, 2021

$

355,000

 

500,000

$

747

 

74,926,711

$

17,828,794

$

(20,015,149)

$

(1,830,608)

6

STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,

(UNAUDITED)

    

2022

    

2021

Cash flows from operating activities:

 

  

 

  

Net loss

$

(2,638,413)

$

(6,634,722)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

Provision for allowance for doubtful accounts

 

 

3,495

Stock-based compensation expense

 

484,603

 

1,409,127

Depreciation and amortization

 

16,406

 

16,406

Forgiveness of debt

 

 

(49,783)

Loss on extinguishment of debt

781,800

Amortization of debt discount and day one derivative loss and warrant expense

 

367,257

 

2,785,844

Change in fair value of derivative liabilities- convertible promissory notes

1,436,756

Change in operating assets and liabilities:

Other

2,839

Accounts receivable

18,404

(16,732)

Inventories

 

100,960

 

(151,194)

Prepaid expenses and other current assets

(63,192)

261,924

Other assets

 

 

7,000

Accounts payable

 

62,300

 

(11,350)

Credit cards payable

 

31,748

 

(8,941)

Accrued expenses and other current liabilities

 

70,171

 

75,083

Customer deposits

 

25,840

 

(26,384)

Other liabilities

 

1,878

 

(5,441)

Net cash used in operating activities

 

(740,238)

 

(906,073)

Cash flows from financing activities:

 

 

Repayments on bank debt

 

(20,700)

 

(19,684)

Related party notes payable-net

 

(57,875)

 

(99,000)

Issuance of convertible promissory notes

1,545,140

937,500

Repayments on convertible promissory notes

 

(693,348)

 

Repayments on notes payable

(12,846)

Issuance of common stock for cash - net

42,766

Net cash provided by financing activities

 

815,983

 

805,970

Net (decrease) increase in cash and cash equivalents

 

75,745

 

(100,103)

Cash and cash equivalents, beginning of period

 

383,170

 

264,913

Cash and cash equivalents, end of period

$

458,915

$

164,810

Supplemental disclosures of cash flow information:

 

 

Cash paid during the period for:

 

 

Interest

$

89,079

$

29,625

Income taxes

$

$

Non-cash investing and financing activities:

 

  

 

  

January 1, 2022 adoption of ASU2020-06

$

379,355

$

Warrants, common stock and beneficial conversion feature issued in conjunction with convertible promissory notes

$

653,774

$

420,096

Derivative liabilities issued in conjunction with convertible promissory notes

$

$

1,197,607

Conversion of convertible promissory notes, derivative liabilities and accrued interest into shares of common stock

$

823,370

$

4,290,655

7

ELECTROMEDICAL TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1.ORGANIZATION AND NATURE OF BUSINESS

ElectroMedical 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 accompanying unaudited financial statements of Electromedical Technologies, Inc. have been prepared in accordance with Accounting Principles Generally Accepted in the United States of America (“GAAP”) for interim financial information and in accordance with Rule 8-03 of Regulation S-X. Certain information and disclosures normally included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. These interim financial statements should be read in conjunction with the audited annual financial statements of the Company as of and for the year ended December 31, 2021. The results of operations for the nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the full year.

Use of Estimates

The preparation of financial statements in conformity with 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 $20.2 million of accumulated net losses. In addition, during the nine months ended September 30, 2022, the Company used $740,238 in operations, and as of September 30, 2022, the Company had a working capital deficit of $1,784,690. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The Company expects to obtain funding through additional debt and equity placement offerings until it consistently achieves positive cash flows from operations. If the Company is unable to obtain additional funding, it may not be able to meet all of its obligations as they come due for the next 12 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.

As a result, there is significant uncertainty whether the Company 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 of September 30, 2022.

8

Revenue Recognition

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 on the balance sheets. The Company generally allows a 30 day right of return to its customers. As of both September 30, 2022 and December 31, 2021, the sales returns allowance was $6,990.

Certain larger customers pay in advance for future shipments. These advance payments totaled $25,840 and $0 at September 30, 2022 and December 31, 2021, respectively, and are recorded as customer deposits in the accompanying balance sheets. Revenue related to these advance payments is recognized upon shipment to the distributor or the end-customer.

At the completion of the initial three-year warranty, the Company sells extended warranties for periods ranging from one to three years. Revenue is recognized on a straight-line basis over the term of the contract. At September 30, 2022 and December 31, 2021, deferred revenue of $26,408 and $28,252, respectively, is recorded in connection with these extended warranties.

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 greater than 10% as a percentage of total sales are as follows:

THREE MONTHS ENDED SEPT 30,

    

NINE MONTHS ENDED SEPT 30,

 

    

2022

    

2021

    

2022

    

2021

 

Customer A

 

26.1

%  

18.5

%

22.0

%  

17.0

%

Customer B

 

13.7

%

13.5

%

15.2

%  

13.1

%

Customer C

18.3

%

12.8

%

Customer D

 

Amounts due these customers totaled $13,718 and $13,300 at September 30, 2022 and December 31, 2021, respectively for commissions and reimbursements. Amounts due from these customers totaled $0 and $4,575 at September 30, 2022 and December 31, 2021, respectively. Customer deposits on hand from these customers totaled $25,840 and $0 at September 30, 2022 and December 31, 2021, respectively. The loss of these customers would have a significant impact on the operations and cash flows of the Company.

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:

    

THREE MONTHS ENDED SEPT 30,

    

NINE MONTHS ENDED SEPT 30,

 

2022

2021

2022

2021

 

Supplier A

 

45.8

%  

95.9

%

Supplier B

 

20.3

%  

38.5

%

15.0

%

Supplier C

 

64.2

%  

61.5

%

23.8

%

There were no amounts outstanding due these suppliers at September 30, 2022 and December 31, 2021. The loss of key vendors may have a significant impact on the operations and cash flows of the Company.

9

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.

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 September 30, 2022 and December 31, 2021, the Company believes there are no excess and obsolete inventories and accordingly, did not record an inventory reserve. Inventories consist of purchased finished goods.

Sales Taxes

Sales taxes for the nine months ended September 30, 2022 and 2021, were recorded on a net basis. Included in accrued expenses at both September 30, 2022 and December 31, 2021 is approximately $61,000 related to sales taxes.

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 three years. Such accruals are based upon historical experience and management’s estimate of the level of future claims. The Company recorded a liability as of September 30, 2022 and December 31,2021 of $13,109 and $14,828, respectively. The expense is included in cost of sales in the statements of operations and within accrued expenses on the accompanying balance sheets.

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 September 30, 2022 and December 31, 2021, diluted net loss per share is the same as basic net loss per share for each period.

Conversion of outstanding warrants, stock options and convertible promissory notes at September 30, 2022 may result in an estimated 170.0 million additional shares of common stock outstanding.

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 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 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.

10

Recently Issued Accounting Pronouncements

In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, Debt —Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). This update simplifies the accounting for certain convertible instruments by removing the separation models for convertible debt with a cash conversion feature and for convertible instruments with a beneficial conversion feature. As a result, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. Additionally, this update amends the diluted earnings per share calculation for convertible instruments by requiring the use of the if-converted method. The treasury stock method is no longer available. Entities may adopt the requirements of ASU 2020-06 using either a full or modified retrospective approach, and it is effective for public businesses, excluding entities eligible to be smaller reporting companies, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.

We adopted ASU 2020-06 on January 1, 2022 using the modified retrospective method of transition, which resulted in an increase in convertible promissory notes of $379,355, a decrease in additional paid-in capital of $1,013,414 and an increase to retained earnings of $634,059 as of January 1, 2022. See Note 4.

In February 2016, the FASB issued 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 accounting guidance, which is effective for the Company beginning on January 1, 2022, has been adopted with no significant financial statement impact.

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:

    

September 30, 

    

December 31, 

2022

2021

Building

$

875,000

$

875,000

Furniture and equipment

 

24,987

 

24,987

 

899,987

 

899,987

Less: accumulated depreciation and amortization

 

(189,049)

 

(172,643)

$

710,938

$

727,344

Depreciation and amortization expense related to property and equipment was $5,469 and $16,406 for both the three and nine -month periods ended September 30, 2022 and 2021, respectively. Depreciation and amortization are included in selling, general and administrative expenses on the accompanying statements of operations.

NOTE 4.NOTES PAYABLE

In April 2020, the Company received $39,500 in payroll protection program loans (“PPP”). These loans provide for certain funding based on previous employment which in part may be forgivable under certain conditions. No payment is due during the deferral period which ends the earlier of the date of SBA forgiveness or ten months after the last day of the covered period. The remaining portion needs to be repaid over two years and carries a 1% annual interest rate. These loans require no collateral nor personal guarantees. The loan was forgiven in its entirety in February 2021 and has been included in other income in the accompanying statement of operations.

11

Related Party Notes Payable

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 common stock at a conversion price of $0.062 per share. Cash payments totaling $158,875, were made in 2021, with the remaining principal balance of $57,875 paid in January 2022. Interest expense totaled $0 and $7,561 for the three months ended September 30, 2022 and 2021, respectively. Interest expense totaled $78 and $14,182 for the nine months ended September 30, 2022 and 2021, respectively.

Convertible Promissory Notes

We adopted ASU 2020-06 on January 1, 2022 using the modified retrospective method of transition. This resulted in an increase in convertible promissory notes of $379,355, by eliminating remaining debt discount related to beneficial conversion features on outstanding notes as of January 1, 2022. See Note 2.

On September 3, 2021, the Company entered into a forbearance agreement with one of its lenders. As additional consideration for entering into the forbearance agreement, the Company has agreed to issue the lender the number of shares equal to $100,000 on January 15, 2022 at a 25% discount based upon the previous 15-day average closing price. Effective after January 15, 2022, if the Company enters into an agreement with a third-party investor for consideration per share less than the $0.50 fixed price per share of the notes, the Company agrees to amend and restate the notes to reduce the conversion price. On January 20, 2022, the conversion price was reset to $0.025 for the remaining outstanding notes. The terms of the forbearance agreement have been treated as a modification to the existing notes and are being amortized over the remaining term of the notes. Amortization of $80,000 related to the stock consideration has been recorded in 2021 as interest expense.

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 fair market value of $0.0357 per share based on the quoted stock price as of the amendment date, 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. The terms of the forbearance agreement have been accounted for as an extinguishment of debt resulting in a loss of $205,600 which has been recorded as other expense in the accompanying statement of operations.

In June 2022, the Company entered into a settlement agreement with the above lender to convert the outstanding convertible notes payable of $617,353 and accrued interest of $51,017 into 26,734,801 restricted shares of the Company’s common stock at a price of $0.025 per share as dictated by the terms of the notes. Under the terms of the settlement agreement, the number of shares of common stock to be issued under the earlier forbearance agreement was reduced to 4,000,000 and recorded as a reduction of $142,800 in the extinguishment of debt resulting in a total loss for the nine months ended September 30, 2022 of $62,800. If, upon the one-year anniversary of the effective date, the lender and its designees have beneficial ownership over the settlement payment shares, and the closing price of the Company’s common stock as reported on the OTC Markets is less than $0.025 per share, then for a period of thirty (30) days after the one-year anniversary, the lender and its designees shall have the right to elect, and the Company shall have the obligation, to issue additional shares to the lender and its designees. If, for a period of two years from the effective date, the Company issues, sells or grants any option to purchase, or sells or otherwise disposes of, or sells or issues any common stock or other securities convertible into, exercisable for, or otherwise entitle any person or entity the right to acquire, shares of Common Stock at an effective price per share less than $0.025 (such lower price a “Dilutive Issuance”), then the price per share used to calculate the settlement payment shares shall be reduced to the lower price.  Convertible promissory notes issued to an investor in September 2022, resulted in a recalculation of the number of shares originally issued as the settlement payment.  Additional shares totaling 17,823,171 are to be issued and have been accounted for as an extinguishment of debt resulting in a loss of $415,000 which has been recorded as other expense in the accompanying statement of operations and as an accrued expense in the accompanying balance sheet.

In April 2022, the Company entered into an agreement with one of its lenders to push back the allowable conversion date of a convertible note payable totaling $500,000. In conjunction with the agreement, the Company issued the lender 2,500,000 warrants at an exercise price of $0.025 and with a 5-year maturity. See Note 8.

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During the nine months ended September 30, 2022, the Company issued convertible promissory notes to certain investors totaling $1,859,480 with net proceeds of $1,545,140. Original issue discount totaling $185,580, loan costs totaling $128,760 and the fair value of warrants issued or to be issued to third party advisors of $110,552 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 subject to adjustment and mature nine months to one year from issuance. As additional consideration for the financings, the Company issued the lenders three to five-year warrants to purchase a total of 21,000,000 shares of common stock at an initial price of $0.025 per share, and three to five-year trigger warrants to purchase a total of 173,000,000 shares of common stock at $0.015- $0.025 per share, subject to price adjustments for certain actions, including dilutive issuances. The relative fair value of the warrants totaling $385,422 has been recorded as a discount on the notes. The trigger warrants may only be exercised if the convertible promissory notes are not paid in full at the maturity dates. The warrants do not provide for registration rights. See Note 8.

During the nine months ended September 30, 2022, lenders converted principal totaling $106,000 plus accrued interest into 6,200,000 shares of common stock.

During the nine months ended September 30, 2022, the subsequent issuance of convertible promissory notes with certain terms and warrant exercises triggered a conversion price reset on the pre-existing convertible promissory notes to $0.015 per share. See Note 8.

The aggregate of convertible promissory notes is as follows:

    

September 30, 

December 31, 

Convertible promissory notes

2022

2021

Principal balance

$

1,977,196

$

1,534,853

Debt discount balance

 

(592,869)

 

(723,166)

Net Notes balance

$

1,384,327

$

811,687

The Net Notes balance at September 30, 2022 is comprised of the following:

    

Principal

    

Debt Discount

    

Net

Pre 2020

$

50,000

$

$

50,000

October 2021

101,475

101,475

February 2022

307,500

(59,673)

247,827

March 2022

307,500

(68,855)

238,645

July 2022

138,721

(14,114)

124,607

August 2022

176,000

(73,000)

103,000

September 2022

896,000

(377,227)

518,773

$

1,977,196

$

(592,869)

$

1,384,327

The Net Notes balance at December 31, 2021 is comprised of the following:

    

Principal

    

Debt Discount

    

Net

Pre 2020

$

50,000

$

$

50,000

July 2020

57,500

57,500

August 2020

215,000

215,000

September 2020

107,500

107,500

November 2020

244,853

(20,000)

224,853

December 2020

110,000

(15,000)

95,000

October 2021

750,000

(688,166)

61,834

$

1,534,853

$

(723,166)

$

811,687

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NOTE 5.LONG-TERM DEBT

Government Debt

In June 2020, the Company received a $150,000 economic injury disaster loan (“EIDL”). The loan accrues interest at a rate of 3.75% annually and is collateralized by all personal property and intangible assets of the Company. The loan has a 30-month moratorium on payments, after which monthly principal and interest payments of $731 will be made through the maturity date of June 2050.

Bank Debt

In September 2015, the Company entered into a credit agreement for a $700,000 term loan with a financial institution. Payment terms consist of monthly payments in arrears of $3,547 for the first year outstanding. The monthly payment then increases to $4,574 until the term loan matures on September 30, 2025, in which the remaining unpaid principal balance and accrued interest is due. The interest rate for the first year was 1.99% per annum and increased to 4.95% per annum for the remaining life of the term loan. The term loan is collateralized by a deed of trust in the office building. The proceeds were used to purchase a building for which the Company’s operations are located. The net principal balance outstanding on the term loan at September 30, 2022 and December 31, 2021 was $526,180 and $546,880, respectively. The term loan is personally guaranteed by the Company’s CEO.

The long-term debt agreements do not contain any financial covenants.

NOTE 6.RELATED PARTY TRANSACTIONS

The Company repaid the remaining principal balance of $57,875 of its related party notes payable in January 2022.

In June 2022, the Company entered into a one-year independent director agreement in conjunction with the appointment of a new member to its Board of Directors. The agreement requires the Company to issue the director $5,000 worth of registered shares for each month of service as compensation. Compensation expense totaling $20,000 has been accrued as of September 30, 2022. On November 2, 2022, the Company issued 1,658,999 shares as payment for the $20,000 in director compensation. The Company previously entered into a consulting agreement with this director for $60,000. During the nine months ended September 30, 2022, the Company settled the $60,000 liability by issuing 6,000,000 shares of its common stock. In addition, the Company issued the director 800,000 shares as payment for certain marketing funds advanced totaling $8,000. See Note 7.

The Company paid the Company’s CEO a bonus of $91,099 and $61,930 during the nine months ended September 30, 2022 and 2021, respectively. During the nine months ended September 30, 2021, the Company also paid the Company’s CEO $20,978 towards the balance of the 2019 signing bonus.

The Company repaid $99,000 during the nine months ended September 30, 2021 of related party notes payable.

In February 2021, the Company issued 1,100,000 shares of common stock to the Company’s CEO as compensation at $0.5499 per share. See Note 7.

In September 2022, the Company issued 500,000 shares of its Series A Preferred Stock to the Company’s CEO as compensation at $0.02 per share. See Note 7.

NOTE 7.STOCKHOLDERS’ DEFICIT

In February 2021, the Company issued 1,100,000 shares of common stock to the Company’s CEO as compensation expense at a value of $604,901 or $0.5499 per share. The value of the compensation has been recorded in selling, general and administrative expenses in the Company’s statement of operations. The fair market value of the shares was determined based the on the Company’s closing price on the date of issuance.

During the nine months ended September 30, 2021, the Company issued 2,334,120 shares of common stock at prices ranging from $0.085 to $0.64 per share, in conjunction with agreements for financial and strategic advisory consulting services. The fair market value of the shares totaling $804,226 was determined based the on the Company’s closing price at the date of issuance. The value of the compensation has been recorded in selling, general and administrative expenses in the Company’s statement of operations.

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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.

In March, 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 250,000,000 to 500,000,000. In September 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 from 500,000,000 to 999,000,000.

In September 2022, the Company issued 500,000 shares of its Series A Preferred Stock to the Company’s CEO as compensation at $0.02 per share or $10,000. The value of the compensation has been recorded in selling, general and administrative expenses in the Company’s statement of operations. The fair market value of the shares was determined based the on the Company’s closing price on the date of issuance.

During the nine months ended September 30, 2022, the Company issued 19,600,000 shares of common stock, at prices ranging from $0.01-$0.035 per share, in conjunction with agreements for financial and strategic advisory consulting services. The fair market value of the shares totaling