UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

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

 

For the quarterly period ended June 30, 2020

 

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

 

For the transition period from ___________ to ___________

 

WELLNESS CENTER USA, INC.

(Name of small business issuer in its charter)

 

NEVADA		333-173216		27-2980395
(State or other jurisdiction of incorporation or organization)		Commission File Number		(IRS Employee Identification No.)

 

145 E. University Boulevard, Tucson, AZ 85705

(Address of Principal Executive Offices)

 

 

(847) 925-1885

(Issuer Telephone number)

 

(Former name or former address, if changed since last report)

 

 

Securities registered under Section 12(b) of the Exchange Act:
Title of each class registered:	Name of each exchange on which registered:
None	None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.001 (Title of class)

 

Indicate by check mark whether the issuer (1) 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 [X] 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 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).

Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

 

Large Accelerated Filer [  ]		Non-Accelerated Filer [  ]
Accelerated Filer [  ]		Smaller Reporting Company [X]
		Emerging growth Company [  ]

 

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.

 

Yes [  ] No [X]

 

The number of shares issued and outstanding of each of the issuer’s classes of common equity as of June 30, 2020 was 116,319,577.

 

 

 

FORM 10-Q

WELLNESS CENTER USA, INC.

JUNE 30, 2020

TABLE OF CONTENTS

 

PART I— FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Control and Procedures	28
PART II— OTHER INFORMATION
Item 1	Legal Proceedings	30
Item 1A	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Mine Safety Disclosures.	31
Item 5.	Other Information	31
Item 6.	Exhibits	31
SIGNATURE		32

 

 

Wellness Center USA, Inc.

Condensed Consolidated Balance Sheets

 

		June 30,				September 30,
		2020				2019
		(Unaudited)
ASSETS
Current Assets
Cash		$	94,318			$	53,147
Accounts receivable			5,000				-
Inventories			72,075				-
Prepaid expenses and other current assets			500				55,000
Total Current Assets			171,893				108,147
Property and equipment, net			-				1,562
Right of use asset			12,257				-
Total Other Assets			12,257				1,562
TOTAL ASSETS		$	184,150			$	109,709
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current Liabilities
Accounts payable and accrued expenses		$	479,558			$	457,037
Payroll taxes payable			96,834				102,834
Lease liability			12,257				-
Lease abandonment liability			672,878				234,582
Loans payable from officers and shareholders			1,054,250				399,250
Total Current Liabilities			2,315,777				1,193,703
Long-term Liabilities
U.S. Small Businessss Administration PPP loan payable			37,166				-
Total Long-term Liabilities			37,166				-
Shareholders’ Deficit
Common stock, par value $0.001, 200,000,000 shares authorized; 116,319,577 and 107,497,077 shares issued and outstanding, respectively			116,320				107,497
Additional paid-in capital			24,843,353				23,777,647
Accumulated deficit			(27,425,368	)			(25,362,287	)
Total Wellness Center USA shareholders’ deficit			(2,465,695	)			(1,477,143	)
Non-controlling interest			296,902				393,149
Total Shareholder’s deficit			(2,168,793	)			(1,083,994	)
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT		$	184,150			$	109,709

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

Wellness Center USA, Inc.

Condensed Consolidated Statements of Operations

 

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2020				2019				2020				2019
		(Unaudited)								(Unaudited)
Sales:
Trade			-			$	3,108			$	5,000			$	19,508
Consulting services			-				4,517				-				13,867
Total Sales			-				7,625				5,000				33,375
Cost of goods sold			-				4,575				-				20,025
Gross profit			-				3,050				5,000				13,350
Operating expenses			813,380				404,210				1,573,783				1,415,667
Loss from operations			(813,380	)			(401,160	)			(1,568,783	)			(1,402,317	)
Other income (expense)
U.S. federal government COVID-19 grant			4,000				-				4,000				-
Amortization of debt discount			-				-				-				(72,078	)
Financing costs			(43,815	)			(108,630	)			(43,815	)			(182,064	)
Cost of stock option modifications			(22,680	)			-				(22,680	)			-
Cost of stock warrant modification			-				-				(507,265	)			-
Interest expense			(19,751	)			(6,042	)			(45,285	)			(17,771	)
Total other income (expense)			(82,246	)			(114,672	)			(615,045	)			(271,913	)
NET LOSS			(895,626	)			(515,832	)			(2,183,828	)			(1,674,230	)
Net loss attributable to non-controlling interest			76,568				4,917				120,747				9,319
Loss from deconsolidation of non-controlling interest			-				-				-				(405,383	)
NET LOSS ATTRIBUTABLE TO WELLNESS CENTER USA, INC.			(819,058	)			(510,915	)			(2,063,081	)			(2,070,294	)
BASIC AND DILUTED LOSS PER SHARE		$	(0.01	)		$	(0.00	)		$	(0.02	)		$	(0.02	)
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC AND DILUTED			110,909,467				107,433,349				108,634,540				106,575,313

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

Wellness Center USA, Inc.

Condensed Consolidated Statements of Shareholders’ Deficit (Unaudited)

 

		Common Stock								Additional Paid-in				Accumulated				Total WCUI				Non- controlling
		Shares				Amount				Capital				Deficit				Deficit				Interest				Total
Balance, March 31, 2020 (unaudited)			107,497,077			$	107,497			$	24,441,950			$	(26,606,310	)		$	(2,056,863	)		$	373,470			$	(1,683,393	)
Fair value of vested stock options			-				-				66,306				-				66,306				-				66,306
Fair value of common stock issued for services			8,247,500				8,248				239,177				-				247,425				-				247,425
Fair value of warrants issued upon conversion of loan payable from shareholder			-				-				43,815				-				43,815				-				43,815
Cost of stock option modifications			-				-				22,680				-				22,680				-				22,680
Conversion of loan payable from shareholder into common shares			575,000				575				29,425				-				30,000				-				30,000
Net loss for the three months ended June 30, 2020			-				-				-				(819,058	)			(819,058	)			(76,568	)			(895,626	)
Balance, June 30, 2020 (unaudited)			116,319,577			$	116,320			$	24,843,353			$	(27,425,368	)		$	(2,465,695	)		$	296,902			$	(2,168,793	)
Balance, September 30, 2019			107,497,077			$	107,497			$	23,777,647			$	(25,362,287	)		$	(1,477,143	)		$	393,149			$	(1,083,994	)
Fair value of vested stock options			-				-				197,844				-				197,844				-				197,844
Fair value of common stock issued for services			8,247,500				8,248				239,177				-				247,425				-				247,425
Fair value of warrants issued upon conversion of loan payable from shareholder			-				-				43,815				-				43,815				-				43,815
Cost of stock option modifications			-								22,680				-				22,680				-				22,680
Cost of stock warrant modification			-				-				507,265				-				507,265				-				507,265
Conversion of loan payable from shareholder into common shares			575,000				575				29,425				-				30,000				-				30,000
Contribution of capital by joint venture partner			-				-				25,500				-				25,500				24,500				50,000
Net loss for the nine months ended June 30, 2020			-				-				-				(2,063,081	)			(2,063,081	)			(120,747	)			(2,183,828	)
Balance, June 30, 2020 (unaudited)			116,319,577			$	116,320			$	24,843,353			$	(27,425,368	)		$	(2,465,695	)		$	296,902			$	(2,168,793	)
Balance, March 31, 2019 (unaudited)			104,012,153			$	104,012			$	23,200,187			$	(24,534,119	)		$	(1,229,920	)		$	151,357			$	(1,078,563	)
Shares issued upon conversion of note payable and accrued interest			2,327,781			$	2,328			$	114,061				-				116,389				-				116,389
Fair value of vested stock options			-				-				72,641				-				72,641				-				72,641
Fair value of common stock issued for services			1,157,143				1,157				68,272				-				69,429				-				69,429
Fair value of additional shares issued upon conversions of note payable			-				-				108,630				-				108,630				-				108,630
Contribution of capital by joint venture partner			-				-				153,000				-				153,000				72,000				225,000
Net loss for the three months ended June 30, 2019			-				-				-				(510,915	)			(510,915	)			(4,917	)			(515,832	)
Balance, June 30, 2019 (unaudited)			107,497,077			$	107,497			$	23,716,791			$	(25,045,034	)		$	(1,220,746	)		$	218,440			$	(1,002,306	)
Balance, September 30, 2018			100,952,569			$	100,952			$	22,450,252			$	(22,974,740	)		$	(423,536	)		$	(401,624	)		$	(825,160	)
Common shares issued for cash			142,857				143				9,857				-				10,000				-				10,000
Shares issued upon conversions of note payable			4,810,222				4,811				285,361				-				290,172				-				290,172
Fair value of common stock issued with convertible note payable			314,286				314				21,686				-				22,000				-				22,000
Fair value of additional shares issued upon conversions of note payable			-				-				160,064				-				160,064				-				160,064
Fair value of vested stock options			-				-				235,819				-				235,819				-				235,819
Fair value of common stock issued for services			1,277,143				1,277				77,752				-				79,029				-				79,029
Termination of non-controlling interest agreement			-				-				-				(405,383	)			(405,383	)			405,383				-
Contribution of capital by joint venture partner			-				-				476,000				-				476,000				224,000				700,000
Net loss for the nine months ended June 30, 2019			-				-				-				(1,664,911	)			(1,664,911	)			(9,319	)			(1,674,230	)
Balance, June 30, 2019 (unaudited)			107,497,077			$	107,497			$	23,716,791			$	(25,045,034	)		$	(1,220,746	)		$	218,440			$	(1,002,306	)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

Wellness Center USA, Inc.

Condensed Consolidated Statements of Cash Flows

 

		Nine Months Ended
		June 30,
		2020				2019
		(Unaudited)
Cash Flows from Operating Activities
Net loss		$	(2,183,828	)		$	(1,674,230	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense			1,562				792
Amortization of right-of-use asset			15,584				-
Amortization of debt discount			-				72,078
Fair value of common shares issued for services			247,425				79,029
Fair value of stock options issued for services			197,844				235,819
Fair value of additional shares issued upon conversions of note payable			-				160,064
Fair value of warrants issued upon conversion of loan payable from shareholder			43,815				-
Loss on abandonment of lease			438,296				22,000
Loss on modification of conversion price on convertible note payable			-				65,000
Cost of stock option modifications			22,680				-
Cost of warrant modification			507,265				-
Changes in Assets and Liabilities
(Increase) Decrease in:
Accounts receivable			(5,000	)			-
Inventories			(17,075	)			(55,000	)
Prepaid expenses and other assets			(500	)			16,550
(Decrease) Increase in:
Accounts payable and accrued expenses			22,521				113,665
Payroll taxes payable			(6,000	)			-
Lease liability			(15,584	)			-
Deferred revenue			-				(8,624	)
Net cash used in operating activities			(730,995	)			(972,857	)
Cash Flows from Financing Activities
Proceeds from loans payable from officers and shareholders			685,000				333,250
Repayment of loans payable from officers and shareholders			-				(25,000	)
Proceeds from U.S. Small Business Administration PPP loan payable			37,166				-
Common stock and warrants issued for cash			-				10,000
Contribution of capital by joint venture partner			50,000				700,000
Net cash provided by financing activities			772,166				1,018,250
Net increase in cash			41,171				45,393
Cash beginning of period			53,147				4,210
Cash end of period		$	94,318			$	49,603
Supplemental cash flows disclosures:
Interest paid		$	-			$	-
Taxes paid		$	-			$	-
Supplemental non-cash financing disclosures:
Initial recognition of right-of-use assets and operating lease liabilities upon adoptionof ASC Topic 842		$	27,841			$	-
Reclassification of prepaid expenses to inventories		$	55,000			$	-
Conversion of loan payable from shareholder into common shares		$	30,000			$	-
Conversion of convertible note payable into common shares		$	-			$	290,172

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

WELLNESS CENTER USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2020 AND 2019

 

NOTE 1 – BASIS OF PRESENTATION

 

Organization and Operations

 

Wellness Center USA, Inc. (“WCUI” or the “Company”) was incorporated in June 2010 under the laws of the State of Nevada. The Company initially engaged in online sports and nutrition supplements marketing and distribution. The Company subsequently expanded into additional businesses within the healthcare and medical sectors through acquisitions, including Psoria-Shield Inc. (“PSI”) and StealthCo Inc. (“SCI”), d/b/a Stealth Mark, Inc.

 

The Company currently operates in the following business segments: (i) distribution of targeted Ultra Violet (“UV”) phototherapy devices for dermatology; and (ii) authentication and encryption products and services. The segments are operated, respectively, through PSI and SCI.

 

Basis of Presentation of Unaudited Financial Information

 

The accompanying unaudited condensed consolidated financial statements of Wellness Center USA, Inc. and Subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the nine months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending September 30, 2020.

 

Going Concern

 

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, the Company has not yet generated significant revenues and has incurred recurring net losses. During the nine months ended June 30, 2020, the Company incurred a net loss of $2,183,828 and used cash in operations of $730,995, and had a shareholders’ deficit of $2,168,793 as of June 30, 2020. In addition, $96,834 of payroll taxes are past due. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its strategies. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

In addition, the Company’s independent registered public accounting firm, in its report on the Company’s September 30, 2019 financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.

 

At June 30, 2020, the Company had cash on hand in the amount of $94,318. The ability to continue as a going concern is dependent on the Company attaining and maintaining profitable operations in the future and raising additional capital soon to meet its obligations and repay its liabilities arising from normal business operations when they come due. Since inception, we have funded our operations primarily through equity and debt financings and we expect to continue to rely on these sources of capital in the future. During the nine months ended June 30, 2020, the Company received $772,166 through short-term loans and contributions of capital by a joint venture partner.

 

No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case of equity financing.

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Consolidation

 

The consolidated financial statements include the Company’s wholly owned subsidiaries and the accounts of its subsidiaries for which it was determined that Company has operational and management control. The Company’s consolidated subsidiaries and/or entities are as follows:

 

Name of consolidated subsidiary or entity		State or other jurisdiction of incorporation or organization		Date of incorporation or formation (date of acquisition/disposition, if applicable)		Attributable interest
Psoria-Shield Inc. (“PSI”)		The State of Florida		June 17, 2009 (August 24, 2012)		51%
StealthCo, Inc. (“StealthCo”)		The State of Illinois		March 18, 2014		100%
Psoria Development Company LLC. (“PDC”)		The State of Illinois		January 15, 2015/November 15, 2018		50%
NEO Phototherapy LLC (“NEO”)		The State of Illinois		December 2018		51%
Protec Scientific, Inc (“Protec”)		The State of New York		April 2020		48%

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in the valuation of accounts receivable and allowance for uncollectible amounts, inventory and obsolescence reserves, accruals for potential liabilities, valuations of stock-based compensation, realization of deferred tax assets, among others. Actual results could differ from these estimates.

 

Income (Loss) Per Share

 

Basic loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of outstanding common shares during the period. Diluted loss per share is computed by dividing the net loss applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. For the nine months ended June 30, 2020 and 2019, the basic and diluted shares outstanding were the same, as potentially dilutive shares were considered anti-dilutive. At June 30, 2020 and 2019, the dilutive impact of outstanding stock options of 13,765,238 and 15,687,738 shares, respectively, and outstanding warrants for 67,634,049 and 66,832,049 shares, respectively, have been excluded because their impact on the loss per share is anti-dilutive.

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Revenue Recognition

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The Company adopted this ASU on October 1, 2018 retrospectively, the cumulative effect of the initial application on our accumulated deficit on that date was immaterial.

 

For trade sales, the Company generates its revenue from sales contracts with customers with revenues being generated upon the shipment of merchandise, or for consulting services, revenue is recognized in the period services are rendered and earned under service arrangements with clients.

 

We sell our products through two main sales channels: 1) directly to customers who use our products (the “Direct Channel”) and 2) to distribution partners who resell our products (the “Indirect Channel”).

 

Under the Direct Channel, we sell our products to and we receive payment directly from customers who purchase our products. Under our Indirect Channel, we have entered into distribution agreements that allow the distributors to sell our products and fulfill performance obligations under the agreements.

 

We determine revenue recognition through the following steps:

 

	●	Identification of the contract, or contracts, with a customer
	●	Identification of the performance obligations in the contract
	●	Determination of the transaction price
	●	Allocation of the transaction price to the performance obligations in the contract
	●	Recognition of revenue when, or as, we satisfy a performance obligation.

 

Revenue is generally recognized upon shipment or when a service has been completed, unless we have significant performance obligations for services still to be completed. We recognize revenue when a material reversal is no longer probable. Payments received before the relevant criteria for revenue recognition are satisfied are recorded as deferred revenue. There was no deferred revenue at June 30, 2020 and September 31, 2019.

 

Non-controlling Interests

 

Through November 2018, non-controlling interest represented the non-controlling interest holder’s proportionate share of the equity of the Company’s majority-owned subsidiary, PDC. Non-controlling interest is adjusted for the non-controlling interest holder’s proportionate share of the earnings or losses and other comprehensive income (loss), if any, and the non-controlling interest continues to be attributed its share of losses even if that attribution results in a deficit non-controlling interest balance.

 

On November 15, 2018, PSI and TMA entered into a Withdraw and Mutual Release Agreement to terminate their joint venture agreement. On the date of termination, the non-controlling interest’s share of the accumulated losses of the joint venture totaled to $405,383. Upon termination, during the year ended September 30, 2019, the Company wrote-off the non-controlling interest’s share of the accumulated losses and recorded a loss from the deconsolidation of a non-controlling interest of $405,383.

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Non-controlling Interests (continued)

 

In December 2018, PSI entered into a Joint Venture Agreement with GEN2 to further development, marketing, licensing and/or sale of PSI technology and products. Pursuant to the Joint Venture Agreement, the venture will be conducted through NEO Phototherapy, Inc. (“NEO”). PSI and GEN2 will be the members of NEO, owning 50.5% and 36.0%, respectively, of the Units issued in connection with the organization of NEO. An additional 13.5% of such Units will be reserved for issuance as incentives for key employees and consultants. Until such shares are distributed, the Company controls 68% of the joint venture and GEN2 the remaining 32%. PSI and GEN2 will manage NEO’s day-to-day operations. PSI will contribute PSI technology to NEO and GEN2 will contribute $700,000. As of December 31, 2019, NEO’s operations required additional funding above the $700,000 documented in the agreement, and as of September 30, 2019, GEN2 had received $925,000 of investments to contribute to NEO. During the nine months ended June 30, 2020, an additional $50,000 was contributed by GEN2 to NEO. As of June 30, 2020, GEN2 had received $975,000 of investments to contribute to NEO. As of April 30, 2020, the Company controlled 51% of the joint venture, GEN2 controlled 39% and another individual controlled the remaining 10%. The Company recorded its proportionate share of the contributions received of $497,250 to additional paid-in-capital and $477,750 to non-controlling interest as of that date.

 

Effective April 30, 2020, the joint venture with GEN2 was reorganized. GEN2 shareholders exchanged their common shares in GEN2, and the individual exchanged his membership interests in NEO, for common shares representing 49% ownership in PSI. The Company retained its common shares in PSI, which provides the Company a 51% economic interest in the PSI technology and products developed by the joint venture. During the three and nine months ended June 30, 2020, the entities recorded a combined loss of $71,442 and $161,604, respectively, relating to its operations, of which $35,007 and $79,186 was allocated to the non-controlling interest.

 

Repayment of the $975,000 investment will begin through and upon the date which PSI has realized and retained cumulative net income/distributable cash in the amount of $300,000. PSI ownership consists of accredited investors, and investment participation of $750,000 from several WCUI officers and directors, including Calvin R. O’Harrow and Roy M. Harsch.

 

At the end of May 2020, the Company’s subsidiary, PSI, agreed to become a majority shareholder in Protec Scientific, Inc. (“Protec”), subject to execution of a definitive agreement. Protec was formed in April 2020 by John Yorke for the purpose of designing, developing and marketing products that use spectral photonic emissions across a variety of applications. As of June 30, 2020, PSI had advanced $80,000 to Protec in furtherance of its agreement to acquire approximately 96% of Protec, with the Company’s derivative share being approximately 48%, based on its PSI ownership. The remaining 52% derivative share is to be attributed to PSI’s minority shareholders, based on their PSI ownership, and other investors. During the three months ended June 30, 2020, Protec recorded a loss of $79,926, of which $41,561 was allocated to the non-controlling interest. Subsequent to June 30, 2020, Protec received additional investments from non-affiliated investors. See Note 10 for additional information.

 

Stock-Based Compensation

 

The Company periodically grants stock options and warrants to employees and non-employees in non-capital raising transactions as compensation for services rendered. The Company accounts for stock option and stock warrant grants to employees based on the authoritative guidance provided by the Financial Accounting Standards Board where the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and stock warrant grants to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board where the value of the stock compensation is determined based upon the measurement date at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option or warrant grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Stock-Based Compensation (continued)

 

The fair value of the Company’s common stock option and warrant grants are estimated using a Black-Scholes Merton option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the common stock options, estimated forfeitures and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes option pricing model, and based on actual experience. The assumptions used in the Black-Scholes Merton option pricing model could materially affect compensation expense recorded in future periods.

 

Leases

 

In February 2016, the FASB issued ASU No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than twelve months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for leases existing at, or entered into after, the beginning of the earliest period presented in the financial statements.

 

The Company adopted ASU 2016-02 effective October 1, 2019. As a result, we recorded right-of-use assets of $27,841, and lease liabilities of the same amount, as of that date. In accordance with ASU 2016-02, the right-of-use assets are being amortized over the life of the underlying leases, and monthly lease payments are being recorded as reductions to the lease liability and imputed interest expense. See Note 4 for additional information.

 

Recently Issued Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC 326”). The standard significantly changes how entities will measure credit losses for most financial assets, including accounts and notes receivables. The standard will replace today’s “incurred loss” approach with an “expected loss” model, under which companies will recognize allowances based on expected rather than incurred losses. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The standard is effective for interim and annual reporting periods beginning after December 15, 2019. The adoption of ASU 2016-13 is not expected to have a material impact on the Company’s financial position, results of operations, and cash flows.

 

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

 

NOTE 3 – LOANS PAYABLE FROM OFFICERS AND SHAREHOLDERS

 

As of September 30, 2019, loans payable from officers and shareholders of $399,250 were outstanding. During the nine months ended June 30, 2020, the Company borrowed $685,000 from its officers and shareholders. The loans have an interest rate of eight percent and are due one year from the date of issuance. During the three months ended June 30, 2020, one of the loan holders who is not an officer or director, converted his loan in the amount of $30,000 into 575,000 shares of the Company’s common stock. In connection with the conversion of the loan payable, the Company issued the loan holder a warrant to purchase 1,150,000 shares of common stock as an inducement to convert. The warrants have an exercise price of $0.07 per share and expire five years from the date of grant. The fair value of the warrants of $43,815 was recorded as a financing cost during the three months ended June 30, 2020 and was based on a probability affected Black-Scholes Merton pricing model with a stock price of $0.04, volatility of 187.0% and a risk-free rate of 0.20%.

 

 

As of June 30, 2020, loans payable to officers and shareholders of $1,054,250 were outstanding. All of the loans are unsecured, have an interest rate of eight percent and are due one year from the date of issuance. As of June 30, 2020, the Company’s officers and directors had the following loans outstanding: Calvin O;Harrow - $544,250; Roy Harsch - $150,000; William Kingsford - $131,000; Paul Jones - $75,000; Douglas Samuelson - $30,000.

 

NOTE 4 – U.S. SMALL BUSINESS ADMINISTRATION LOAN PAYABLE

 

During the three months ended June 30, 2020, the Company’s subsidiary, PSI, entered into a loan agreement with the United States Small Business Administration (SBA) under which the Company borrowed $37,166. The loan is unsecured, accrues interest at 1.0% and is due on April 23, 2022. Beginning in October 2020, PSI is required to make monthly interest payments and all principal and unpaid interest is due in April 2022. If PSI meets certain criteria as defined in the agreement, the loan may be forgiven.

 

NOTE 5 – LEASE LIABILITIES

 

In February 2019, the Company’s PSI subsidiary entered into a 24-month non-cancellable lease for its office facilities that requires monthly payments of $1,800 through January 2021. The Company adopted ASU 2016-02, Leases, effective October 1, 2019, which requires a lessee to record a right-of-use asset and a corresponding lease liability at the inception of the lease initially measured at the present value of the lease payments. The Company classified the lease as an operating lease and determined that the value of the lease assets and liability at the adoption date was $27,841 using a discount rate of 4.00%. During the three and nine months ended June 30, 2020, the Company made payments of $5,245 and $15,584, respectively, towards the lease liability. As of June 30, 2020, lease liability amounted to $12,257.

 

ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. Rent expense for the three and nine months ended June 30, 2020 was $5,400 and $16,200, respectively. During the three and nine months ended June 30, 2020, the Company reflected amortization of right of use asset of $5,245 and $15,584, respectively, related to this lease, resulting in a net asset balance of $12,257 as of June 30, 2020.

 

NOTE 6 – SHAREHOLDERS’ EQUITY

 

Restricted Stock Grants

 

In April 2020, the Company’s Board of Directors approved the issuance of a combined total of 19,910,000 restricted shares of the Company’s common stock to its Officers and Directors. A total of 6,860,000 shares vested in April 2020, while 1,800,000 will vest monthly from April 2020 through March 2021, and 11,250,000 will vest monthly from April 2020 through March 2023. Of the 13,050,000 shares that vest over time, a total of 1,387,500 shares vested during the three months ended June 30, 2020.

 

The following table summarizes restricted common stock activity:

 

		Number of Restricted Shares				Fair Value				Weighted Average Grant Date Fair Value
Non-vested, September 30, 2019			-			$	-			$	-
Granted			19,910,000				597,300				0.03
Vested			(8,247,500	)			(247,425	)			0.03
Forfeited			-				-				-
Non-vested, June 30, 2020			11,662,500			$	349,875			$	0.03

 

 

NOTE 6 – SHAREHOLDERS’ EQUITY (CONTINUED)

 

Stock Options

 

On December 22, 2010, the Company’s Board of Directors approved the adoption of the “2010 Non-Qualified Stock Option Plan” (“2010 Option Plan”) by unanimous consent. The 2010 Option Plan was initiated to encourage and enable officers, directors, consultants, advisors and key employees of the Company to acquire and retain a proprietary interest in the Company by ownership of its common stock. A total of 7,500,000 of the authorized shares of the Company’s common stock may be subject to, or issued pursuant to, the terms of the plan. Effective January 1, 2018, the Board of Directors approved to increase the number of authorized shares of the Company’s common stock that may be subject to, or issued pursuant to, the terms of the plan from 7,500,000 to 30,000,000.

 

The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. Additionally, the Company’s policy is to issue new shares of common stock to satisfy stock option exercises. The Company applied fair value accounting for all share based payments awards. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model.

 

The table below summarizes the Company’s stock option activities for the nine months ended June 30, 2020:

 

		Number of Option Shares				Exercise Price Range Per Share				Weighted Average Exercise Price
Balance, September 30, 2019			15,237,738				$ 0.03 - 2.00			$	0.27
Granted			4,375,000				0.04				0.04
Cancelled			(4,910,000	)			0.14 – 0.30				0.14
Exercised			-				-				-
Expired			(937,500	)			0.11 - 0.25				0.16
Balance, June 30, 2020			13,765,238				$ 0.03 – 2.00			$	0.24
Vested and exercisable, June 30, 2020			9,877,738				$ 0.03 – 2.00			$	0.32
Unvested, June 30, 2020			3,887,500				$ 0.04 - 0.14			$	0.04

 

During the period ended June 30, 2020, the Company’s Board of Directors approved the cancellation of stock options to purchase 3,360,000 shares of the Company’s common stock with an exercise prices of $0.14 and $0.30 per share that had vested as of March 31, 2020, and 1,550,000 shares with an exercise price of $0.14 per share that were set to vest monthly from April 2020 through March 2021. All of the cancelled options were held by the Company’s Officers and Directors.

 

The Board approved the grant of stock options to its Chief Executive Officer to purchase 4,250,000 shares with an exercise price of $0.04 per share that expire ten years from the date of grant. The fair value of the shares was determined to be $127,500 as of the date of grant based on a Black-Scholes option model. A total of 500,000 shares vested during the three months ended June 30, 2020 and 3,750,000 shares will vest monthly over three years from April 2020 through March 2023

 

The Board approved the following modifications relating to the Chief Executive Officer’s options:

 

	a.	Repricing of stock options to purchase 1,200,000 shares with an exercise price of $0.14 per share to $0.04 per share that had vested as of March 31, 2020,
	b.	Repricing of stock options to purchase 600,000 shares with an exercise price of $0.14 per share to $0.04 per share that were set to vest monthly from April 2020 through March 2021.
	c.	Extend the expiration of the options to ten years from the date of grant, rather than the five-year expiration the shares initially had.

 

The incremental fair value of the options resulting from the modifications was $22,680 that was recognized as an expense during the three months ended June 30, 2020.

 

 

NOTE 6 – SHAREHOLDERS’ EQUITY (CONTINUED)

 

Stock Options (continued)

 

In addition to the options granted to the Company’s Chief Executive Officer noted above, during the nine months ended June 30, 2020, the Company granted options to an employee to purchase a total of 125,000 shares of its common stock with an aggregate fair value of $4,688. The options have an exercise price of $0.04 per share and expire five years from the date of grant. The shares vested on the date of grant. The Company valued the options using a Black-Scholes option pricing model.

 

The assumptions used for all of the options granted during the nine months ended June 30, 2020 are as follows:

 

Exercise price		$	0.04
Expected dividends			-
Expected volatility			157.6% – 182.9	%
Risk free interest rate			0.26 % - 1.60	%
Expected life of options			2.5

 

During the three and nine months ended June 30, 2020, the Company recorded $66,306 and $197,844 of stock compensation for the value of all outstanding options, and as of June 30, 2020, unvested compensation of $107,645 remained that will be amortized over the remaining vesting period.

 

The aggregate intrinsic value for option shares outstanding at June 30, 2020 was $625. As of June 30, 2020, there were 16,234,762 shares of stock options remaining available for issuance under the 2010 Plan.

 

The following table summarizes information concerning outstanding and exercisable options as of June 30, 2020:

 

					Options Outstanding												Options Exercisable
	Range of Exercise Prices				Number Outstanding				Average Remaining Contractual Life (in years)				Weighted Average Exercise Price				Number Exercisable				Average Remaining Contractual Life (in years)				Weighted Average Exercise Price
$	0.06 - 0.39				12,302,738				3.34			$	0.09				8,415,238				2.70			$	0.12
	0.40 - 0.99				62,500				1.75				0.40				62,500				1.75				0.40
	1.00 - 1.99				750,000				0.50				1.00				750,000				0.50				1.00
	2.00				650,000				0.50				2.00				650,000				0.50				2.00
$	0.06 - 2.00				13,765,238				3.05			$	0.24				9,877,738				2.38			$	0.32

 

 

NOTE 6 – SHAREHOLDERS’ EQUITY (CONTINUED)

 

Stock Warrants

 

The table below summarizes the Company’s warrants activities for the nine months ended June 30, 2020:

 

		Number of Warrant Shares				Exercise Price Range Per Share				Weighted Average Exercise Price
Balance, September 30, 2019			66,484,049				$ 0.12 - 0.40			$	0.17
Granted			1,150,000				0.07				0.07
Cancelled			-				-				-
Exercised			-				-				-
Expired			-				-				-
Balance, June 30, 2020			67,634,049				$ 0.07 - 0.40			$	0.16
Vested and exercisable, June 30, 2020			67,634,049				$ 0.07 - 0.40			$	0.16

 

Effective January 1, 2020, the Company’s Board of Directors approved the extension of the Company’s unexpired stock warrants as of December 31, 2019, by an additional one year period. This change affected approximately 66,000,000 warrant shares and approximately 20,000,000 warrant shares that were set to expire by the year ending September 30, 2020. The 20,000,000 warrant shares that were set to expire by September 30, 2020, had exercise prices ranging from $0.15 per share to $0.25 per share. The 66,000,000 warrant shares had exercise prices ranging from $0.12 per share to $0.40 per share. The incremental fair value of the warrants resulting from modification was $507,265 and was recognized as an expense during the nine months ended June 30, 2020.

 

There was no aggregate intrinsic value for warrant shares outstanding at June 30, 2020.

 

The following table summarizes information concerning outstanding and exercisable warrants as of June 30, 2020:

 

					Warrants Outstanding												Warrants Exercisable
	Range of Exercise Prices				Number Outstanding				Average Remaining Contractual Life (in years)				Weighted Average Exercise Price				Number Exercisable				Average Remaining Contractual Life (in years)				Weighted Average Exercise Price
$	0.12 – 0.20				60,429,384				2.20			$	0.15				60,429,384				2.20			$	0.15
	0.21 – 0.40				7,204,665				1.13				0.26				7,204,665				1.13				0.26
$	0.12 – 0.40				67,634,049				2.09			$	0.16				67,634,049				2.09			$	0.16

 

 

NOTE 7 – SEGMENT REPORTING

 

Reportable segments are components of an enterprise about which separate financial information is available and that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

 

The Company operates in the following business segments:

 

(i) Medical Devices: which stems from PSI, its wholly-owned subsidiary acquired on August 24, 2012, a developer, manufacturer, marketer and distributer of targeted Ultra Violet (“UV”) phototherapy devices for the treatment of skin diseases.

 

(ii) Authentication and Encryption Products and Services: which stems from StealthCo, its wholly-owned subsidiary formed on March 18, 2014, which has engaged in the business of selling, licensing or otherwise providing certain authentication and encryption products and services since acquisition of certain assets from SMI on April 4, 2014.

 

The detailed segment information of the Company is as follows:

 

Assets By Segment

 

		June 30, 2020
		Corporate				Medical Devices				Authentication and Encryption				Total
ASSETS
Current Assets
Cash		$	39,770			$	51,402			$	3,146			$	94,318
Accounts receivable			-				-				5,000				5,000
Inventories			-				72,075				-				72,075
Prepaid expenses and other current assets			500				-				-				500
Total current assets			40,270				123,477				8,146				171,893
Right-of-use asset			-				12,257				-				12,257
Total other assets			-				12,257				-				12,257
TOTAL ASSETS		$	40,270			$	135,734			$	8,146			$	184,150

 

Operations by Segment For the Three Months Ended June 30, 2020 and 2019

 

		For the Three Months Ended
		June 30, 2020
		Corporate				Medical Devices				Authentication and Encryption				Total
Sales:
Trade		$	-			$	-			$	-			$	-
Consulting services			-				-				-				-
Total Sales			-				-				-				-
Cost of goods sold			-				-				-				-
Gross profit			-				-				-				-
Operating expenses			620,650				208,047				(15,317	)			813,380
Income (loss) from operations		$	(620,650	)		$	(208,047	)		$	15,317			$	(813,380	)

 

		For the Three Months Ended
		June 30, 2019
		Corporate				Medical Devices				Authentication and Encryption				Total
Sales:
Trade		$	-			$	-			$	3,108			$	3,108
Consulting services			-				-				4,517				4,517
Total Sales			-				-				7,625				7,625
Cost of goods sold			-				-				4,575				4,575
Gross profit			-				-				3,050				3,050
Operating expenses			175,784				95,306				133,120				404,210
Loss from operations		$	(175,784	)		$	(95,306	)		$	(130,070	)		$	(401,160	)

 

 

Operations by Segment For the Nine Months Ended June 30, 2020 and 2019

 

		For the Nine Months Ended
		June 30, 2020
		Corporate				Medical Devices				Authentication and Encryption				Total
Sales:
Trade		$	-			$	-			$	5,000			$	5,000
Consulting services			-				-				-				-
Total Sales			-				-				5,000				5,000
Cost of goods sold			-				-				-				-
Gross profit			-				-				5,000				5,000
Operating expenses			861,611				590,158				122,014				1,573,783
Loss from operations		$	(861,611	)		$	(590,158	)		$	(117,014	)		$	(1,568,783	)

 

		For the Nine Months Ended
		June 30, 2019
		Corporate				Medical Devices				Authentication and Encryption				Total
Sales:
Trade		$	-			$	-			$	19,508			$	19,508
Consulting services			-				-				13,867				13,867
Total Sales			-				-				33,375				33,375
Cost of goods sold			-				-				20,025				20,025
Gross profit			-				-				13,350				13,350
Operating expenses			716,900				399,111				299,656				1,415,667
Loss from operations		$	(716,900	)		$	(399,111	)		$	(286,306	)		$	(1,402,317	)

 

NOTE 8 – LEGAL MATTERS

 

The Company is periodically engaged in legal proceedings arising from and relating to its business operations. During the period covered by this Report, we have attempted to preserve revenue and reduce operating expenses through actions including, but not limited to, facilities consolidation and staff reductions, with the hope of reaching negotiated transactions with lessors, employees and other third parties. Such actions have resulted in disputes with and claims by such parties which, if not resolved through negotiations, may impact negatively the Company’s ability to continue as a going concern.

 

Through December 31, 2019, we had negotiated settlement of all but $89,302 in ex-employee wage and benefits claims, with agreement to pay such remaining amount, together with interest at the rate of 4% per annum on the principal amount from time to time outstanding, when and as cash flow permits. One of the employees claims additional amounts due for certain statutory damages under the Illinois Wage Payment and Collection which currently could exceed $25,600 and would increase at the rate of 2% of the wages due per month plus attorneys’ fees if the employee elects to file suit for a violation of the Act and is successful in obtaining a judgment on his claim. During the nine months ended June 30, 2020, the Company paid $49,393 to one of the employees who had a claim against the Company.

 

On or about April 1, 2020, the Company received notice from the Illinois Department of Labor that our ex-CEO had filed a wage claim for $179,543. The Company has responded to the claim denying any amount is payable. The claim relates to services claimed to have been performed during the period in which such ex-CEO admitted in a guilty plea to violation of certain federal criminal laws involving, among other things, manipulation of the price of our stock and engaging in undisclosed sales of our stock resulting in his receipt of proceeds exceeding $600,000. Our response relies upon settled Illinois law that a willful, deliberate, and repeated breach of fiduciary duty by a corporate officer and/or director, as evidenced by a guilty plea in a criminal proceeding, justifies a complete forfeiture of officer and director’s compensation.

 

On or about June 29, 2020, the Company received notice that a suit had been filed in the Circuit Court of Cook County alleging our failure to pay Base Rent and abandonment of certain office space in Hoffman Estates, Illinois, as noted in the following Note 9.

 

 

NOTE 9 – COMMITMENTS

 

Other Leases

 

The Company leased its corporate office facility in Hoffman Estates, Illinois pursuant to a non-cancellable lease initiated in July 2016 and expiring February 28, 2024. The lease terms require a monthly payment of approximately $11,000. The Company vacated the facility in April 2019, in favor of its present facilities in Tucson AZ, which are provided by a shareholder on a rent-free basis. The Company is in negotiations with the owners regarding the settlement of its lease obligations and expects that the property will be subleased or a settlement with the landlord will be reached at an amount significantly less than the remaining payment obligations. At the date of abandonment, the Company had a remaining lease obligation of $631,587. During the year ended September 30, 2019, the Company recorded an accrual for its estimate for the potential settlement of this matter and wrote-off its $15,000 security deposit relating to the lease.

 

On or about June 29, 2020, we received notice that Hanover Hoffman Estates, LLC (“HHE”), filed case number 2020L006092 in the Circuit Court of Cook County alleging our failure to pay Base Rent and abandonment of certain office space in Hoffman Estates, Illinois subject to a Commercial Lease dated May 26, 2016. HHE seeks at least $672,878 in base rent and other amounts under the lease, as well as treble damages from our ex-CEO and two past Directors who were serving on our Board as of the date of the lease. We are currently evaluating the allegations, defenses and alternate actions.

 

During the three and nine months ended June 30, 2020, the Company recorded an additional expense of $334,557 and $438,296, respectively, relating to the lease obligation, and recorded the full amount of the claim due as of June 30, 2020.

 

Commencing on October 1, 2016, the Company’s wholly-owned subsidiary, StealthCo, entered into a non-cancellable lease agreement to lease its office facilities in Oak Ridge, Tennessee. The term of the lease is five years and expires September 30, 2021. On January 6, 2020, the Company entered into an agreement with the owners to terminate the agreement effective January 1, 2020. Under the agreement, the Company agreed to pay $11,000 and abandon certain Company property as documented in the agreement. During the nine months ended June 30, 2020, the $11,000 was paid by the Company.

 

NOTE 10 – SUBSEQUENT EVENTS

 

Subsequent to June 30, 2020, Protec Scientific, Inc. (see Note 2) received $95,000 of investments, of which $75,000 was received from non-affiliated investors.  Due to those investments, as of the date of this filing, PSI’s ownership in Protec was reduced to approximately 86% and the Company’s derivative ownership was reduced to approximately 43%.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward Looking Statements

 

Except for historical information, the following discussion contains forward-looking statements based upon current expectations that involve certain risks and uncertainties. Such forward-looking statements include statements regarding, among other things, (a) our projected sales and profitability, (b) our growth strategies, (c) anticipated trends in our industry, (d) our future financing plans, (e) our anticipated needs for working capital, (f) our lack of operational experience and (g) the benefits related to ownership of our common stock. Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found under “Description of Business,” and “Analysis of Financial Condition and Results of Operations”, as well as in this Report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” in our Annual Report on Form 10-K and in other Reports we have filed with the Securities and Exchange Commission, as well as matters described in this Report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Report will in fact occur as projected.

 

The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto. This section includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. You should not place undue certainty on these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our predictions.

 

Description of Business

 

Background

 

Wellness Center USA, Inc. (“WCUI” or the “Company”) was incorporated in June 2010 under the laws of the State of Nevada. We initially engaged in online sports and nutrition supplements marketing and distribution. We subsequently expanded into additional businesses within the healthcare and medical sectors through acquisitions, including Psoria-Shield Inc. (“PSI”) and StealthCo Inc. (“SCI”), d/b/a Stealth Mark, Inc.

 

The Company currently operates in two business segments: (i) distribution of targeted Ultra Violet (“UV”) phototherapy devices for dermatology; and (ii) authentication and encryption products and services. The segments are conducted through our wholly-owned subsidiaries, PSI and SCI.

 

PSI

 

PSI was incorporated under the laws of the state of Florida on June 17, 2009. We acquired all of the issued and outstanding shares of stock in PSI on August 24, 2012.

 

 

Joint Ventures

 

We conducted PSI operations through Psoria Development Company LLC, an Illinois limited liability company (“PDC”), from January 15, 2015 through October, 2018. PDC was a joint venture between WCUI/PSI and The Medical Alliance, Inc., a Florida corporation (“TMA”). On November 15, 2018, PSI and TMA terminated the PDC joint venture. On the termination date, the non-controlling interest’s share of the accumulated losses of the joint venture totaled $405,383. During the year ended September 30, 2019, the Company wrote-off the non-controlling interest’s share of the accumulated losses and recorded a loss from deconsolidation of non-controlling interest of $405,383.

 

In December 2018, the Company and PSI entered into a Joint Venture Agreement with PSI GEN2 Funding, Inc., an Illinois corporation (“GEN2”), to further develop, market, license and/or sell PSI technology and products. The Joint Venture Agreement provides for the venture to be conducted through NEO Phototherapy, LLC, an Illinois limited liability company (“NEO”), with PSI and GEN2 to hold membership Units representing 50.5% and 36.0% ownership, respectively. It provides for an additional 13.5% of such Units to be reserved for issuance as incentive awards to key employees and consultants. PSI and GEN2 are to jointly manage NEO’s day-to-day operations.

 

According to the Joint Venture Agreement, PSI would contribute PSI technology to NEO in consideration for its Units and GEN2 would contribute $700,000 for its Units. Once NEO has realized and retained cumulative net income/distributable cash in the amount of $300,000, the next $700,000 of realized and retained cumulative net income/distributable cash would be distributed to GEN2. Distributions thereafter would be made to PSI, GEN2 and other members, if any, in proportion to their respective Unit ownership, at the times and in the manner determined from time to time by the managers, in their sole discretion.

 

During the nine months ended June 30, 2020, NEO’s operations required funding in excess of the $700,000 initially anticipated by the joint venture. As of June 30, 2020, GEN2 had contributed $975,000 to NEO, for which GEN2 received Units representing a cumulative total of 39.0% ownership of NEO. Additional Units representing a 10% ownership interest in NEO were awarded to one individual as a key staff incentive from the reserve initially established for such awards, with no further awards currently anticipated. As a result, once NEO has realized and retained cumulative net income/distributable cash in the amount of $300,000, the next $975,000 of realized and retained cumulative net income/distributable cash would be distributed to GEN2. Distributions thereafter would be made to PSI, GEN2 and the other member, in proportion to their respective Unit ownership, at the times and in the manner determined from time to time by the managers, in their sole discretion.

 

GEN2 contributions to NEO were derived from its shareholders, which consist of accredited investors, and which include several WCUI officers and directors, including Calvin R. O’Harrow, Roy M. Harsch, William E. Kingsford, Douglas Samuelson, Paul D. Jones and Thomas E. Scott. GEN2 shareholders, including said officers and directors of WCUI, will share any realized and retained cumulative net income/distributable cash that may be distributed to GEN2.

 

As of September 30, 2019, the Company’s interest was adjusted to 51% of the joint venture, GEN2 controlled 39% and another individual controlled the remaining 10%.

 

Effective April 30, 2020, the joint venture with GEN2 was reorganized. GEN2 shareholders exchanged their common shares in GEN2, and the individual exchanged his membership interests in NEO, for common shares representing 49% ownership in PSI. The Company retained its common shares in PSI, which provides the Company a 51% economic interest in the PSI technology and products developed by the joint venture. During the three and nine months ended June 30, 2020, the entities recorded a combined loss of $71,442 and $161,604, respectively, relating to its operations.

 

Repayment of the $975,000 investment will begin through and upon the date which PSI has realized and retained cumulative net income/distributable cash in the amount of $300,000. PSI ownership consists of accredited investors, and investment participation of $750,000 from several WCUI officers and directors, including Calvin R. O’Harrow and Roy M. Harsch.

 

At the end of May 2020, the Company’s subsidiary, PSI, agreed to become a majority shareholder in Protec Scientific, Inc. (“Protec”), subject to execution of a definitive agreement. Protec was formed in April 2020 by John Yorke for the purpose of designing, developing and marketing products that use spectral photonic emissions across a variety of applications. As of June 30, 2020, PSI had advanced $80,000 to Protec in furtherance of its agreement to acquire approximately 96% of Protec, with the Company’s derivative share being approximately 48%, based on its PSI ownership. The remaining 52% derivative share is to be attributed to PSI’s minority shareholders, based on their PSI ownership, and other investors.

 

 

Psoria-Light

 

PSI designs, develops and markets a targeted ultraviolet (“UV”) phototherapy device called the Psoria-Light. The Psoria-Light is designated for use in targeted PUVA photochemistry and UVB phototherapy and is designed to treat certain skin conditions including psoriasis, vitiligo, atopic dermatitis (eczema), seborrheic dermatitis, and leukoderma.

 

Psoriasis, eczema, and vitiligo, are common skin conditions that can be challenging to treat, and often cause the client significant psychosocial stress. Clients may undergo a variety of treatments to address these skin conditions, including routine consumption of systemic and biologic drug therapies which are highly toxic, reduce systemic immune system function, and come with a host of chemotherapy-like side effects. Ultraviolet (UV) phototherapy is a clinically validated alternate treatment modality for these disorders.

 

Traditionally, “non-targeted” UV phototherapy was administered by lamps that emitted either UVA or UVB light to both diseased and healthy skin. While sunblocks or other UV barriers may be used to protect healthy skin, the UV administered in this manner must be low dosage to avoid excessive exposure of healthy tissue. Today, “targeted” UV phototherapy devices administer much higher dosages of light only to affected tissue, resulting in “clearance” in the case of psoriasis and eczema, and “repigmentation” in the case of vitiligo, at much faster rates than non-targeted (low dosage) UV treatments.

 

Targeted UV treatments are typically administered to smaller total body surface areas, and are therefore used to treat the most intense parts of a client’s disease. Non-targeted UV treatment is typically used as a follow-up and for maintenance, capable of treating large surfaces of the body. Excimer laser devices (UVB at 308nm) are expensive and consume dangerous chemicals (Xenon and Chlorine). Mercury lamp devices (UVB and/or UVA) require expensive lamp replacements regularly and require special disposal (due to mercury content). Additionally, mercury lamp devices typically deliver wavelengths of light below 300nm. While within the UVB spectrum, it has been shown that wavelengths below 300nm produce significantly more “sunburn” type side effects than do wavelengths between 300 and 320nm without improvement in therapeutic benefit.

 

The Psoria-Light is a targeted UV phototherapy device that produces UVB light between 300 and 320 nm as well as UVA light between 350 and 395nm. It does not require consumption of dangerous chemicals or require special environmental disposal, and is cost effective for clinicians, which should result in increased patient access to this type of treatment. It has several unique and advanced features that we believe will distinguish it from the non-targeted and targeted UV phototherapy devices that are currently being used by dermatologists and other healthcare providers. These features include the following: the utilization of deep narrow-band UVB (“NB-UVB”) LEDs as light sources; the ability to produce both UVA or NB-UVB therapeutic wavelengths; an integrated high resolution digital camera and client record integration capabilities; the ability to export to an external USB memory device a PDF file of treatment information including a patent pending graph that includes digital images plotted against user tracked metrics which can be submitted to improve medical reimbursements; an accessory port and ability to update software; ease of placement and portability; advanced treatment site detection safety sensor; international language support; a warranty which includes the UV lamp(s); and a non-changeable treatment log (that does not include HIPPA information).

 

The Psoria-Light consists of three components: a base console, a color display with touchscreen control, and a hand-held delivery device with a conduit (or tether) between the handheld device and the base console. PSI requires clearance by the United States Food and Drug Administration (“FDA”) to market and sell the device in the United States as well as permission from TUV SUD America Inc., PSI’s Notified Body, to affix the CE mark to the Psoria-Light in order to market and sell the device in countries of the European Union.

 

To obtain FDA clearance and permission to affix the CE mark, PSI was required to conduct EMC and electrical safety testing, which it completed in the second quarter of 2011. PSI received FDA clearance on February 11, 2011 (no. K103540) and was granted permission to affix the CE mark on November 10, 2011. In its 510(k) application with the FDA (application number K103540), PSI asserted that the Psoria-Light was “substantially equivalent” in intended use and technology to two predicate devices, the X -Trac Excimer Laser, which has wide acceptance in the medical billing literature and has a large installed base in the U.S., and the Dualight, another competing targeted UV phototherapy device.

 

PSI has established an ISO 13485 compliant quality system for the Psoria-Light, which was first audited in the third quarter of 2011. This system is intended to ensure PSI devices will be manufactured in a controlled and reliable environment and that its resources follow similar practices and is required for sales in countries requiring a CE mark. PSI has also received Certified Space Technology designation from the Space Foundation, based on PSI’s incorporation of established NASA-funded LED technology.

 

 

PSI began Psoria-Light Beta deployment in January 2012. It is currently operating at a loss, and there is no assurance that its business development plans and strategies will ever be successful. PSI’s success depends upon the acceptance by healthcare providers and clients of Psoria-Light treatment as a preferred method of treatment for psoriasis and other UV-treatable skin conditions. Psoria-Light treatment appears to have been beneficial to clients, without demonstrable harmful side effects or safety issues, as evidenced by more than 10,000 treatments completed on more than 1,000 clients, domestically and Mexico, since 2012. In order for the Company to continue PSI operations, it will need additional capital and it will have to successfully coordinate integration of PSI operations without materially and adversely affecting continuation and development of other Company operations.

 

SCI

 

SCI was incorporated under the laws of the state of Illinois on March 18, 2014. SCI acquired certain Stealth Mark assets on April 4, 2014 and operates as a wholly-owned subsidiary of the Company. It is a provider of: a) Stealth Mark encryption and authentication solutions offering advanced technologies within the security and supply chain management vertical sectors (Intelligent Microparticles), and b) advanced data intelligence services offering proprietary, unprecedented, and actionable technology for industries, companies, and agencies on a global scale (ActiveDuty™).

 

Intelligent Microparticles

 

SCI provides clients premiere authentication technology for the protection of a variety of products and brands from illicit counterfeiting and diversion activities. Its technology is applicable to a wide range of industries affected by counterfeiting, diversion and theft including, but not limited to, pharmaceuticals, defense/aerospace, automotive, electronics, technology, consumer and personal care goods, designer products, beverage/spirits, and many others.

 

SCI delivers the client a complete, simple to use, easy to implement, and cost effective turnkey system that is extremely difficult to compromise. SCI’s technology includes a combination of proprietary software and intelligent microparticle marks that are unduplicatable and undetectable to the human eye. These taggants are created with proprietary materials that create unique numerical codes that are assigned meaning by the client and are machine readable without the use of rare earth or chemical tracers. They have been used in covert and overt operations with easy to implement technology and do-it-yourself in-the-field forensic caliber verification.

 

In April 2018, the Company’s subsidiary, SCI, concluded licensing of a patent for technology that is the next generation of Stealth Mark. Working with researchers at the Oak Ridge National Labs, the patent signifies development of a new technology that will generate an invisible marking system with attributes currently unavailable in the anti-counterfeit marketplace today. The formula and techniques have been shown through extensive testing to be resilient to manufacturing processes and can be used on a wide range of materials from woven and non-woven fabrics, cardboard, metal, concrete, plastics, leather, wood, and paper. In addition, the complexity of the information that can be encoded with the system makes counterfeiting difficult.

 

ActiveDuty™

 

SCI’s ActiveDuty™ data intelligence services offer unique, unprecedented, actionable technology for industries, companies, and agencies on a global scale. Comprised of a suite of powerful analytical tools, including artificial intelligence and social-psychology, the service provides timely and actionable intelligence to clients. ActiveDuty™ is adaptable to a broad spectrum of illicit activities within both private and public sectors such as, but not limited to, counterfeiting, sex and human trafficking, money laundering, and a variety of other markets.

 

The proprietary algorithmic architecture of ActiveDuty™ creates the first systemic reporting mechanism to deliver strategic and tactical results supported by an intense worldwide analysis of patterns of human behavior. The ActiveDuty™ global framework is heuristic in nature, capable of comprehending big data across the digital spectrum and speaks all the major languages. Up until now, there has not existed a unified system that could actively measure this lifecycle that is a collection of discreet and seemingly random behaviors of criminals anywhere within the digital domain. Criminals change their identities but not their basic behaviors.

 

 

SCI was managed initially by Ricky Howard, who brought over thirty years of experience in operations management and executive positions in a variety of industries ranging from entrepreneurial startups to Fortune 500 companies. He played an integral role in bringing the company’s capabilities to its present status including design and creation of its manufacturing capabilities, implementation of its ERP inventory controls system, software and hardware development, marketing and sales materials processes and day-to-day operational procedures and processes. In November 2018, Mr. Howard passed away suddenly and Mr. O’Harrow took over operations of SCI’s business on an interim basis.

 

Proposed Share Exchange

 

On September 3, 2019, our Board unanimously approved, subject to stockholder approval, the execution and delivery of a proposed Share Exchange Agreement relating to the share exchange and transfer of certain assets of SCI to DTI Holdings, Inc. (“DTI”) pursuant to the terms and conditions of a Memorandum of Agreement providing, among other things, as follows:

 

● DTI will pay the Company $500,000 upon execution of a definitive share exchange agreement (“Share Exchange Agreement”) which the parties will endeavor to negotiate and execute as quickly as possible, and not later than October 15, 2019.

● DTI will pay the Company an additional $500,000 within seven days following the completion date of the transfer of all assets and/or full ownership of SCI to DTI, with such date to occur within 120 days following execution of the Share Exchange Agreement.

● DTI will issue to the Company 3,112,000 shares of DTI common stock and will guaranty that the value of the 3,112,000 shares of DTI common stock will have a value of at least $4.50 per share ($14,004,000, in the aggregate), as of December 31, 2021.

● To the extent that the value of the DTI common shares, as of December 31, 2021, is less than $4.50 per share ($14,004,000, in the aggregate), DTI will issue additional shares of DTI common stock, at the then current fair market value, in an amount sufficient to cause the resulting aggregate value of all shares of DTI common stock issued to the Company to be $14,004,000, in the aggregate.

● DTI will assign the assets transferred by SCI, including trademarks, intellectual properties, and patents, to its subsidiary, Femtobitz, Inc., a Delaware corporation, and will pay to the Company 1% of annual gross revenue arising from or relating to operation of Femtobitz, Inc.

● Upon closing of the share exchange, the Company’s Chairman will be appointed an advisory board member of DTI and a board member of Femtobitz, Inc.

 

The 3,112,000 shares of DTI common stock to be issued to us in exchange for all of our shares of SCI common stock will represent a minority of the issued and outstanding shares of DTI common stock as of the date of issuance. The DTI shares will be issued in reliance upon the exemption from registration requirements under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(2) thereof and Regulation D thereunder. As such, such shares may not be offered or sold by us unless they are registered under the Securities Act or qualify for an exemption from the registration requirements under the Securities Act.

 

As of September 18, 2019, stockholders holding a majority of our outstanding common stock approved the share exchange and the Company began discussions and negotiations with DTI, which are currently on-going as of the date of this filing. There can be no assurance that the proposed transaction will be concluded successfully on the terms described or any alternate terms that may be proposed hereafter.

 

Analysis of Financial Condition and Results of Operations

 

Results of Operations for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

 

Revenue and Cost of Goods Sold

 

Revenue for the three months ended June 30, 2019 was $7,625. There was no revenue, cost of sales or gross profit for the three months ended June 30, 2020. The decrease in revenue in 2020 related to the decrease in revenues at SCI, as there was no revenue at PSI for each period. Cost of sales for the three months ended June 30, 2019 was $4,575. Gross profit for the three months ended June 30, 2019 was $3,050.

 

 

Operating Expenses

 

Operating expenses for the three months ended June 30, 2020 and 2019 were $813,380 and $404,210, respectively. The increase in operating expenses in 2020 was primarily due to the increase in lease settlement expenses, but also to employee-related costs and stock compensation costs.

 

Other Income (Expense)

 

Other income during the three months ended June 30, 2020 consisted of $4,000 from a U.S. government grant relating to COVID-19. Other expenses during the three months ended June 30, 2020 consisted of $22,680 relating to the cost of the modification of terms of stock options, $43,815 of financing costs and $19,751 of interest expense, totaling to a net expense of $82,246. Other expenses during the three months ended June 30, 2019 consisted of $108,630 of financing costs and $6,042 of interest expense, totaling to $114,672.

 

Net Loss

 

Our net loss for the three months ended June 30, 2020 was $895,626, compared to a net loss of $515,832 for the three months ended June 30, 2019. The increase in the net loss in 2020 was primarily due to the increase in operating expenses.

 

Results of Operations for the nine months ended June 30, 2020 compared to the nine months ended June 30, 2019.

 

Revenue and Cost of Goods Sold

 

Revenue for the nine months ended June 30, 2020 and 2019 was $5,000 and $33,375, respectively. The decrease in revenues in 2020 was due to the decrease in revenues at SCI, as there was no revenue at PSI for each period. Cost of sales for the nine months ended June 30, 2019 was $20,025. There was no cost of sales for the three months ended June 30, 2020. Gross profit for the nine months ended June 30, 2019 was $5,000 and $13,350, respectively.

 

Operating Expenses

 

Operating expenses for the nine months ended June 30, 2020 and 2019 were $1,573,783 and $1,415,667, respectively. The increase in operating expenses in 2020 was primarily due to the increase in lease settlement expenses.

 

Other Income (Expense)

 

Other income during the nine months ended June 30, 2020 consisted of $4,000 from a U.S. government grant relating to COVID-19. Other expenses during the nine months ended June 30, 2020 consisted of $507,265 relating to the cost of the modification of terms of stock warrants, $22,680 relating to the cost of the modification of terms of stock options, $43,815 of financing costs and $45,285 of interest expense, totaling to a net expense of $615,045. Other expenses during the nine months ended June 30, 2019 consisted of $72,078 of amortization of debt discount, $182,064 of financing costs and $17,771 of interest expense, totaling to $271,913.

 

Net Loss

 

Our net loss for the nine months ended June 30, 2020 was $2,183,828, compared to a net loss of $1,674,230 for the nine months ended June 30, 2019. The increase in the net loss in 2020 was primarily due to the increase in operating expenses and other expenses.

 

Results of Operations by Segment

 

The Company currently maintains two business segments:

 

	(i)	Medical Devices: which it provided through PSI, its wholly-owned subsidiary acquired on August 24, 2012, a developer, manufacturer, marketer and distributer of targeted Ultra Violet (“UV”) phototherapy devices for the treatment of skin diseases; and
	(ii)	Authentication and Encryption Products and Services: which it provided through SCI, its wholly-owned subsidiary that on April 4, 2014 acquired certain assets of SMI Holdings, Inc. d/b/a Stealth Mark, Inc., including Stealth Mark tradenames and marks, and related encryption and authentication solutions offering advanced product security technologies within the security and supply chain management vertical sectors.

 

 

The detailed segment information of the Company is as follows:

 

Operations by Segment For the Three Months Ended June 30, 2020 and 2019

 

		For the Three Months Ended
		June 30, 2020
		Corporate				Medical Devices				Authentication and Encryption				Total
Sales:
Trade		$	-			$	-			$	-			$	-
Consulting services			-				-				-				-
Total Sales			-				-				-				-
Cost of goods sold			-				-				-				-
Gross profit			-				-				-				-
Operating expenses			620,650				208,047				(15,317	)			813,380
Income (loss) from operations		$	(620,650	)		$	(208,047	)		$	15,317			$	(813,380	)

 

		For the Three Months Ended
		June 30, 2019
		Corporate				Medical Devices				Authentication and Encryption				Total
Sales:
Trade		$	-			$	-			$	3,108			$	3,108
Consulting services			-				-				4,517				4,517
Total Sales			-				-				7,625				7,625
Cost of goods sold			-				-				4,575				4,575
Gross profit			-				-				3,050				3,050
Operating expenses			175,784				95,306				133,120				404,210
Loss from operations		$	(175,784	)		$	(95,306	)		$	(130,070	)		$	(401,160	)

 

There was no revenue or cost of goods sold for the Medical Devices segment for the three months ended June 30, 2020 and 2019. Operating expenses for the three months ended June 30, 2020 and 2019 was $208,047 and $95,306, respectively. The increase in operating expenses in 2020 was due primarily to the increase in contract labor. The loss from operations for the three months ended June 30, 2020 and 2019 was $208,047 and $95,306, respectively.

 

Revenue for the Authentication and Encryption segment for the three months ended June 30, 2019 was $7,625. There was no revenue or cost of goods sold for the Authentication and Encryption segment for the three months ended June 30, 2020. The decrease in 2020 was due to the decrease in trade sales and consulting services. Cost of goods sold for the three months ended June 30, 2019 was $4,775 and the gross profit was $3,050. The gross profit decrease in 2020 was due to the decrease in sales. Operating expenses for the three months ended June 30, 2020 and 2019 was $(15,317) and $133,120, respectively. The decrease in operating expenses in 2020 was primarily due to the decrease in stock compensation costs and employee-related costs. The income (loss) from operations for the three months ended June 30, 2020 and 2019 was $15,317 and $(130,070), respectively.

 

The Corporate segment primarily provides executive management services for the Company. Operating expenses for the three months ended June 30, 2020 and 2019 was $620,650 and $175,784, respectively. The increase in operating expenses in 2020 was primarily due to the increase in lease settlement expenses. The loss from operations for the three months ended June 30, 2020 and 2019 was $620,650 and $175,784, respectively.

 

Operations by Segment For the Nine Months Ended June 30, 2020 and 2019

 

		For the Nine Months Ended
		June 30, 2020
		Corporate				Medical Devices				Authentication and Encryption				Total
Sales:
Trade		$	-			$	-			$	5,000			$	5,000
Consulting services			-				-				-				-
Total Sales			-				-				5,000				5,000
Cost of goods sold			-				-				-				-
Gross profit			-				-				5,000				5,000
Operating expenses			861,611				590,158				122,014				1,573,783
Loss from operations		$	(861,611	)		$	(590,158	)		$	(117,014	)		$	(1,568,783	)

 

 

		For the Nine Months Ended
		June 30, 2019
		Corporate				Medical Devices				Authentication and Encryption				Total
Sales:
Trade		$	-			$	-			$	19,508			$	19,508
Consulting services			-				-				13,867				13,867
Total Sales			-				-				33,375				33,375
Cost of goods sold			-				-				20,025				20,025
Gross profit			-				-				13,350				13,350
Operating expenses			716,900				399,111				299,656				1,415,667
Loss from operations		$	(716,900	)		$	(399,111	)		$	(286,306	)		$	(1,402,317	)

 

There was no revenue or cost of goods sold for the Medical Devices segment for the nine months ended June 30, 2020 and 2019. Operating expenses for the nine months ended June 30, 2020 and 2019 was $590,158 and $399,111, respectively. The increase in operating expenses in 2020 was primarily due to the increase in contract labor. The loss from operations for the nine months ended June 30, 2020 and 2019 was $590,158 and $399,111, respectively.

 

Revenue for the Authentication and Encryption segment for the nine months ended June 30, 2020 and 2019 was $5,000 and $33,375. The decrease in 2020 was due to the decrease in trade sales and consulting services. There was no cost of goods sold for the nine months ended June 30, 2020 and the gross profit was $5,000. Cost of goods sold for the nine months ended June 30, 2019 was $20,025 and the gross profit was $13,350. The gross profit decrease in 2020 was primarily due to the decrease in sales. Operating expenses for the nine months ended June 30, 2020 and 2019 was $122,014 and $299,656, respectively. The decrease in operating expenses in 2020 was primarily due to the decrease in stock compensation costs and employee-related costs. The loss from operations for the nine months ended June 30, 2020 and 2019 was $117,014 and $286,306, respectively.

 

The Corporate segment primarily provides executive management services for the Company. Operating expenses for the nine months ended June 30, 2020 and 2019 was $861,611 and $716,900, respectively. The increase in operating expenses in 2020 was primarily due to the increase in lease settlement costs. The loss from operations for the nine months ended June 30, 2020 and 2019 was $861,611 and $716,900, respectively.

 

 

Liquidity and Capital Resources

 

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, the Company has not yet generated significant revenues and has incurred recurring net losses. During the nine months ended June 30, 2020, the Company incurred a net loss of $2,183,828 and used cash in operations of $730,995, and had a shareholders’ deficit of $2,168,793 as of June 30, 2020. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its strategies. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

In addition, the Company’s independent registered public accounting firm, in its report on the Company’s September 30, 2019 financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.

 

At June 30, 2020, the Company had cash on hand in the amount of $94,318. The ability to continue as a going concern is dependent on the Company attaining and maintaining profitable operations in the future and raising additional capital soon to meet its obligations and repay its liabilities arising from normal business operations when they come due. Since inception, we have funded our operations primarily through equity and debt financings and we expect to continue to rely on these sources of capital in the future. During the nine months ended June 30, 2020, the Company received $772,166 through short-term loans and contributions of capital by a joint venture partner. As of June 30, 2020, loans payable to officers and shareholders of $1,054,250 were outstanding. All of the loans are unsecured, have an interest rate of eight percent and are due one year from the date of issuance. In addition, the Company entered into a loan with the United States Small Business Administration under which the Company borrowed $37,166. The loan is unsecured, accrues interest at 1.0% and is due on April 23, 2022.

 

No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case of equity financing.

 

Comparison of nine months ended June 30, 2020 and 2018

 

As of June 30, 2020, we had $94,318 in cash, negative working capital of $2,143,884 and an accumulated deficit of $27,463,732.

 

As of June 30, 2019, we had $49,603 in cash, negative working capital of $1,005,893 and an accumulated deficit of $25,045,034.

 

Cash flows used in operating activities

 

During the nine months ended June 30, 2020, the Company used cash flows in operating activities of $730,995, compared to $685,290 used in the nine months ended June 30, 2019. During the nine months ended June 30, 2020, the Company incurred a net loss of $2,183,828 and $1,474,471 of non-cash expenses, compared to a net loss of $1,674,230 and $634,782 of non-cash expenses during the nine months ended June 30, 2019.

 

Cash flows used in investing activities

 

During the nine months ended June 30, 2020 and 2019, the Company had no cash flows from investing activities.

 

Cash flows provided by financing activities

 

During the nine months ended June 30, 2020, the Company had proceeds of $685,000 from loans payable from officers and shareholders, $37,166 from a U.S. SBA loan and $50,000 from contributions of capital by its joint venture partners. During the nine months ended June 30, 2019, the Company had proceeds from loans payable from officers and shareholders of $333,250, from the sale of common stock of $10,000 and from contributions of capital by its joint venture partner of $700,000. The Company used cash of $25,000 for the repayment of loans payable from officers and shareholders.

 

 

Off-Balance Sheet Arrangements

 

We have no 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.

 

Summary of Critical Accounting Policies.

 

The Company has identified critical accounting policies that, as a result of the judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operations involved could result in material changes to its financial condition or results of operations under different conditions or using different assumptions. The Company’s most critical accounting policies include, but are not limited to, those related to fair value of financial instruments, revenue recognition, stock based compensation for obtaining employee services, and equity instruments issued to parties other than employees for acquiring goods or services. Details regarding the Company’s use of these policies and the related estimates are described in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019, filed with the Securities and Exchange Commission on January 28, 2020. There have been no material changes to the Company’s critical accounting policies that impact the Company’s financial condition, results of operations or cash flows for the nine months ended June 30, 2020.

 

Recently Issued Accounting Pronouncements

 

See Management’s discussion of recent accounting policies included in footnote 2 to the condensed consolidated financial statements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not required for smaller reporting Companies.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Regulations under the Securities Exchange Act of 1934 (the “Exchange Act”) require public companies to maintain “disclosure controls and procedures,” which are defined as controls and other procedures that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits 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. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

 

The Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of June 30, 2020, the end of the period covered by this report. Based upon that evaluation, the Company’s CEO concluded that the Company’s disclosure controls and procedures are not effective at the reasonable assurance level due to the material weaknesses described below:

 

1. The lack of an independent audit committee and the lack of internal personnel necessary to provide accurate and timely regulatory filings.

 

2. The Company does not have written documentation of its internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act which is applicable to the Company. Management evaluated the impact of its failure to have written documentation of its internal controls and procedures on its assessment of its disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

 

3. The Company does not have sufficient segregation of duties within its accounting functions, which is a basic internal control. Due to its size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of its failure to have segregation of duties on its assessment of its disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

4. The Company does not have sufficient segregation of duties so that one person can initiate, authorize and execute transactions.

 

In light of the material weaknesses, the management of the Company performed additional analysis and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with the accounting principles generally accepted in the United States of America. Accordingly, we believe that our consolidated financial statements included herein fairly present, in all material respects, our consolidated financial condition, consolidated results of operations and cash flows as of and for the reporting periods then ended.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officer and effected by the issuer’s board of directors, 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 accounting principles generally accepted in the United States of America and includes those policies and procedures that:

 

● Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;

 

● Only in accordance with authorizations of management and directors of the issuer; and provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the Company are being made;

 

● Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 

 

As of the end of our most recent fiscal year, management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and SEC guidance on conducting such assessments. Based on that evaluation, they concluded that, as of September 30, 2019, such internal control over financial reporting was not effective. This was due to deficiencies that existed in the design or operation of our internal control over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.

 

The matters involving internal control over financial reporting that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; and (2) inadequate segregation of duties consistent with control objectives of having segregation of the initiation of transactions, the recording of transactions and the custody of assets. The aforementioned material weaknesses were identified by our Chief Executive Officer in connection with the review of our financial statements as of June 30, 2020.

 

To address the material weaknesses set forth in items (1) and (2) discussed above, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.

 

This Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to the rules of the SEC that permit the Company to provide only the management’s report in this Report.

 

Management’s Remediation Initiatives

 

In response to the above identified weaknesses in our internal control over financial reporting, we plan to work on documenting in writing our internal control policies and procedures and implement sufficient segregation of duties within our accounting functions, so that one person cannot initiate, authorize and execute transactions, and so that one person cannot record transactions in the accounting records without sufficient review by a separate person. We do not have a specific timeline within which we expect to conclude these remediation initiatives but do expect it to be an on-going process for the foreseeable future. We continue to evaluate testing of our internal control policies and procedures, including assessing internal and external resources that may be available to complete these tasks, but do not know when these tasks will be completed.

 

Our CEO and CFO, along with other Board members, are and will be active participants in these remediation processes. We believe the steps taken to date have improved the effectiveness of our internal control over financial reporting.

 

Changes in internal control over financial reporting.

 

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15 (f) under the Exchange Act) during the nine months ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company is periodically engaged in legal proceedings arising from and relating to its business operations. During the period covered by this Report, we have attempted to preserve revenue and reduce operating expenses through actions including, but not limited to, facilities consolidation and staff reductions, with the hope of reaching negotiated transactions with lessors, employees and other third parties. Such actions have resulted in disputes with and claims by such parties which, if not resolved through negotiations, may impact negatively the Company’s ability to continue as a going concern.

 

Through December 31, 2019, we had negotiated settlement of all but $89,302 in ex-employee wage and benefits claims, with agreement to pay such remaining amount, together with interest at the rate of 4% per annum on the principal amount from time to time outstanding, when and as cash flow permits. One of the employees claims additional amounts due for certain statutory damages under the Illinois Wage Payment and Collection which currently could exceed $25,600 and would increase at the rate of 2% of the wages due per month plus attorneys’ fees if the employee elects to file suit for a violation of the Act and is successful in obtaining a judgment on his claim. During the nine months ended June 30, 2020, the Company paid $49,393 to one of the employees who had a claim against the Company.

 

 

On or about April 1, 2020, the Company received notice from the Illinois Department of Labor that our ex-CEO had filed a wage claim for $179,543. The Company has responded to the claim denying any amount is payable. The claim relates to services claimed to have been performed during the period in which such ex-CEO admitted in a guilty plea to violation of certain federal criminal laws involving, among other things, manipulation of the price of our stock and engaging in undisclosed sales of our stock resulting in his receipt of proceeds exceeding $600,000. Our response relies upon settled Illinois law that a willful, deliberate, and repeated breach of fiduciary duty by a corporate officer and/or director, as evidenced by a guilty plea in a criminal proceeding, justifies a complete forfeiture of officer and director’s compensation.

 

On or about June 29, 2020, we received notice that Hanover Hoffman Estates, LLC (“HHE”), filed case number 2020L006092 in the Circuit Court of Cook County alleging our failure to pay Base Rent and abandonment of certain office space in Hoffman Estates, Illinois subject to a Commercial Lease dated May 26, 2016. HHE seeks at least $672,878 in base rent and other amounts under the lease, as well as treble damages from our ex-CEO and two past Directors who were serving on our Board as of the date of the lease. We are currently evaluating the allegations, defenses and alternate actions.

 

Item 1A. Risk Factors

 

Not required for smaller reporting companies.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None

 

Item 6. Exhibits

 

Exhibit No.		Description
31.1 31.2		Certification of Principal Executive Officer Pursuant to Rule 13a-14* Certification of Principal Financial Officer Pursuant to Rule 13a-14*
32.1 32.2		CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act* CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act*
101.INS		XBRL Instance Document**
101.SCH		XBRL Taxonomy Extension Schema**
101.CAL		XBRL Taxonomy Extension Calculation Linkbase**
101.DEF		XBRL Taxonomy Extension Definition Linkbase**
101.LAB		XBRL Taxonomy Extension Label Linkbase**
101.PRE		XBRL Taxonomy Extension Presentation Linkbase**

 

* Filed herewith.

**Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.

 

	WELLNESS CENTER USA, INC.
Date: August 25, 2020	By:	/s/ Paul D. Jones
		Paul D. Jones President (Duly Authorized Principal Executive Officer)

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.

 

	WELLNESS CENTER USA, INC.
Date: August 25, 2020	By:	/s/ Douglas W. Samuelson
		Douglas W. Samuelson Chief Financial Officer and Principal Accounting Officer (Duly Authorized Principal Accounting Officer)

 

POWER OF ATTORNEY

 

Each person whose signature appears below hereby constitutes and appoints severally Paul D. Jones, his true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, 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/ Calvin O’Harrow		Chief Executive Officer, Director		August 25, 2020
Calvin O’Harrow
/s/ Douglas W. Samuelson		Chief Financial Officer and Principal Accounting Officer		August 25, 2020
Douglas W. Samuelson
/s/ Paul D. Jones		Director, President		August 25, 2020
Paul D. Jones
/s/ Thomas E. Scott		Director, Secretary		August 25, 2020
Thomas E. Scott
/s/ William E. Kingsford		Director		August 25, 2020
William E. Kingsford
/s/ Roy M. Harsch		Director, Chairman		August 25, 2020
Roy M. Harsch