NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR
THE NINE MONTHS ENDED JUNE 30, 2021 and 2020
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 sanitation purposes; 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, 2021 are not necessarily indicative of the results that may be expected for the year ending September 30, 2021.
COVID-19
Considerations
During
the period ended June 30, 2021, the COVID-19 pandemic did not have a material net impact on our operating results. In the future, the
pandemic may cause reduced demand for our products if, for example, the pandemic results in a recessionary economic environment which
negatively effects the consumers who purchase our products.
Our
ability to operate without significant negative operational impact from the COVID-19 pandemic will in part depend on our ability to protect
our employees and our supply chain. The Company has endeavored to follow the recommended actions of government and health authorities
to protect our employees. Since the onset of the COVID-19 pandemic, we maintained the consistency of our operations. However, the uncertainty
resulting from the pandemic could result in an unforeseen disruption to our workforce and supply chain (for example an inability of a
key supplier or transportation supplier to source and transport materials) that could negatively impact our operations.
Through
June 30, 2021, the COVID-19 pandemic has not negatively impacted the Company’s liquidity position as of such date. Through June
30, 2021, the Company continues to generate cash flows through financing activities to meet its short-term liquidity needs, and it expects
to maintain access to those shareholder loans. The Company has not observed any material impairments of its assets or a significant change
in the fair value of its assets due to the COVID-19 pandemic.
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, 2021, the Company incurred a net loss of $966,487 and used cash in operations of $760,521, and had a shareholders’
deficit of $3,047,268 as of June 30, 2021. In addition, loans payable of $1,045,250 and payroll taxes of $80,334 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, 2020
financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.
At
June 30, 2021, the Company had cash on hand in the amount of $41,799. 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, 2021, the Company received $751,000 through short-term loans from officers and shareholders.
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 stockholders, in case of equity financing.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Consolidation
The
consolidated financial statements include the Company’s 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 controlled entities are as
follows:
SCHEDULE OF COMPANY'S CONSOLIDATED SUBSIDIARIES
|
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 at September 30, 2020
|
|
|
Attributable interest at
June
30, 2021
|
|
|
Psoria-Shield
Inc. (“PSI”)
|
|
The
State of Florida
|
|
June
2009 (August 2012)
|
|
|
51
|
%(1)
|
|
|
51
|
%(1)
|
|
StealthCo,
Inc. (“StealthCo”)
|
|
The
State of Illinois
|
|
March
2014
|
|
|
100
|
%
|
|
|
100
|
%
|
|
Psoria
Development Company LLC. (“PDC”)
|
|
The
State of Illinois
|
|
January
2015/November 2018
|
|
|
0
|
%
|
|
|
0
|
%
|
|
NEO
Phototherapy LLC (“NEO”)
|
|
The
State of Illinois
|
|
December
2018
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Protec
Scientific, Inc (“Protec”)
|
|
The
State of New York
|
|
April
2020
|
|
|
38
|
%
|
|
|
38
|
%
|
|
(1)
|
|
- Effective April
30, 2020, the Company’s 51% interest in NEO was converted into a 51% interest in PSI.
|
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, and 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, 2021 and 2020, the basic and diluted shares outstanding were
the same, as potentially dilutive shares were considered anti-dilutive. At June 30, 2021 and 2020, the dilutive impact of outstanding
stock options of 5,277,738 and 13,765,238 shares, respectively, and outstanding warrants for 34,712,074 and 67,634,049 shares, respectively,
have been excluded because their impact on the loss per share is anti-dilutive.
Revenue
Recognition
The
company records revenue under the guidance of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with
Customers (Topic 606) which 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.
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, 2021 and September
30, 2020.
Non-controlling
Interests
PSI
In
December 2018, PSI entered into a Joint Venture Agreement with GEN2 for further development, marketing, licensing and/or sale of PSI
technology and products to be conducted through NEO Phototherapy, Inc. (“NEO”). PSI and GEN2 were the members of NEO, owning
50.5%
and 36.0%,
respectively. As of April 30, 2020, the Company controlled 51%
of the joint venture, GEN2 controlled 39%
and another individual controlled the remaining 10%.
Effective
April 30, 2020, the 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. During
three and nine months ended June 30, 2021, PSI recorded a loss of $168,350 and $506,860, respectively, relating to its operations, of
which $82,491 and $248,361, respectively, was allocated to the non-controlling interest.
As
of September 30, 2019, GEN2 had received $975,000 of
investments to contribute to NEO. 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. As
of June 30, 2021, PSI had not recorded any cumulative net income/distributable cash. The minority interest of PSI ownership
consists of accredited investors, and investment participation of $750,000 from some
of the Company’s officers and directors, including Calvin R. O’Harrow and Roy M. Harsch.
Protec
In
May 2020, the Company’s subsidiary, PSI, agreed to become a majority shareholder in Protec Scientific, Inc. (“Protec”),
a company formed in April 2020. As of September 30, 2020, PSI had contributed $191,000 to Protec with the Company’s share being
approximately 32%, based on its PSI ownership. The remaining 30% share is attributed to PSI’s minority shareholders. During the
year ended September 30, 2020, Protec received an additional $120,000 from non-affiliated investors. The additional investments gave
the non-controlling interests a 68% ownership interest in Protec. During the three and nine months ended June 30, 2021, Protec recorded
a loss of $6,710 and $249,567, respectively, of which $4,589 and $170,654 was allocated to the non-controlling interests.
Inventories
Inventories
are stated at the lower of cost or net realizable value. Cost is computed on a first-in, first-out basis. At June 30, 2021, primarily
all of the inventories consisted of raw materials or work-in-progress. The Company provides inventory reserves based on excess and obsolete
inventories determined primarily by future demand forecasts. The write down amount, if any, is measured as the difference between the
cost of the inventory and net realizable value based upon assumptions about future demand and charged to the provision for inventory,
which is a component of cost of sales. At the point of the loss recognition, a new, lower cost basis for that inventory is established,
and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
At June 30, 2021, the Company recorded a reserve of $100,000 for excess and slow moving inventories. At September 30, 2020, no reserve
was recorded for excess, slow moving or obsolete inventory.
Stock-Based
Compensation
The
Company periodically issues stock-based compensation to officers, directors, and consultants for services rendered, and as part of
financing transactions. Such issuances vest and expire according to terms established at the issuance date. Stock-based payments to
officers, directors, employees, and for acquiring goods and services from non-employees, which include grants of stock options, are
recognized in the financial statements based on their fair values in accordance with Topic 718. Stock option grants, which are
generally time vested, will be measured at the grant date fair value and charged to operations on a straight-line basis over the
vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company has paid
cash for the services.
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.
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.
In
May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50),
Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic
815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options.
ASU 2021-04 provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding
equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. An issuer measures
the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value
of that warrant immediately before modification or exchange. ASU 2021-04 introduces a recognition model that comprises four categories
of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and
modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal
years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided
in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date. Early adoption is permitted for
all entities, including adoption in an interim period. If an entity elects to early adopt ASU 2021-04 in an interim period, the guidance
should be applied as of the beginning of the fiscal year that includes that interim period. The adoption of ASU 2021-04 is not expected
to have a material impact on the Company’s financial statements or disclosures.
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, 2020, loans payable from officers and shareholders of $1,165,250 were outstanding. During the nine months ended June
30, 2021, the Company borrowed $751,000 from its officers and shareholders. 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, 2021, loans payable to officers and shareholders of $1,916,250
were outstanding and $1,045,250 was past due.
NOTE
4 – LEASE LIABILITIES
Operating
Lease
In
February 2019, the Company’s PSI subsidiary entered into a 24-month non-cancellable lease for its office facilities that will require
monthly payments of $1,850 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 asset
and liability at the inception of the lease was $27,841, using a discount rate of 4.00%. As of September 30, 2020, the value of the lease
asset and liability was $6,961, respectively. During the three and nine months ended June 30, 2021, the Company made payments of $1,613
and $6,961, respectively, towards the lease liability. As of June 30, 2021, the lease liability was fully paid off.
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, 2021 was $1,794 and
$7,142, respectively. During the three and nine months ended June 30, 2021, the Company reflected amortization of right of use asset
of $1,613 and $6,961, respectively, related to this lease, resulting in no net asset balance as of June 30, 2021.
Other
Leases - lease abandonment liability
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 vacation, the Company had a remaining lease obligation of $631,587.
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, and continuing settlement negotiations. As of June 30, 2021, the Company
has recorded a liability of $672,878 for the full amount of the judgement due.
NOTE
5 – SHAREHOLDERS’ EQUITY
Restricted
Stock Grants
In
April 2020, the Company’s Board of Directors approved the issuance of a combined total of 20,170,000
restricted shares of the Company’s common
stock to its Officers and Directors. A total of 7,120,000
shares vested in April 2020, while 1,800,000
shares
vested from April 2020 through March 2021, and a total of 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 937,500
and 3,712,500
shares vested during the three and nine months
ended June 30, 2021, respectively.
During
the three months ended June 30, 2021, the Company’s Board of Directors approved the issuance of a combined total of 3,750,000
restricted shares of the Company’s
common stock to its Officers and Directors, all of which will vest monthly from April 2021 through March 2024. A total of 312,500
shares vested during the three and nine months
ended June 30, 2021, respectively.
During
the three months ended June 30, 2021, the Company’s Board of Directors approved the issuance of a combined total of 41,353,731
restricted shares of the Company’s common stock to its Officers and Directors, all of which will only be issued upon the sale
or merger of the Company. No stock compensation was recorded relating to that grant as management feels it is a remote possibility that
a sale or merger of the Company will happen within the next twelve months. In relation to that grant, a total of 16,093,018
warrant shares held by the Officers and Directors
were cancelled (see Stock Warrants below).
SUMMARY OF RESTRICTED COMMON STOCK
The
following table summarizes restricted common stock activity:
|
|
|
|
Number
of Restricted
Shares
|
|
|
Fair
Value
|
|
|
Weighted
Average
Grant
Date
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested,
September 30, 2020
|
|
|
|
10,275,000
|
|
|
$
|
308,250
|
|
|
$
|
0.03
|
|
|
Granted
|
|
|
|
3,750,000
|
|
|
|
187,500
|
|
|
|
0.05
|
|
|
Vested
|
|
|
|
(4,025,000
|
)
|
|
|
(127,000
|
)
|
|
|
0.03
|
|
|
Forfeited
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Non-vested,
June 30, 2021
|
|
|
|
10,000,000
|
|
|
$
|
368,750
|
|
|
$
|
0.03
|
|
During
the three and nine months ended June 30, 2021, the Company recorded $43,750 and $127,000, respectively, of stock compensation for the
value of restricted common stock vesting during the period, and as of June 30, 2021, unvested compensation of $368,750 remained that
will be amortized over the remaining vesting period.
Stock
Options
On
December 22, 2010, effective retroactively as of June 30, 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, 2021:
SCHEDULE OF STOCK OPTION ACTIVITY
|
|
|
|
Number
of Option Shares
|
|
|
Exercise
Price Range Per Share
|
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2020
|
|
|
|
14,127,738
|
|
|
|
$
0.03 - 2.00
|
|
|
$
|
0.29
|
|
|
Granted
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled
|
|
|
|
(7,262,500
|
)
|
|
|
0.04
– 0.40
|
|
|
|
0.06
|
|
|
Exercised
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Expired
|
|
|
|
(1,587,500
|
)
|
|
|
0.11
- 2.00
|
|
|
|
1.29
|
|
|
Balance,
June 30, 2021
|
|
|
|
5,277,738
|
|
|
|
$
0.03 - 0.26
|
|
|
$
|
0.15
|
|
|
Vested
and exercisable, June 30, 2021
|
|
|
|
5,277,738
|
|
|
|
$
0.03 - 0.26
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested,
June 30, 2021
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
following table summarizes information concerning outstanding and exercisable options as of June 30, 2021:
SCHEDULE OF OUTSTANDING AND EXERCISABLE OPTIONS BY EXERCISE PRICE RANGE
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.03
- 0.26
|
|
|
|
5,277,738
|
|
|
|
1.83
|
|
|
$
|
0.15
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.03
- 0.26
|
|
|
|
5,277,738
|
|
|
|
5.07
|
|
|
$
|
0.10
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
During
the three months ended June 30, 2021, the Company’s Board of Directors approved the cancellation of 6,050,000 option shares held
the Company’s Chief Executive Officer (CEO) and replaced them with a grant of 6,050,000 option shares that will only be granted
upon the sale or merger of the Company. No stock compensation was recorded relating to that grant as management feels it is a remote
possibility that a sale or merger of the Company will happen within the next twelve months.
During
the nine months ended June 30, 2021, the Company recorded $21,764
of stock compensation for the value of options
vesting during the period, and as of June 30, 2021, no unvested compensation remained that will be amortized over the remaining
vesting period. There was no
stock compensation recorded during the three months ended June 30, 2021, for the value of options vesting during the period.
The
total aggregate intrinsic value for option shares outstanding at June 30, 2021 was $625. As of June 30, 2021, there were 24,722,262 shares
of stock options remaining available for issuance under the 2010 Plan.
Stock
Warrants
The
table below summarizes the Company’s warrants activities for the nine months ended June 30, 2021:
SCHEDULE OF WARRANT ACTIVITY
|
|
|
|
Number
of Warrant Shares
|
|
|
Exercise
Price
Range Per Share
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2020
|
|
|
|
67,634,049
|
|
|
$
|
0.07 - 0.40
|
|
|
$
|
0.16
|
|
|
Granted
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled
|
|
|
|
(16,093,018
|
)
|
|
|
0.12
- 0.18
|
|
|
|
0.15
|
|
|
Exercised
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Expired
|
|
|
|
(16,828,957
|
)
|
|
|
0.15
- 0.25
|
|
|
|
0.17
|
|
|
Balance,
June 30, 2021
|
|
|
|
34,712,074
|
|
|
$
|
$
0.07 - 0.40
|
|
|
$
|
0.17
|
|
|
Vested
and exercisable, June 30, 2021
|
|
|
|
34,712,074
|
|
|
$
|
$
0.07 - 0.40
|
|
|
$
|
0.17
|
|
The
following table summarizes information concerning outstanding and exercisable warrants as of June 30, 2021:
SCHEDULE OF OUTSTANDING AND EXERCISABLE WARRANTS BY EXERCISE PRICE RANGE
|
|
|
|
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
|
|
|
|
31,082,075
|
|
|
|
2.03
|
|
|
$
|
0.16
|
|
|
|
31,082,075
|
|
|
|
2.03
|
|
|
$
|
0.16
|
|
|
|
0.21
– 0.40
|
|
|
|
3,629,999
|
|
|
|
0.48
|
|
|
|
0.31
|
|
|
|
3,629,999
|
|
|
|
0.48
|
|
|
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.12
– 0.67
|
|
|
|
34,712,074
|
|
|
|
1.86
|
|
|
$
|
0.17
|
|
|
|
34,712,074
|
|
|
|
1.86
|
|
|
$
|
0.17
|
|
During
the three months ended June 30, 2021, the Company’s Board of Directors approved the cancellation of 16,093,018 warrant shares held
by the Company’s Officers and Directors. See Restricted Stock Grants above relating to this cancellation.
There
was no aggregate intrinsic value for warrant shares outstanding at June 30, 2021.
NOTE
6 – 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 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:
SCHEDULE OF ASSETS OF REPORTABLE SEGMENTS
Assets
By Segment
|
|
|
June
30, 2021
|
|
|
|
|
Corporate
|
|
|
Medical
Devices
|
|
|
Authentication
and Encryption
|
|
|
Total
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
900
|
|
|
$
|
39,019
|
|
|
$
|
1,880
|
|
|
$
|
41,799
|
|
|
Accounts
receivable
|
|
|
-
|
|
|
|
37,500
|
|
|
|
-
|
|
|
|
37,500
|
|
|
Inventories
|
|
|
-
|
|
|
|
129,130
|
|
|
|
-
|
|
|
|
129,130
|
|
|
Total
current assets
|
|
|
900
|
|
|
|
205,649
|
|
|
|
1,880
|
|
|
|
208,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
900
|
|
|
$
|
205,649
|
|
|
$
|
1,880
|
|
|
$
|
208,429
|
|
Operations
by Segment for the Three Months Ended June 30, 2021 and 2020
SCHEDULE OF OPERATIONS OF REPORTABLE SEGMENTS
|
|
|
For
the Three Months Ended
|
|
|
|
|
June
30, 2021
|
|
|
|
|
Corporate
|
|
|
Medical
Devices
|
|
|
Authentication
and Encryption
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
Sales
|
|
$
|
-
|
|
|
$
|
78,620
|
|
|
$
|
-
|
|
|
$
|
78,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
-
|
|
|
|
10,400
|
|
|
|
-
|
|
|
|
10,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
-
|
|
|
|
68,220
|
|
|
|
-
|
|
|
|
68,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
42,849
|
|
|
|
226,575
|
|
|
|
3,242
|
|
|
|
272,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
$
|
(42,849
|
)
|
|
$
|
(158,355
|
)
|
|
$
|
(3,242
|
)
|
|
$
|
(204,446
|
)
|
|
|
|
For
the Three Months Ended
|
|
|
|
|
June
30, 2020
|
|
|
|
|
WCUI
|
|
|
PSI
|
|
|
Stealthco
|
|
|
|
|
|
|
|
Corporate
|
|
|
Medical
Devices
|
|
|
Authentication
and Encryption
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
Sales
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
620,650
|
|
|
|
208,047
|
|
|
|
(15,317
|
)
|
|
|
813,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
$
|
(620,650
|
)
|
|
$
|
(208,047
|
)
|
|
$
|
15,317
|
|
|
$
|
(813,380
|
)
|
Operations
by Segment for the Nine Months Ended June 30, 2021 and 2020
|
|
|
For
the Nine Months Ended
|
|
|
|
|
June
30, 2021
|
|
|
|
|
Corporate
|
|
|
Medical
Devices
|
|
|
Authentication
and Encryption
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
Sales
|
|
$
|
-
|
|
|
$
|
220,769
|
|
|
$
|
-
|
|
|
$
|
220,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
-
|
|
|
|
149,450
|
|
|
|
-
|
|
|
|
149,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
-
|
|
|
|
71,319
|
|
|
|
-
|
|
|
|
71,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
138,619
|
|
|
|
791,589
|
|
|
|
13,217
|
|
|
|
943,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
$
|
(138,619
|
)
|
|
$
|
(720,270
|
)
|
|
$
|
(13,217
|
)
|
|
$
|
(872,106
|
)
|
|
|
|
For
the Nine Months Ended
|
|
|
|
|
June
30, 2020
|
|
|
|
|
WCUI
|
|
|
PSI
|
|
|
Stealthco
|
|
|
|
|
|
|
|
Corporate
|
|
|
Medical
Devices
|
|
|
Authentication
and Encryption
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
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
|
)
|
NOTE
7 – LEGAL MATTERS
The
Company is periodically engaged in legal proceedings arising from and relating to its business operations. Except as otherwise described
herein and in Note 4, we currently are not involved in any litigation that we believe could have a material adverse effect on our financial
condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any
of our subsidiaries, threatened against or affecting our Company, our common stock, any of our subsidiaries or of our Company’s
or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse
effect on our financial condition or results of operations.
We
continue efforts to preserve revenue and reduce operating expenses through actions including, but not limited to, facilities consolidation
and staff reductions, which we hope to implement through negotiated transactions with lessors, employees and other third parties. Such
actions may result 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. To date, the Company has negotiated settlement of all ex-employee wage and benefits
claims except for two. The first regards unpaid wages claimed due together with interest at the rate of 4%
per annum on such amount as the Company originally agreed upon in settlement negotiations. The ex-employee claims additional amounts
due for certain statutory damages under the Illinois Wage Payment and Collection which currently could exceed $21,600
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.
The
second claim was filed with the Illinois Department of Labor asserting a violation of the Illinois Wage Payment and Collection Act by
the Company’s former CEO. That claim alleges unpaid wages in the amount of $158,715
and unpaid vacation pay in the amount of
$20,833
for a total amount of $179,548,
as well as certain statutory damages including, but not limited to,
2%
of the wages due per month plus attorneys’ fees if the ex-CEO elects to file suit for a violation of the Act and is successful
in obtaining a judgment on his claim. The Company has filed its response to such claim with the Department denying the substantive allegations
therein and asserting certain factual and legal defenses, including breach of fiduciary duty, as a bar to all claimed compensation. The
claim remains pending, but as the date hereof, no suit has been filed against the Company asserting a violation of the Act based on said
claim.
NOTE
8 – SUBSEQUENT EVENTS
Subsequent
to June 30, 2021, the Company borrowed $154,950 from its officers and shareholders. All of the loans are unsecured, have an interest
rate of eight percent and are due one year from the date of issuance.
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 sanitation purposes; and (ii) authentication and encryption products and services. The segments are conducted through
our subsidiaries, PSI and SCI.
COVID-19
Uncertainties
In
March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. The responses by federal, state and local
governments to restrict public gatherings and travel rapidly grew to include stay-at-home orders, school closures and mandatory restrictions
on non-essential businesses and services that has adversely affected workforces, economies, and financial markets resulting in a significant
economic downturn. The Company’s corporate office is located in Tucson, Arizona and its manufacturing facility is in Utica, New
York. Since March 2020, we have been following the recommendations of local health authorities to minimize exposure risk for our employees,
including temporary closures of our offices and having employees work remotely to the extent possible.
The order, which has subsequently been modified to provide for a gradual re-opening of businesses and travel, is to remain in
place until further notice.
While
this disruption is currently expected to be temporary, there is considerable uncertainty around the duration. We are actively monitoring
the COVID-19 situation and its impact in the markets we serve. We are taking all precautionary measures as directed by health authorities
and local and national governments. Due to continuing uncertainties regarding the ultimate scope and trajectory of COVID-19’s spread
and evolution, it is impossible to predict the total impact that the pandemic will have on our business. If public and private entities
continue to implement restrictive measures, the material adverse effect on our business, results of operations, financial condition and
cash flows could persist.
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
In
December 2018, PSI entered into a Joint Venture Agreement with GEN2 for 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. As of September
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%.
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
three and nine months ended June 30, 2021, PSI recorded a loss of $168,350 and $506,860, respectively, relating to its operations, of
which $82,491 and $248,361, respectively, 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. The minority interest of 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.
In
May 2020, the Company’s subsidiary, PSI, agreed to become a majority shareholder in Protec Scientific, Inc. (“Protec”),
a company 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 September 30, 2020, PSI had advanced $191,000 to Protec in furtherance of its agreement
to acquire approximately 62% of Protec, with the Company’s share being approximately 32%, based on its PSI ownership. The remaining
30% share is to be attributed to PSI’s minority shareholders, based on their PSI ownership. During the year ended September 30,
2020, Protec received an additional $120,000 from non-affiliated investors, of which $74,400 was recorded to additional paid-in capital
and $45,600 to the non-controlling interests. The additional investments gave the non-controlling interests a 68% ownership interest
in Protec. During the three and nine months ended June 30, 2021, Protec recorded a loss of $6,710 and $249,567, respectively, of which
$4,589 and $170,654 was allocated to the non-controlling interests.
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.
Analysis
of Financial Condition and Results of Operations
Results
of Operations for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.
Revenue
and Cost of Goods Sold
Revenue
for the three months ended June 30, 2021 was $78,620. There was no revenue or cost of goods sold for the three months ended June 30,
2020. The increase in revenue in 2021 related to the increase in revenues at PSI due to the roll-out of their new Aurora medical device.
Cost of sales for the three months ended June 30, 2021 was $10,400. Gross profit for the three months ended June 30, 2021 was $68,220.
Operating
Expenses
Operating
expenses for the three months ended June 30, 2021 and 2020 were $272,666 and $813,380, respectively. The decrease in operating expenses
in 2021 was due primarily to the decrease in consulting fees, employee-related costs and stock compensation.
Other
Expenses
Other
expenses during the three months ended June 30, 2021 consisted of $ $36,230 of interest 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.
Net
Loss
Our
net loss for the three months ended June 30, 2021 was $240,676, compared to a net loss of $895,626 for the three months ended June 30,
2020. The decrease in the net loss in 2021 was primarily due to the decrease in operating and other expenses.
Results
of Operations for the nine months ended June 30, 2021 compared to the nine months ended June 30, 2020.
Revenue
and Cost of Goods Sold
Revenue
for the nine months ended June 30, 2021 and 2020 was $220,769 and $5,000, respectively. The increase in revenue in 2021 related to the
increase in revenues at PSI due to the roll-out of their new Aurora medical device. Cost of sales for the nine months ended June 30,
2021 was $149,450. There was no cost of sales for the nine months ended June 30, 2020. Gross profit for the nine months ended June 30,
2021 and 2020 was $71,319 and $5,000, respectively.
Operating
Expenses
Operating
expenses for the nine months ended June 30, 2021 and 2020 were $943,425 and $1,573,783, respectively. The decrease in operating expenses
in 2021 was due primarily to the decrease in consulting fees, employee-related costs and stock compensation.
Other
Expenses
Other
expenses during the nine months ended June 30, 2021 consisted of $94,381 of interest 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.
Net
Loss
Our
net loss for the nine months ended June 30, 2021 was $966,487, compared to a net loss of $2,183,828 for the nine months ended June 30,
2020. The decrease in the net loss in 2021 was primarily due to the decrease in operating and other expenses.
Results
of Operations by Segment
The
Company currently maintains two business segments:
|
|
(i)
|
Medical
Devices: which it provided through PSI, its 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, 2021 and 2020
|
|
|
For
the Three Months Ended
|
|
|
|
|
June
30, 2021
|
|
|
|
|
Corporate
|
|
|
Medical
Devices
|
|
|
Authentication
and Encryption
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
Sales
|
|
$
|
-
|
|
|
$
|
78,620
|
|
|
$
|
-
|
|
|
$
|
78,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
-
|
|
|
|
10,400
|
|
|
|
-
|
|
|
|
10,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
-
|
|
|
|
68,220
|
|
|
|
-
|
|
|
|
68,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
42,849
|
|
|
|
226,575
|
|
|
|
3,242
|
|
|
|
272,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
$
|
(42,849
|
)
|
|
$
|
(158,355
|
)
|
|
$
|
(3,242
|
)
|
|
$
|
(204,446
|
)
|
|
|
|
For
the Three Months Ended
|
|
|
|
|
June
30, 2020
|
|
|
|
|
WCUI
|
|
|
PSI
|
|
|
Stealthco
|
|
|
|
|
|
|
|
Corporate
|
|
|
Medical
Devices
|
|
|
Authentication
and Encryption
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
Sales
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
620,650
|
|
|
|
208,047
|
|
|
|
(15,317
|
)
|
|
|
813,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
$
|
(620,650
|
)
|
|
$
|
(208,047
|
)
|
|
$
|
15,317
|
|
|
$
|
(813,380
|
)
|
Revenue
for the Medical Devices segment for the three months ended June 30, 2021 was $78,620. There was no revenue or cost of goods sold for
the Medical Devices segment for the three months ended June 30, 2020. The increase in sales in 2021 was due to the increase in trade
sales. Cost of goods sold for the three months ended June 30, 2021 was $10,400 and the gross profit was $68,220. Operating expenses for
the three months ended June 30, 2021 and 2020 was $226,575 and $208,047, respectively. The increase in operating expenses in 2021 was
primarily due to the increase in employee-related costs and contract labor. The loss from operations for the three months ended June
30, 2021 and 2020 was $158,355 and $208,047, respectively.
There
was no revenue or cost of goods sold for the Authentication and Encryption segment for the three months ended June 30, 2021 and 2020.
Operating expenses for the three months ended June 30, 2021 and 2020 was $3,242 and $(15,317), respectively. The increase in operating
expenses in 2021 was primarily due to the increase in other expenses. The income (loss) from operations for the three months ended June
30, 2021 and 2020 was $(3,242) and $15,317, respectively.
The
Corporate segment primarily provides executive management services for the Company. Operating expenses for the three months ended June
30, 2021 and 2020 was $42,849 and $620,650, respectively. The decrease in operating expenses in 2021 was primarily due to the decrease
in professional fees and stock compensation. The loss from operations for the three months ended June 30, 2021 and 2020 was $42,489 and
$620,650, respectively.
Operations
by Segment for the Nine Months Ended June 30, 2021 and 2020
|
|
|
For
the Nine Months Ended
|
|
|
|
|
June
30, 2021
|
|
|
|
|
Corporate
|
|
|
Medical
Devices
|
|
|
Authentication
and Encryption
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
Sales
|
|
$
|
-
|
|
|
$
|
220,769
|
|
|
$
|
-
|
|
|
$
|
220,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
-
|
|
|
|
149,450
|
|
|
|
-
|
|
|
|
149,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
-
|
|
|
|
71,319
|
|
|
|
-
|
|
|
|
71,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
138,619
|
|
|
|
791,589
|
|
|
|
13,217
|
|
|
|
943,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
$
|
(138,619
|
)
|
|
$
|
(720,270
|
)
|
|
$
|
(13,217
|
)
|
|
$
|
(872,106
|
)
|
|
|
|
For
the Nine Months Ended
|
|
|
|
|
June
30, 2020
|
|
|
|
|
WCUI
|
|
|
PSI
|
|
|
Stealthco
|
|
|
|
|
|
|
|
Corporate
|
|
|
Medical
Devices
|
|
|
Authentication
and Encryption
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
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
|
)
|
Revenue
for the Medical Devices segment for the nine months ended June 30, 2021 was $220,769. There was no revenue or cost of goods sold for
the Medical Devices segment for the nine months ended June 30, 2020. The increase in 2021 was due to the increase in trade sales. Cost
of goods sold for the nine months ended June 30, 2021 was $149,450 and the gross profit was $71,319. Operating expenses for the nine
months ended June 30, 2021 and 2020 was $791,589 and $590,158, respectively. The increase in operating expenses in 2021 was primarily
due to the increase in employee-related costs and contract labor. The loss from operations for the nine months ended June 30, 2021 and
2020 was $720,270 and $590,158, respectively.
Revenue
for the Authentication and Encryption segment for the nine months ended June 30, 2020 was $5,000. There was no revenue or cost of goods
sold for the Authentication and Encryption segment for the nine months ended June 30, 2021. The decrease in revenues in 2021 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. The gross profit decrease in 2021 was due to the decrease in sales. Operating expenses for the nine months ended
June 30, 2021 and 2020 was $13,217 and $122,014, respectively. The decrease in operating expenses in 2021 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, 2021 and 2020 was
$13,217 and $117,014, respectively.
The
Corporate segment primarily provides executive management services for the Company. Operating expenses for the nine months ended June
30, 2021 and 2020 was $138,619 and $861,611, respectively. The decrease in operating expenses in 2021 was primarily due to the decrease
in professional fees and stock compensation. The loss from operations for the nine months ended June 30, 2021 and 2020 was $138,619 and
$861,611, 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, 2021, the Company incurred a net loss of $966,487 and used cash in operations of $760,521, and had a shareholders’
deficit of $3,047,268 as of June 30, 2021. In addition, loans payable of $1,045,250 and payroll taxes of $80,334 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, 2020
financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.
At
June 30, 2021, the Company had cash on hand in the amount of $41,799. 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, 2021, the Company received $751,000 through short-term loans from its officers and shareholders. As of June 30, 2021,
loans payable to officers and shareholders of $1,916,250 were outstanding, of which $1,045,825 were past due. All of the loans are unsecured,
have an interest rate of eight percent and are due one year from the date of issuance.
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, 2021 and 2020
As
of June 30, 2021, we had $41,799 in cash, negative working capital of $3,010,102 and an accumulated deficit of $28,130,835.
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.
Cash
flows used in operating activities
During
the nine months ended June 30, 2021, the Company used cash flows in operating activities of $760,521, compared to $730,995 used in the
nine months ended June 30, 2020. During the nine months ended June 30, 2021, the Company incurred a net loss of $966,487 and $255,725
of non-cash expenses, compared to a net loss of $2,183,828 and $1,474,471 of non-cash expenses during the nine months ended June 30,
2020.
Cash
flows used in investing activities
During
the nine months ended June 30, 2021 and 2020, the Company had no cash flows from investing activities.
Cash
flows provided by financing activities
During
the nine months ended June 30, 2021, the Company had proceeds from loans payable from officers and shareholders of $751,000. 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.
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, 2020, filed with the Securities and Exchange Commission on February 8, 2021. 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, 2021.
Recently
Issued Accounting Pronouncements
See
Management’s discussion of recent accounting policies included in footnote 2 to the condensed consolidated financial statements.