Quarterly Report (10-q)

Date : 09/30/2019 @ 10:27PM
Source : Edgar (US Regulatory)
Stock : Wellness Center USA Inc (QB) (WCUI)
Quote : 0.0495  0.0059 (13.53%) @ 9:27PM

Quarterly Report (10-q)

 

 

 

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, 2019

 

[  ] 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)

2500 West Higgins Road, Ste. 780, Hoffman Estates, IL, 60169

 

 

 

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 [  ]

Accelerated Filer [  ]

 

 

Non-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, 2019 was 107,497,077.

 

 

 

   
     

 

FORM 10-Q

WELLNESS CENTER USA, INC.

JUNE 30, 2019

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 17
Item 3 Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Control and Procedures 24

 

PART II— OTHER INFORMATION

 

Item 1 Legal Proceedings 27
Item 1A Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Mine Safety Disclosures. 28
Item 5. Other Information 28
Item 6. Exhibits 28
     
SIGNATURE 29

 

  2  
     

 

Wellness Center USA, Inc.

Condensed Consolidated Balance Sheets

 

    June 30, 2019     September 30, 2018  
    (Unaudited)        
ASSETS                
Current Assets                
Cash   $ 49,603     $ 4,210  
Inventories     55,000       -  
Prepaid expenses and other current assets     -       1,550  
Total Current Assets     104,603       5,760  
                 
Property and equipment, net     1,827       2,619  
Other assets     1,760       16,760  
Total Other Assets     3,587       19,379  
                 
TOTAL ASSETS   $ 108,190     $ 25,139  
                 
LIABILITIES AND SHAREHOLDERS’ DEFICIT                
Current Liabilities                
Accounts payable and accrued expenses   $ 736,246     $ 572,753  
Deferred revenue     -       8,624  
Convertible notes payable     -       202,922  
Loans payable from officers and shareholders     374,250       66,000  
Total Current Liabilities     1,110,496       850,299  
                 
Shareholders’ Deficit                
Common stock, par value $0.001, 185,000,000 shares authorized; 107,497,077 and 100,952,569 shares issued and outstanding, respectively     107,497       100,952  
Additional paid-in capital     23,716,791       22,450,252  
Accumulated deficit     (25,045,034 )     (22,974,740 )
Total Wellness Center USA shareholders’ deficit     (1,220,746 )     (423,536 )
                 
Non-controlling interest     218,440       (401,624 )
Total Shareholder’s deficit     (1,002,306 )     (825,160 )
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT   $ 108,190     $ 25,139  

 

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

 

  3  
     

 

Wellness Center USA, Inc.

Condensed Consolidated Statements of Operations

 

    Three Months Ended     Nine Months Ended  
    June 30,     June 30,  
    2019     2018     2019     2018  
    (Unaudited)     (Unaudited)  
Sales:                                
Trade   $ 3,108     $ 60,500     $ 19,508     $ 96,500  
Consulting services     4,517       11,000       13,867       42,750  
Total Sales     7,625       71,500       33,375       139,250  
                                 
Cost of goods sold     4,575       16,967       20,025       51,625  
                                 
Gross profit     3,050       54,533       13,350       87,625  
                                 
Operating expenses     404,210       837,368       1,415,667       1,732,848  
                                 
Loss from operations     (401,160 )     (782,835 )     (1,402,317 )     (1,645,223 )
                                 
Other expenses                                
Amortization of debt discount     -       (69,837 )     (72,078 )     (205,674 )
Financing costs     (108,630 )     (720,517 )     (182,064 )     (790,939 )
Loss on modification of conversion price on convertible note payable     -       -       -       (158,400 )
Loss on modification of exercise price on warrants in connection with convertible note payable     -       -       -       (5,445 )
Interest expense     (6,042 )     (7,248 )     (17,771 )     (20,336 )
Total other expenses     (114,672 )     (797,602 )     (271,913 )     (1,180,794 )
                                 
NET LOSS     (515,832 )     (1,580,437 )     (1,674,230 )     (2,826,017 )
                                 
Net loss (gain) attributable to non-controlling interest     4,917       (2,179 )     9,319       65,263  
Loss from deconsolidation of non-controlling interest     -       -       (405,383 )     -  
                                 
NET LOSS ATTRIBUTABLE TO WELLNESS CENTER USA, INC.   $ (510,915 )   $ (1,582,616 )   $ (2,070,294 )   $ (2,760,754 )
                                 
Deemed dividend relating to settlement with shareholder     -       (433,000 )             (433,000 )
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS   $ (510,915 )   $ (2,015,616 )   $ (2,070,294 )   $ (3,193,754 )
                                 
BASIC AND DILUTED LOSS PER SHARE   $ (0.00 )   $ (0.02 )   $ (0.02 )   $ (0.03 )
                                 
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING BASIC AND DILUTED     107,433,349       95,906,597       106,575,313       92,912,125  

 

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

 

  4  
     

 

Wellness Center USA, Inc.

Condensed Consolidated Statement of Shareholders’ Deficit (Unaudited)

 

          Additional           Total     Non-        
    Common Stock     Paid-in     Accumulated     WCUI     controlling        
    Shares     Amount     Capital     Deficit     Deficit     Interest     Total  
                                           
                                           
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 conversion of note payable and accrued interest     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 )
                                                         
Balance, March 31, 2018 (unaudited)     92,879,384     $ 92,879     $ 19,841,396     $ (20,310,695 )   $ (376,420 )   $ (384,830 )   $ (761,250 )
                                                         
Common shares issued for cash     333,333       333       49,667       -       50,000       -       50,000  
                                                         
Fair value of common stock issued for services     620,000       620       83,980       -       84,600       -       84,600  
                                                         
Shares issued upon conversions of note payable     1,195,631       1,196       118,367       -       119,563       -       119,563  
                                                         
Shares issued upon conversion of loans payable from officers and shareholders     3,019,165       3,019       403,981       -       407,000       -       407,000  
                                                         
Fair value of additional shares issued upon conversion of loans payable from officers and shareholders     -       -       30,583       -       30,583       -       30,583  
                                                         
Fair value of warrants issued as an inducement for conversion of loans payable from officers and shareholders     -       -       689,934       -       689,934       -       689,934  
                                                         
Fair value of vested stock options     -       -       348,744       -       348,744       -       348,744  
                                                         
Fair value of shares and warrants issued upon settlement of Favored Nations clause     1,066,667       1,067       431,933       (433,000 )     -       -       -  
                                                         
Net loss for the three months ended June 30, 2018     -       -       -       (1,582,616 )     (1,582,616 )     2,179       (1,580,437 )
                                                         
Balance, June 30, 2018 (unaudited)     99,114,180     $ 99,114     $ 21,998,585     $ (22,326,311 )   $ (228,612 )   $ (382,651 )   $ (611,263 )
                                                         
Balance, September 30, 2017     90,284,916     $ 90,285     $ 19,069,211     $ (19,132,557 )   $ 26,939     $ (317,388 )   $ (290,449 )
                                                         
Common shares issued for cash     333,333       333       49,667       -       50,000       -       50,000  
                                                         
Exercise of stock warrants     1,407,619       1,407       169,507       -       170,914       -       170,914  
                                                         
Fair value of common stock issued for services     770,000       770       110,530       -       111,300       -       111,300  
                                                         
Shares issued upon conversions of note payable     1,745,631       1,746       172,817       -       174,563       -       174,563  
                                                         
Shares issued upon conversion of loans payable from officers and shareholders     3,019,165       3,019       403,981       -       407,000       -       407,000  
                                                         
Fair value of additional shares issued upon conversion of loans payable from officers and shareholders     -       -       30,583       -       30,583       -       30,583  
                                                         
Fair value of warrants issued as an inducement for conversion of loans payable from officers and shareholders     -       -       689,934       -       689,934       -       689,934  
                                                         
Fair value of vested stock options     -       -       486,642       -       486,642       -       486,642  
                                                         
Fair value of common stock issued in connection with convertible note payable     486,849       487       69,935       -       70,422       -       70,422  
                                                         
Fair value of shares and warrants issued upon settlement of Favored Nations clause     1,066,667       1,067       431,933       (433,000 )     -       -       -  
                                                         
Discount on convertible note payable due to beneficial conversion and warrants     -       -       150,000       -       150,000       -       150,000  
                                                         
Loss on modification of conversion price and exercise price on warrants in connection with convertible note payable     -       -       163,845       -       163,845       -       163,845  
                                                         
Net loss for the nine months ended June 30, 2018     -       -       -       (2,760,754 )     (2,760,754 )     (65,263 )     (2,826,017 )
                                                         
Balance, June 30, 2018 (unaudited)     99,114,180     $ 99,114     $ 21,998,585     $ (22,326,311 )   $ (228,612 )   $ (382,651 )   $ (611,263 )

 

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

 

  5  
     

 

Wellness Center USA, Inc.

Condensed Consolidated Statements of Cash Flows

 

    Nine Months Ended  
    June 30,  
    2019     2018  
    (Unaudited)  
Cash Flows from Operating Activities                
Net loss   $ (1,674,230 )   $ (2,826,017 )
                 
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation expense     792       2,243  
Amortization of debt discount     72,078       205,674  
Fair value of common shares issued for services     79,029       111,300  
Fair value of stock options issued for services     235,819       486,642  
Fair value of additional shares issued upon conversion of loans payable from officers and shareholders     -       30,583  
Fair value of warrants issued upon conversion of loans payable from officers and shareholders     -       689,934  
Fair value of additional shares issued upon conversions of note payable     160,064       -  
Fair value of common stock issued with convertible note payable     22,000       -  
Loss on abandonment of lease     65,000       -  
Loss on modification of conversion price on convertible note payable     -       158,400  
Loss on modification of exercise price on warrants in connection with convertible note payable     -       5,445  
Fair value of common stock issued in connection with convertible note payable     -       70,422  
Changes in Assets and Liabilities                
(Increase) Decrease in:                
Accounts receivable     -       24,999  
Inventories     (55,000 )     321  
Prepaid expenses and other assets     16,550       (2,111 )
(Decrease) Increase in:                
Accounts payable and accrued expenses     113,665       273,774  
Accrued payroll - officers     -       (13,440 )
Deferred revenue     (8,624 )     (8,250 )
Net cash used in operating activities     (972,857 )     (790,081 )
                 
Cash Flows from Financing Activities                
Proceeds from loans payable from officers and shareholders     333,250       427,500  
Repayment of loans payable from officers and shareholders     (25,000 )     (20,500 )
Proceeds from convertible note payable     -       150,000  
Common stock and warrants issued for cash     10,000       50,000  
Exercise of stock warrants     -       170,914  
Contribution of capital by joint venture partner     700,000       -  
Net cash provided by financing activities     1,018,250       777,914  
                 
Net increase (decrease) in cash     45,393       (12,167 )
                 
Cash beginning of period     4,210       29,369  
Cash end of period   $ 49,603     $ 17,202  
                 
Supplemental cash flows disclosures:                
Interest paid   $ -     $ -  
Taxes paid   $ -     $ -  
                 
Supplemental non-cash financing disclosures:                
Conversion of convertible note payable and accrued interest into common shares   $ 290,172     $ 174,563  
Debt discount on convertible note payable   $ -     $ 150,000  

 

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

 

  6  
     

 

WELLNESS CENTER USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE NINE MONTHS ENDED JUNE 30, 2019 AND 2018

 

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, 2019 are not necessarily indicative of the results that may be expected for the year ending September 30, 2019.

 

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, 2019, the Company incurred a net loss of $1,674,230 and used cash in operations of $972,857, and had a shareholders’ deficit of $1,002,306 as of June 30, 2019. 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, 2018 financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.

 

At June 30, 2019, the Company had cash on hand in the amount of $49,603. 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, 2019, the Company received $1,018,250 through short-term loans, contributions of capital by a joint venture partner and the sale of common stock.

 

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.

 

  7  
     

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Consolidation

 

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)
    100 %
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     50.5 %

 

Through October 2018, PSI was operated by PDC, a joint venture between PSI and the Medical Alliance, Inc (“TMA”). On November 15, 2018, the Company and TMA entered into a Withdraw and Mutual Release Agreement to terminate their joint venture agreement. In December 2018, the Company and its wholly-owned subsidiary, Psoria-Shield, Inc. (“PSI”), entered into a Joint Venture Agreement with PSI Gen 2 Funding, Inc. (“GEN2”), an Illinois corporation, to further development, marketing, licensing and/or sale of PSI technology and products. The joint venture is conducted through NEO Phototherapy, LLC, a recently formed Illinois limited liability company (“NEO”), with principal offices and records to be maintained at WCUI’s offices. See Non-Controlling Interests in Note 2 for more details.

 

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, 2019 and 2018, the basic and diluted shares outstanding were the same, as potentially dilutive shares were considered anti-dilutive. At June 30, 2019 and 2018, the dilutive impact of outstanding stock options of 15,687,738 and 17,890,000 shares, respectively, and outstanding warrants for 66,832,049 and 69,022,753 shares, respectively, have been excluded because their impact on the loss per share is anti-dilutive.

 

  8  
     

 

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. Deferred revenue at September 30, 2018 was $8,624. No deferred revenue was recorded at June 30, 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 three months ended December 31, 2018, 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.

 

  9  
     

 

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. 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. Repayment of the $700,000 investment by GEN2 will begin through and upon the date which NEO has realized and retained cumulative net income/distributable cash in the amount of $300,000. Distributions thereafter will be made to PSI, GEN2 and other members 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 consists of accredited investors, and investment participation from several WCUI officers and directors, including Calvin R. O’Harrow and Roy M. Harsch.

 

As of June 30, 2019, GEN2 had received $700,000 of investments to contribute to NEO and the Company recorded its proportionate share of $476,000 to additional paid-in-capital and $224,000 to non-controlling interest. During the three and nine months ended June 30, 2019, NEO recorded a loss of $15,367 and $17,373, respectively, relating to its operations.

 

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.

 

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 February 2016, the FASB issued Accounting Standards Update (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 12 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 capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and 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.

 

  10  
     

 

NOTE 3 – LOANS PAYABLE FROM OFFICERS AND SHAREHOLDERS

 

As of September 30, 2018, loans payable from officers and shareholders of $66,000 were outstanding. During the nine months ended June 30, 2019, the Company borrowed $333,250 from its officers and shareholders and repaid $25,000 to 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, 2019, loans payable to officers and shareholders of $374,250 were outstanding.

 

NOTE 4 – CONVERTIBLE NOTE AGREEMENTS

 

    June 30, 2018     September 30, 2018  
             
Convertible note payable (a)   $ -     $ 165,000  
Convertible note payable (b)     -       110,000  
Debt discount – unamortized balance     -       (72,078 )
Convertible note payable, net   $ -     $ 202,922  

 

(a) On March 5, 2018, the Company entered into a Convertible Note Payable Agreement with an individual under which the Company borrowed $165,000. Net proceeds received by the Company under the agreement after payment of a $15,000 fee to the lender was $150,000. In connection with the agreement, the Company issued the individual 300,000 restricted shares of its common stock with a fair value of $48,000 and warrants to purchase 660,000 shares of its common stock, which vested upon grant. The warrants expire five years from the date of grant and have an exercise price of $0.20 per share. The note payable accrues interest at eight percent per annum, is unsecured and is convertible at any time after the 90th day from the issue date into the Company’s common stock at the fixed conversion price of $0.10 per share. The note matured in October 2018.

 

The Company calculated the related fair value of the warrants issued to the noteholder to be $55,032 using a Black Scholes Merton option pricing model and performing a relative value calculation. The Company then made a calculation to determine if a beneficial conversion feature (BCF) existed. The beneficial conversion was based upon the effective conversion price based on the proceeds received that were allocated to the convertible instrument. Based upon the Company’s calculation, it was determined that a beneficial conversion feature existed amounting to $94,968 and was recorded as a debt discount. As such the Company recognized a debt discount at the date of issuance in the aggregate amount of $165,000 relating to the $15,000 fees paid to the lender, the relative value of the warrants and the BCF. The note discount is being amortized over the term of the note and the unamortized portion is recognized as a reduction to the carrying amount of the Convertible note (a valuation debt discount). The balance of the unamortized discount at September 30, 2018 was $3,837.

 

During the nine months ended June 30, 2019, the Company amended the terms of the agreement by extending the maturity date to January 2019 and reducing the conversion price from $0.10 per share to $0.07 per share. The reduction of the conversion price caused the Company to issue an additional 744,732 shares, which on the dates of amendment had a combined total fair value of $51,434, which was recorded a financing cost during the nine months ended June 30, 2019.

 

During the nine months ended June 30, 2019, the individual converted $165,000 of the convertible note payable and $8,783 of accrued interest into 2,482,441 shares of the Company’s common stock. During the nine months ended June 30, 2019, the Company amortized the remaining $3,837 of debt discount, leaving no unamortized balance at June 30, 2019. No amounts were outstanding under the agreement as of June 30, 2019.

 

  11  
     

 

NOTE 4 – CONVERTIBLE NOTE AGREEMENTS (CONTINUED)

 

(b) On July 11, 2018, the Company entered into another Convertible Note Payable Agreement with the same individual under which the Company borrowed an additional $110,000. Net proceeds received by the Company under the agreement after payment of a $10,000 fee to the lender was $100,000. In connection with the agreement, the Company issued the individual 200,000 restricted shares of its common stock with a fair value of $36,000 and warrants to purchase 440,000 shares of its common stock, which vested upon grant. The warrants expire five years from the date of grant and have an exercise price of $0.18 per share. The note payable accrues interest at eight percent per annum, is unsecured and is convertible at any time after the 90th day from the issue date into the Company’s common stock at the fixed conversion price of $0.15 per share. The note matures in February 2019, but may be extended at the option of the individual. The Company may prepay the note at any time immediately following the issue date upon seven days’ prior written notice. The note was past due as of March 31, 2019, but on April 2, 2019, was converted into shares of the Company’s common stock (see below).

 

The Company calculated the related fair value of the warrants issued to the noteholder to be $66,440 using a Black Scholes Merton option pricing model and performing a relative value calculation. The Company then made a calculation to determine if a beneficial conversion feature (BCF) existed. The beneficial conversion was based upon the effective conversion price based on the proceeds received that were allocated to the convertible instrument. Based upon the Company’s calculation, it was determined that a beneficial conversion feature existed amounting to $33,560 and was recorded as a debt discount. As such the Company recognized a debt discount at the date of issuance in the aggregate amount of $110,000 relating to the $10,000 fees paid to the lender, the relative value of the warrants and the BCF. The note discount is being amortized over the term of the note and the unamortized portion is recognized as a reduction to the carrying amount of the Convertible note (a valuation debt discount). As of September 30, 2018, the Company had amortized $41,759 of debt discount, leaving an unamortized balance of $68,241 at September 30, 2018.

 

During the nine months ended June 30, 2019, the Company amended the terms of the agreement by reducing the conversion price from $0.15 per share to $0.05 per share. The reduction of the conversion price caused the Company to issue an additional 1,551,854 shares, which on the date of amendment had a fair value of $108,630, which was recorded a financing cost during the three and nine months ended June 30, 2019.

 

During the three and nine months ended June 30, 2019, the Company amortized $21,389 and $68,241 of debt discount, respectively, leaving no unamortized balance at June 30, 2019. On April 2, 2019, the individual converted the note payable of $110,000 and $6,389 of accrued interest into 2,327,781 shares of the Company’s common stock. No amounts were outstanding under the agreement as of June 30, 2019.

 

NOTE 5 – SHAREHOLDERS’ EQUITY

 

Common shares issued for cash

 

During the nine months ended June 30, 2019, the Company received $10,000 from the sale of 142,857 shares of its common stock. In connection with the sale, the Company issued a warrant to the shareholder to purchase 284,714 shares of the Company’s common stock. The warrant expires five years from the date of grant and has an exercise price of $0.15 per share.

 

Common shares issued for Services

 

During the nine months ended June 30, 2019, the Company issued 1,277,143 shares of its common stock valued at $79,029 for services provided by consultants. The shares were valued at the trading price of the common stock at the date of issuance.

 

  12  
     

 

NOTE 5 – SHAREHOLDERS’ EQUITY (CONTINUED)

 

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.

 

During the nine months ended June 30, 2019, the Company granted options to an employee to purchase an aggregate total of 187,500 shares of its common stock with an aggregate fair value of $8,684. The options have exercise prices of $0.04 and $0.06 per share and expire five years from the date of grant. The shares vested equally each quarter beginning on December 31, 2018. The Company valued the options using a Black-Scholes option pricing model.

 

The assumptions used for the option granted during the nine months ended June 30, 2019 are as follows:

 

Exercise price   $0.04 - $ 0.06  
Expected dividends     -  
Expected volatility     126.8 - 137.4%
Risk free interest rate     1.73 - 2.47%
Expected life of options     2.5  

 

During the nine months ended June 30, 2019, the Company recorded $235,819 of stock compensation for the value of all outstanding options, and as of June 30, 2019, unvested compensation of $452,659 remained that will be amortized over the remaining vesting period.

 

The table below summarizes the Company’s stock option activities for the nine months ended June 30, 2019:

 

    Number of
Option Shares
   

Exercise

Price Range
Per Share

    Weighted Average
Exercise Price
    Fair Value at
Date of Grant
 
                         
Balance, September 30, 2018     17,946,667     $ 0.10 - 2.00     $ 0.28     $ 3,244,755  
Granted     187,500       0.04 - 0.06       0.05       8,684  
Cancelled     (646,429 )     0.14 - 0.19       0.17       -  
Exercised     -       -       -       -  
Expired     (1,800,000 )     0.40       0.40       -  
Balance, June 30, 2019     15,687,738     $ 0.04 – 2.00     $ 0.27     $ 3,253,439  
Vested and exercisable, June 30, 2019     11,946,667     $ 0.04 – 2.00     $ 0.31     $ 2,185,052  
                                 
Unvested, June 30, 2019     3,741,071     $ 0.14 – 0.19     $ 0.14     $ 1,068,387  

 

There was no aggregate intrinsic value for option shares outstanding at June 30, 2019. As of June 30, 2019, there were 14,312,262 shares of stock options remaining available for issuance under the 2010 Plan.

 

  13  
     

 

NOTE 5 – SHAREHOLDERS’ EQUITY (CONTINUED)

 

Stock Options (continued)

 

The following table summarizes information concerning outstanding and exercisable options as of June 30, 2019:

 

      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       13,975,238       3.30     $ 0.15       10,234,167       3.13     $ 0.15  
  0.40 - 0.99       312,500       0.62       0.40       312,500       0.62       0.40  
  1.00 - 1.99       750,000       1.50       1.00       750,000       1.50       1.00  
  2.00       650,000       1.50       2.00       650,000       1.50       2.00  
$ 0.06 - 2.00       15,687,738       3.06     $ 0.27       11,946,667       3.07     $ 0.31  

 

Stock Warrants

 

During the nine months ended June 30, 2019, the Company issued a warrant to purchase 284,714 shares with an exercise price of $0.15 per share as part of the sale of equity units. The warrant expires five years from the date of grant.

 

The table below summarizes the Company’s warrants activities for the nine months ended June 30, 2019:

 

   

Number of

Warrant Shares

   

Exercise

Price Range Per Share

    Weighted Average Exercise Price     Fair Value at Date of Issuance  
                         
Balance, September 30, 2018     67,907,728     $ 0.12 - 0.67     $ 0.17     $ 3,434,560  
Granted     284,714       0.15       0.15       17,803  
Cancelled     -       -       -       -  
Exercised     -       -       -       -  
Expired     (1,360,393 )     0.40 – 0.67       0.47       -  
Balance, June 30, 2019     66,832,049     $ 0.12 - 0.40     $ 0.17     $ 3,452,363  
Vested and exercisable, June 30, 2019     66,832,049     $ 0.12 - 0.40     $ 0.17     $ 3,452,363  

 

There was no aggregate intrinsic value for warrant shares outstanding at June 30, 2019.

 

The following table summarizes information concerning outstanding and exercisable warrants as of June 30, 2019:

 

      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       59,279,384       2.15     $ 0.15       59,279,384       2.15     $ 0.15  
  0.21 – 0.49       7,552,665       1.05       0.26       7,552,665       1.05       0.26  
  0.50 – 0.67       -       -       -       -       -       -  
                                                     
$ 0.12 – 0.67       66,832,049       2.03     $ 0.17       66,832,049       2.03     $ 0.17  

 

  14  
     

 

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 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, 2019  
    Corporate     Medical Devices     Authentication and Encryption     Total  
ASSETS                        
Current Assets                                
Cash   $ 1,687     $ 47,916     $ -     $ 49,603  
Inventories     -       55,000       -       55,000  
Total current assets     1,687       102,916       -       104,603  
                                 
Property and equipment, net     -       -       1,827       1,827  
Other assets     -       1,760       -       1,760  
Total other assets     -       1,760       1,827       3,587  
                                 
TOTAL ASSETS   $ 1,687     $ 104,676     $ 1,827     $ 108,190  

 

Operations by Segment

 

    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 )

 

    For the Nine Months Ended  
    June 30, 2018  
    Corporate     Medical Devices     Authentication and Encryption     Total  
Sales:                                
Trade   $ -     $ 45,000     $ 51,500     $ 96,500  
Consulting services     -       -       42,750       42,750  
Total Sales     -       45,000       94,250       139,250  
                                 
Cost of goods sold     -       -       51,625       51,625  
                                 
Gross profit     -       45,000       42,625       87,625  
                                 
Operating expenses     940,169       176,859       615,820       1,732,848  
                                 
Loss from operations   $ (940,169 )   $ (131,859 )   $ (573,195 )   $ (1,645,223 )

 

NOTE 7 – LEGAL MATTERS

 

The Company is periodically engaged in legal proceedings arising from and relating to its business operations. 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. However, we recently decided to attempt 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, we have negotiated settlement of all but $80,454 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.

 

In periodic reports on Forms 10K and 10Q for the periods ending September 30, 2017 and December 31, 2017, respectively, the Company disclosed that on May 25, 2017, the SEC’s Chicago Regional Office informed it that it had made a preliminary determination to recommend filing of an enforcement action against the Company and its CEO based on possible violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act, and Section 15(a) of the Exchange Act. Subsequent discussions resulted in the submission of an Offer of Settlement (“Settlement”) through an administrative cease and desist action on November 17, 2017, which was accepted by the SEC on April 12, 2018, as disclosed on Form 8K filed April 18, 2018. Pursuant to the Settlement, the Company neither admitted nor denied any of the allegations, but was enjoined from violating the above-referenced Sections and Rule. The Settlement imposed no financial penalties or sanctions against the Company.

 

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NOTE 7 – LEGAL MATTERS (CONTINUED)

 

The Form 8K also disclosed that on April 13, 2018, the SEC filed a separate complaint against the CEO in the U.S. District Court for the Northern District of Illinois, asserting the allegations noted above, as well as allegations that he manipulated the price of company shares through undisclosed trading, realizing more than $130,000 from such trading. On the date of filing, the CEO voluntarily resigned as an officer and director of the Company. Without admitting or denying the allegations, the CEO consented to the entry of the judgment, which was entered on September 26, 2018 by the U.S. District Court for the Northern District of Illinois. The judgment permanently enjoined him from violating the anti-fraud provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and the broker registration provisions of Section 15(a) of the Exchange Act. It also bars him from serving as an officer or director of a public company and from participating in penny stock offerings, and ordered disgorgement and interest and penalties to be determined by the court.

 

On January 31, 2019, the employment agreement between the Company and its former CEO dated April 1, 2018 was terminated and his service thereunder as Director of Business Development ceased as of that date.

 

NOTE 8 – COMMITMENTS

 

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, or a total aggregate remaining payment of approximately $640,000. 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. During the nine months ended June 30, 2019, the Company recorded an accrual for the estimated potential settlement and wrote-off its $15,000 security deposit relating to the lease.

 

NOTE 9 – SUBSEQUENT EVENTS

 

Subsequent to June 30, 2019, the Company borrowed $50,000 from two of its officers and shareholders. The loans are unsecured, have an interest rate of eight percent and are due one year from the date of issuance.

 

On September 3, 2019, our Board of Directors unanimously approved, subject to stockholder approval: (1) execution and delivery of a proposed Share Exchange Agreement with DTI Holdings, Inc. (“DTI”) relating to the share exchange and transfer of certain assets of SCI pursuant to the terms and conditions of a Memorandum of Agreement in substantially the form of the copy presented to the Board (“Agreement”); and (2) the amendment of our Articles of Incorporation to increase our total authorized capital stock from 185,000,000 common shares to 200,000,000 common shares (“Amendment”). As of September 18, 2019, holders of a majority of the outstanding shares of voting capital stock have executed written stockholder consents approving these actions.

 

The Agreement provides, among other things, that: (1) DTI will pay the Company $500,000 upon the 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; (2) 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; (3) 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; (4) 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; (5) 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.; and (6) 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.

 

Discussions between the Company and DTI are in the initial stages and there can be no assurance that the proposed transaction described in the Agreement will be concluded successfully on the terms described or any alternate terms that may be proposed hereafter.

 

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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. 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.

 

PSI

 

PSI was incorporated under the laws of the state of Florida on June 17, 2009. On August 24, 2012, we acquired all of the issued and outstanding shares of stock in PSI. PSI is a wholly-owned subsidiary of the Company and operated by Psoria Development Company LLC, an Illinois limited liability company (“PDC”), a joint venture between WCUI/PSI and The Medical Alliance, Inc., a Florida corporation (“TMA”).

 

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 nine months ended June 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.

 

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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. 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. Repayment of the $700,000 investment by GEN2 will begin through and upon the date which NEO has realized and retained cumulative net income/distributable cash in the amount of $300,000. Distributions thereafter will be made to PSI, GEN2 and other members 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 consists of accredited investors, and investment participation from several WCUI officers and directors, including Calvin R. O’Harrow and Roy M. Harsch.

 

As of June 30, 2019, GEN2 had received $700,000 of investments to contribute to NEO and the Company recorded its proportionate share of $476,000 to additional paid-in-capital and $224,000 to non-controlling interest. During the nine months ended June 30, 2019, NEO recorded a net loss of $17,373 relating to its operations.

 

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).

 

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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 provides: a) Stealth Mark encryption and authentication solutions offering advanced technologies within the security and supply chain management vertical sectors (Microparticles), and b) advanced data intelligence services offering proprietary, unprecedented, and actionable technology for industries, companies, and agencies on a global scale (ActiveDutyTM).

 

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.

 

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ActiveDutyTM

 

SCI’s ActiveDutyTM 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. ActiveDutyTM 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 ActiveDutyTM creates the first systemic reporting mechanism to deliver strategic and tactical results supported by an intense worldwide analysis of patterns of human behavior. The ActiveDutyTM 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.

 

Analysis of Financial Condition and Results of Operations

 

Results of Operations for the three months ended June 30, 2019 compared to the three months ended June 30, 2018.

 

Revenue and Cost of Goods Sold

 

Revenue for the three months ended June 30, 2019 and 2018 was $7,625 and $71,500, respectively. The decrease of $63,875 in 2019 was due to the decrease in revenues at PSI and SCI. Cost of sales for the three months ended June 30, 2019 and 2018, was $4,575 and $16,967, respectively. Gross profit for the three months ended June 30, 2019 and 2018 was $3,050 and $54,533, respectively. The gross profit decrease of $51,483 was primarily due to the decrease in revenues at PSI and SCI during the three months ended June 30, 2019.

 

Operating Expenses

 

Operating expenses for the three months ended June 30, 2019 and 2018 were $404,210 and $837,368, respectively. The decrease in operating expenses of $433,158 was due primarily to the decrease in consulting fees and stock compensation during the three months ended June 30, 2019.

 

Other Expenses

 

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. Other expenses during the three months ended June 30, 2018 consisted of $69,837 of amortization of debt discount, $720,517 of financing costs and $7,248 of interest expense, totaling to $797,602.

 

Net Loss

 

Our net loss for the three months ended June 30, 2019 was $515,832, compared to a net loss of $1,580,437 for the three months ended June 30, 2018. The decrease in the net loss of $1,064,605 was primarily due to the decrease in operating and other expenses.

 

  20  
     

 

Results of Operations for the nine months ended June 30, 2019 compared to the nine months ended June 30, 2018.

 

Revenue and Cost of Goods Sold

 

Revenue for the nine months ended June 30, 2019 and 2018 was $33,375 and $139,250, respectively. The decrease of $105,875 in 2019 was due to the decrease in revenues at PSI and SCI. Cost of sales for the nine months ended June 30, 2019 and 2018 was $20,025 and $51,625, respectively. Gross profit for the nine months ended June 30, 2019 and 2018 was $13,350 and $87,625, respectively. The gross profit decrease of $74,275 was primarily due to the decrease in revenues at PSI and SCI during the nine months ended June 30, 2019.

 

Operating Expenses

 

Operating expenses for the nine months ended June 30, 2019 and 2018 were $1,415,667 and $1,732,848, respectively. The decrease in operating expenses of $317,181 was due primarily to the decrease in consulting and professional fees and stock compensation during the nine months ended June 30, 2019.

 

Other Expenses

 

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. Other expenses during the nine months ended June 30, 2018 consisted of $205,674 of amortization of debt discount, $790,939 of financing costs, a loss on the modification of the conversion price on a convertible note payable of $158,400, a loss on the modification of the exercise price on warrants in connection with a convertible note payable of $5,445, and $20,336 of interest expense, totaling to $1,180,794.

 

Net Loss

 

Our net loss for the nine months ended June 30, 2019 was $1,674,230, compared to a net loss of $2,826,017 for the nine months ended June 30, 2018. The decrease in the net loss of $1,151,787 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 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.

 

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The detailed segment information of the Company is as follows:

 

Operations by Segment

 

    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 )

 

    For the Nine Months Ended  
    June 30, 2018  
    Corporate     Medical
Devices
    Authentication
and Encryption
    Total  
Sales:                                
Trade   $ -     $ 45,000     $ 51,500     $ 96,500  
Consulting services     -       -       42,750       42,750  
Total Sales     -       45,000       94,250       139,250  
                                 
Cost of goods sold     -       -       51,625       51,625  
                                 
Gross profit     -       45,000       42,625       87,625  
                                 
Operating expenses     940,169       176,859       615,820       1,732,848  
                                 
Loss from operations   $ (940,169 )   $ (131,859 )   $ (573,195 )   $ (1,645,223 )

 

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There was no revenue or cost of goods sold for the Medical Devices segment for the nine months ended June 30, 2019. Revenue for the Medical Devices segment for the nine months ended June 30, 2018 was $45,000. There was no cost of goods sold for the Medical Devices segment for the nine months ended June 30, 2019 and 2018. Operating expenses for the nine months ended June 30, 2019 and 2018 was $399,111 and $176,859, respectively. The increase in operating expenses of $222,252 in 2019 was due primarily to the increase in contract labor. The loss from operations for the nine months ended June 30, 2019 and 2018 was $399,111 and $131,859, respectively.

 

Revenue for the Authentication and Encryption segment for the nine months ended June 30, 2019 and 2018 was $33,375 and $94,250, respectively. The decrease of $60,875 was due to the decrease in trade sales and consulting services in 2019. Cost of goods sold for the nine months ended June 30, 2019 and 2018 was $20,025 and $51,625, respectively, and the gross profit was $13,350 and $42,625, respectively. The gross profit decrease in 2019 of $29,275 was primarily due to the decrease in sales in 2019. Operating expenses for the nine months ended June 30, 2019 and 2018 was $299,656 and $615,820, respectively. The decrease in operating expenses of $316,164 in 2019 was due primarily to the decrease in stock compensation costs and salaries and wages. The loss from operations for the nine months ended June 30, 2019 and 2018 was $286,306 and $573,195, respectively.

 

The Corporate segment primarily provides executive management services for the Company. Operating expenses for the nine months ended June 30, 2019 and 2018 was $716,900 and $940,169, respectively. The decrease in operating expenses of $223,269 in 2019 was due primarily to the decrease in professional fees and stock compensation. The loss from operations for the nine months ended June 30, 2019 and 2018 was $716,900 and $940,169, 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, 2019, the Company incurred a net loss of $1,674,230 and used cash in operations of $972,857, and had a shareholders’ deficit of $1,002,306 as of June 30, 2019. 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, 2018 financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.

 

At June 30, 2019, the Company had cash on hand in the amount of $49,603. 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, 2019, the Company received $1,018,250 through short-term loans, contributions of capital by a joint venture partner and the sale of common stock. As of June 30, 2019, loans payable to officers and shareholders of $374,250 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.

 

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, 2019 and 2018

 

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.

 

As of June 30, 2018, we had $17,202 in cash, negative working capital of $630,906 and an accumulated deficit of $22,326,311.

 

Cash flows used in operating activities

 

During the nine months ended June 30, 2019, the Company used cash flows in operating activities of $972,857, compared to $790,081 used in the nine months ended June 30, 2018. During the nine months ended June 30, 2019, the Company incurred a net loss of $1,674,230 and $634,782 of non-cash expenses, compared to a net loss of $2,826,017 and $1,760,643 of non-cash expenses during the nine months ended June 30, 2018.

 

  23  
     

 

Cash flows used in investing activities

 

During the nine months ended June 30, 2019 and 2018, the Company had no cash flows from investing activities.

 

Cash flows provided by financing activities

 

During the nine months ended June 30, 2019, the Company had proceeds from loans payable from officers and shareholders of $333,250, proceeds from common stock issued for cash of $10,000 and proceeds of $700,000 from contributions of capital by its joint venture partner. The Company used cash to repay loans payable from officers and shareholders of $25,000. During the nine months ended June 30, 2018, the Company had proceeds from loans payable from officers and shareholders of $427,500, from a convertible note payable of $150,000, from the sale of common stock of $50,000 and from the exercise of stock warrants of $170,914. The Company used cash to repay loans payable from officers and shareholders of $20,500.

 

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, 2018, filed with the Securities and Exchange Commission on January 15, 2019. 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 three months ended June 30, 2019.

 

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.

 

  24  
     

 

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, 2019, 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 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.

 

2. 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.

 

3. 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.

 

Remediation of Material Weaknesses

 

The Company remediated certain of the material weaknesses in our disclosure controls and procedures identified above by adding independent directors and by hiring a CFO with SEC reporting experience. Effective November 17, 2017, the Board of Directors filled then existing vacancies in the Board by appointing each of the following persons as a member of the Board: William E. Kingsford; Thomas E. Scott, CPA; Paul D. Jones; and Roy M. Harsch, each to serve until the next annual meeting of the shareholders, or until his successor has been duly qualified and appointed. On December 1, 2017, the Board of Directors consisting of Andrew J. Kandalepas, Jay Joshi, M.D., Messrs. Kingsford, Scott, Jones, and Harsch, accepted the voluntary resignation of Mr. Kandalepas, as President, and appointed Mr. Jones as President. Mr. Kandalepas’ resignation and Mr. Jones’ appointment were effective immediately. On February 5, 2018, the Board of Directors appointed Calvin R. O’Harrow as Chief Operating Officer and a member of the Board. It accepted the resignation of Andrew J. Kandalepas as Chief Financial Officer (CFO) and Principal Accounting Officer (PAO) and appointed Douglas W. Samuelson, CPA, as CFO and PAO. It also removed Jay Joshi, M.D., as a Director. The Board of Directors also appointed a Compensation Committee consisting of Messrs. Jones, Scott and Kingsford. On April 17, 2018, Mr. Kandalepas voluntarily resigned as an Officer and Director and agreed to provide transition services to Calvin R. O’Harrow and Roy M. Harsch, who have been appointed to serve as CEO and Chairman, respectively, from the date of Mr. Kandalepas’ resignation.

 

The Company has implemented the following corporate policies to remediate the noted material weaknesses:

 

  All Debt agreements must be approved by the Board
     
  All Equity grants must be approved by the Board
     
  All Officers must have an agreement approved by the Board
     
  All employees must have a written agreement
     
  Consultant agreements with payments totaling over $20,000 must be approved by the Board
     
  Creation of a Board compensation plan
     
  Creation of an Audit Committee with an Audit Committee Charter
     
  Creation of a policy for Board approval on cash disbursements over $20,000
     
  Creation of a policy to ensure no one at any entity can initiate a payment to them selves

 

  25  
     

 

  Creation of controls over all Press Releases
     
  Ensure the Company will only work with licensed dealer/brokers relating to the sale of equity instruments.

 

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.

 

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, 2018, 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, 2019.

 

To address the material weaknesses set forth in items (2) and (3) 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.

 

  26  
     

 

Management’s Remediation Initiatives

 

In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated, or plan to initiate, all of the series of measures noted above in Remediation of Material Weaknesses.

 

Changes in internal control over financial reporting.

 

There have been no changes in our internal control over financial reporting that occurred during the quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is 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. 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. However, we recently decided to attempt 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, we have negotiated settlement of all but $80,454 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.

 

In periodic reports on Forms 10K and 10Q for the periods ending September 30, 2017 and December 31, 2017, respectively, the Company disclosed that on May 25, 2017, the SEC’s Chicago Regional Office informed it that it had made a preliminary determination to recommend filing of an enforcement action against the Company and its CEO based on possible violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act, and Section 15(a) of the Exchange Act. Subsequent discussions resulted in the submission of an Offer of Settlement (“Settlement”) through an administrative cease and desist action on November 17, 2017, which was accepted by the SEC on April 12, 2018, as disclosed on Form 8K filed April 18, 2018. Pursuant to the Settlement, the Company neither admitted nor denied any of the allegations, but was enjoined from violating the above-referenced Sections and Rule. The Settlement imposed no financial penalties or sanctions against the Company.

 

The Form 8K also disclosed that on April 13, 2018, the SEC filed a separate complaint against the CEO in the U.S. District Court for the Northern District of Illinois, asserting the allegations noted above, as well as allegations that he manipulated the price of company shares through undisclosed trading, realizing more than $130,000 from such trading. On the date of filing, the CEO voluntarily resigned as an officer and director of the Company. Without admitting or denying the allegations, the CEO consented to the entry of the judgment, which was entered on September 26, 2018 by the U.S. District Court for the Northern District of Illinois. The judgment permanently enjoined him from violating the anti-fraud provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and the broker registration provisions of Section 15(a) of the Exchange Act. It also bars him from serving as an officer or director of a public company and from participating in penny stock offerings, and ordered disgorgement and interest and penalties to be determined by the court.

 

On January 31, 2019, the employment agreement between the Company and its ex-CEO dated April 1, 2018 was terminated and his service thereunder as Director of Business Development ceased as of that date.

 

  27  
     

 

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   Certification of Principal Executive Officer Pursuant to Rule 13a-14*
31.2   Certification of Principal Financial Officer Pursuant to Rule 13a-14*
32.1   CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act*
32.2   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.

 

  28  
     

 

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: September 30, 2019 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: September 30, 2019 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   September 30, 2019
Calvin O’Harrow        
         
/s/ Douglas W. Samuelson   Chief Financial Officer and Principal Accounting Officer   September 30, 2019
Douglas W. Samuelson        
         
/s/ Paul D. Jones   Director, President   September 30, 2019
Paul D. Jones        
         
/s/ Thomas E. Scott   Director, Secretary   September 30, 2019
Thomas E. Scott        
         
/s/ William E. Kingsford   Director   September 30, 2019
William E. Kingsford        
         
/s/ Roy M. Harsch   Director, Chairman   September 30, 2019
Roy M. Harsch        

 

  29  
     

 

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