NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR
THE NINE MONTHS ENDED JUNE 30, 2022 and 2021
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 Ultraviolet (“UV”) phototherapy
devices for dermatology and sanitation purposes; and (ii) authentication and encryption products and services. The segments are operated,
respectively, through PSI and SCI.
Basis
of Presentation of Unaudited Financial Information
The
accompanying unaudited condensed consolidated financial statements of Wellness Center USA, Inc. and Subsidiaries (the “Company”)
have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all
normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the nine months ended
June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending September 30, 2022.
COVID-19
Considerations
During
the nine months ended June 30, 2022, the COVID-19 pandemic did not have a material net impact on our operating results. In the future,
the pandemic may cause reduced demand for our products if, for example, the pandemic results in a recessionary economic environment which
negatively effects the customers who purchase our products.
Our
ability to operate without significant negative operational impact from the COVID-19 pandemic will in part depend on our ability to protect
our employees and our supply chain. The Company has endeavored to follow the recommended actions of government and health authorities
to protect our employees. Since the onset of the COVID-19 pandemic, we maintained the consistency of our operations. However, the uncertainty
resulting from the pandemic could result in an unforeseen disruption to our workforce and supply chain (for example an inability of a
key supplier or transportation supplier to source and transport materials) that could negatively impact our operations.
Through
June 30, 2022, the COVID-19 pandemic has not negatively impacted the Company’s liquidity position as of such date. Through June
30, 2022, the Company continues to generate cash flows through financing activities to meet its short-term liquidity needs, and it expects
to maintain access to those shareholder loans. The Company has not observed any material impairments of its assets or a significant change
in the fair value of its assets due to the COVID-19 pandemic.
Going
Concern
The
accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the
accompanying condensed consolidated financial statements, the Company has not yet generated significant revenues and has incurred
recurring net losses. During the nine months ended June 30, 2022, the Company incurred a net loss of $1,202,064 and
used cash in operations of $735,634,
and at June 30, 2022, had a shareholders’ deficit of $3,998,537 as
of June 30, 2022. In addition, loans payable of $1,907,250 and
payroll taxes of $62,334 are
past due. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. In addition, the Company’s independent
registered public accounting firm, in its report published on our September 30, 2021 year-end financial statements, raised 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.
At
June 30, 2022, the Company had cash on hand in the amount of $42,045. 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, 2022, the Company received $601,000 through short-term loans from officers and shareholders and $304,600 through a U.S.
SBA loan payable.
No
assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to
the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the
case of debt financing or cause substantial dilution for our stockholders, in case of equity financing.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Consolidation
The
consolidated financial statements include the Company’s subsidiaries and the accounts of its subsidiaries for which it was determined
that Company has operational and management control. The Company’s consolidated subsidiaries and/or controlled entities are as
follows:
SCHEDULE
OF COMPANY CONSOLIDATED SUBSIDIARIES
| Name of consolidated subsidiary or entity | |
State or other jurisdiction of
incorporation or organization | |
Date of incorporation or formation (date of acquisition/disposition, if applicable) | |
Attributable interest at
June 30, 2022 | |
| Psoria-Shield Inc. (“PSI”) | |
The State of Florida | |
June 2009 (August 2012) | |
| 51 | % |
| StealthCo, Inc. (“StealthCo”) | |
The State of Illinois | |
March 2014 | |
| 100 | % |
| Protec Scientific, Inc (“Protec”) | |
The State of New York | |
April 2020 | |
| 32 | % |
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant
estimates are used in the valuation of accounts receivable and allowance for uncollectible amounts, inventory and obsolescence reserves,
accruals for potential liabilities, valuations of stock-based compensation, and realization of deferred tax assets, among others. Actual
results could differ from these estimates.
Income
(Loss) Per Share
Basic
loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of outstanding common
shares during the period. Diluted loss per share is computed by dividing the net loss applicable to common stockholders by the weighted
average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive
potential common shares had been issued. For the nine
months ended June 30, 2022 and 2021, the basic and diluted shares outstanding were the same, as potentially dilutive shares were considered
anti-dilutive. At June 30, 2022 and 2021, the dilutive impact of outstanding stock options of 4,427,738 and 5,277,738 shares, respectively,
and outstanding warrants for 25,028,083 and 34,712,074 shares, respectively, have been excluded because their impact on the loss per
share is anti-dilutive.
Revenue
Recognition
The
Company records revenue under the guidance of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with
Customers (Topic 606) which requires a company to recognize revenue to depict the transfer of goods or services to a customer at
an amount that reflects the consideration it expects to receive in exchange for those goods or services.
For
trade sales, the Company generates its revenue from sales contracts with customers with revenues being generated upon the shipment of
merchandise, or for consulting services, revenue is recognized in the period services are rendered and earned under service arrangements
with clients.
The
Company sells its products through two main sales channels: 1) directly to customers who use its products (the “Direct
Channel”) and 2) to distribution partners who resell its products (the “Indirect Channel”). Under the Direct
Channel, the Company sells its products to and receives payment directly from customers who purchase its products. Under the
Indirect Channel, the Company has entered into distribution agreements that allow the distributors to sell its products and fulfill
performance obligations under the agreements. During the nine months ended June 30, 2022 and 2021, all of the Company’s
products were sold through its Direct Channel.
Revenue
is generally recognized upon shipment or when a service has been completed, unless we have significant performance obligations for services
still to be completed. We recognize revenue when a material reversal is no longer probable. Payments received before the relevant criteria
for revenue recognition are satisfied are recorded as deferred revenue. There was no deferred revenue at June 30, 2022 and September
30, 2021.
Inventories
Inventories
are stated at the lower of cost or net realizable value. Cost is computed on a first-in, first-out basis. At June 30, 2022,
primarily all of the inventories consisted of raw materials or work-in-progress. The Company provides inventory reserves based on
excess and obsolete inventories determined primarily by future demand forecasts. The write down amount, if any, is measured as the
difference between the cost of the inventory and net realizable value based upon assumptions about future demand and charged to the
provision for inventory, which is a component of cost of sales. At the point of the loss recognition, a new, lower cost basis for
that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in
that newly established cost basis. At June 30, 2022 and September 30, 2021, the Company had
recorded a cumulative write-down of $173,930 for
excess and slow moving inventories.
Stock-Based
Compensation
The
Company periodically issues stock-based compensation to officers, directors, and consultants for services rendered, and as part of financing
transactions. Such issuances vest and expire according to terms established at the issuance date. Stock-based payments to officers, directors,
employees, and for acquiring goods and services from non-employees, which include grants of stock options, are recognized in the financial
statements based on their fair values in accordance with Topic 718. Stock option grants, which are generally time vested, will be measured
at the grant date fair value and charged to operations on a straight-line basis over the vesting period. Recognition of compensation
expense for non-employees is in the same period and manner as if the Company has paid cash for the services.
The
fair value of the Company’s common stock option and warrant grants are estimated using a Black-Scholes Merton option pricing model,
which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the common stock options, estimated
forfeitures and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes option pricing
model and based on actual experience. The assumptions used in the Black-Scholes Merton option pricing model could materially affect compensation
expense recorded in future periods.
Recently
Issued Accounting Pronouncements
In
June 2016, the FASB issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC 326”).
The standard significantly changes how entities will measure credit losses for most financial assets, including accounts and notes receivables.
The standard will replace today’s “incurred loss” approach with an “expected loss” model, under which companies
will recognize allowances based on expected rather than incurred losses. Entities will apply the standard’s provisions as a cumulative-effect
adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The standard is
effective for interim and annual reporting periods beginning after October 1, 2023. The adoption of ASU 2016-13 is not expected to have
a material impact on the Company’s financial position, results of operations, and cash flows.
In
May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50),
Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic
815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options.
ASU 2021-04 provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding
equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. An issuer measures
the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value
of that warrant immediately before modification or exchange. ASU 2021-04 introduces a recognition model that comprises four categories
of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and
modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal
years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided
in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date. Early adoption is permitted for
all entities, including adoption in an interim period. If an entity elects to early adopt ASU 2021-04 in an interim period, the guidance
should be applied as of the beginning of the fiscal year that includes that interim period. The adoption of ASU 2021-04 is not expected
to have a material impact on the Company’s financial statements or disclosures.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s
present or future consolidated financial statements.
NOTE
3 – LOANS PAYABLE FROM OFFICERS AND SHAREHOLDERS
As
of September 30, 2021, loans payable to officers and shareholders of $2,071,200 were
outstanding and $1,165,250 was
past due. During the nine months ended June 30, 2022, the Company and its subsidiary, PSI, borrowed $601,000 from
its officers and shareholders and repaid $160,000 of
those loans. The loans have an interest rate of eight percent per annum and are due one year from the date of issuance. As
of June 30, 2022, loans payable to officers and shareholders of $2,512,200 were
outstanding, of which $1,907,250 of
principal was past due. In addition, as of June 30, 2022, $363,530 of accrued and unpaid interest is included in accounts payable and accrued
expenses.
At
September 30, 2021, the balance of the unamortized discount related to loans payable to officers and shareholders was $15,822.
During the three and nine months ended June 30, 2022, the Company amortized $4,375 and
$13,125,
respectively, of the debt discount and the balance of the unamortized discount at June 30, 2022 was $2,697.
NOTE
4 – U.S. SMALL BUSINESS ADMINISTRATION LOAN PAYABLE
During
the nine months ended June 30, 2022, the Company entered into a loan agreement with the U.S. Small Business Administration (SBA) under
which the Company borrowed $304,600. The note accrues interest at 3.75% per annum and calls for monthly payments of $1,569 beginning
in February 2024 and maturing in February 2052. The loan is secured by all of the assets of the Company and is personally guaranteed
by the Company’s Chief Executive Officer. The balance of $304,600 was due as of June 30, 2022, plus $3,974 of accrued and unpaid
interest.
NOTE
5 – LEASE ABANDONMENT LIABILITY
The
Company leased its corporate office facility in Hoffman Estates, Illinois pursuant to a non-cancellable lease initiated in July 2016
and expiring February 28, 2024. The lease terms require a monthly payment of approximately $11,000. The Company vacated the facility
in April 2020, in favor of its present facilities in Tucson AZ, which are provided by a shareholder on a rent-free basis. At the date
of vacation, the Company had a remaining lease obligation of $631,587.
On
or about June 29, 2020, the Company received notice that Hanover Hoffman Estates, LLC (“HHE”), filed case number 2020L006092
in the Circuit Court of Cook County alleging a failure to pay Base Rent and abandonment of certain office space in Hoffman Estates, Illinois
subject to a Commercial Lease dated May 26, 2016 (the “HHE Litigation”). HHE sought at least $672,878 in base rent and other
amounts under the lease, as well as treble damages from the Company’s ex-CEO and two past Directors who were serving on our Board
as of the date of the lease. As of June 30, 2022, the Company has recorded the full amount of the judgement due.
On
October 6, 2021, HHE and the Company settled the HHE Litigation pursuant to an agreement providing, among other things, that the Company
agree to the entry of a final judgment order on the complaint in the amount of $725,795, which includes $657,194 in base rent awarded
HHE by the Court on HHE’s Motion for Summary Judgment and the additional fees claimed by HHE and costs. HHE will forebear on the
enforcement of the judgment and will provide the Company a satisfaction of the judgment upon the payment by the Company of $350,000,
plus interest on the principal amount thereof outstanding from time to time at the rate of 5% per annum (the “Settlement Amount”),
until the Settlement Amount is paid in full.
An
initial payment of $125,000 was due January 1, 2022. The Company received a letter of default from HHE on January 20, 2022, which provided
the Company 30 days to make the payment or HHE could seek collection of the Agreed Final Judgement Amount of $725,795. The Company made
the payment of $125,000 on February 10, 2022. The balance of $225,000 will be paid over a five-year period beginning on January 1, 2023,
as follows: January 1, 2023 – $15,000 plus accrued interest only; January 1, 2024 – $15,000 plus accrued interest only; January
1, 2025 – $45,000 plus accrued interest; January 1, 2026 – $75,000 plus accrued interest; and January 1, 2027 – $75,000
plus accrued interest.
As
of September 30, 2021, the Company had recorded a lease settlement liability of $672,878.
During the nine months ended June 30, 2022, the Company made a payment of $125,000
towards the Settlement Amount and as of June 30, 2022, the lease settlement liability was $547,878.
The Company will adjust any remaining balance of the lease settlement liability after it has completed the payment and satisfaction
of the remaining $225,000
Settlement Amount.
NOTE
6 – SHAREHOLDERS’ EQUITY
Common
Stock Issued for Services
During
the year ended September 30, 2021, the Company entered into an agreement with a consulting firm under which the firm would provide certain
services for the Company. Under the agreement, the firm could earn 1,000,000 restricted shares of the Company’s common stock for
completing certain services. In April 2022, the Company’s Board of Directors approved the issuance of the 1,000,000 shares once
the services had been completed. The shares vested upon grant and had a fair value on the date of grant of $50,000.
Restricted
Stock Grants
The
following table summarizes restricted common stock activity:
SUMMARY OF RESTRICTED COMMON STOCK
| | |
Number of
Restricted Shares | | |
Fair Value | | |
Weighted Average
Grant Date
Fair Value | |
| | |
| | |
| | |
| |
| Non-vested, September 30, 2021 | |
| 8,750,000 | | |
$ | 325,000 | | |
$ | 0.03 | |
| Granted | |
| 3,750,000 | | |
| 187,500 | | |
| 0.05 | |
| Vested | |
| (4,062,500 | ) | |
| (146,875 | ) | |
| 0.04 | |
| Forfeited | |
| - | | |
| - | | |
| - | |
| Non-vested, June 30, 2022 | |
| 8,437,500 | | |
$ | 365,625 | | |
$ | 0.04 | |
On
April 1, 2022, the Company’s Board of Directors approved the issuance of a combined total of 3,750,000 restricted shares of the
Company’s common stock to certain of its Officers and Directors for future services to be performed. The shares vest monthly from
April 2022 through March 2025. The fair value of the shares on the date of grant was $187,500.
During
the three and nine months ended June 30, 2022, the Company recorded $59,375 and $146,875, respectively, of stock compensation for the
value of vested restricted common stock, and as of June 30, 2022, unvested compensation of $365,625 remained that will be amortized over
the remaining vesting period, through March 2025.
In
addition to the above grants, during the year ended September 30, 2021, the Company’s Board of Directors approved the issuance
of a combined total of 41,353,731
restricted shares of the Company’s common stock (“Escrow Shares Account”) to its Officers and Directors all of
which will only be issued upon the sale or merger of the Company. No stock compensation was recorded relating to that grant as
management feels it is a remote possibility that a sale or merger of the Company will happen within the next twelve months. The
Company will account for the shares once they are granted to its Officers and Directors (see below). The number of shares available
to be issued under this condition is reduced by the issuance of shares from the Escrow Shares Account and increased by the grant of
shares into the Escrow Shares Account.
On
April 1, 2022, the Board approved the issuance of a combined total of 7,060,000 restricted shares of the Company’s common
stock to certain of its Officers and Directors in connection with their officer and shareholder loans. The shares vested upon grant and
had a fair value on the date of grant of $353,000. These shares were granted from the 41,353,731 Escrow Shares Account (see above), thus
reducing the number of shares that can be issued under that account. The Board also approved the issuance of 1,250,000 shares to its
CEO, which were added to the Escrow Shares Account balance. The 1,250,000 shares will only be issued upon the sale or merger of the Company,
and as such, no stock compensation was recorded.
Stock
Options
On
December 22, 2010, effective retroactively as of June 30, 2010, the Company’s Board of Directors approved the adoption of the “2010
Non-Qualified Stock Option Plan” (“2010 Option Plan”) by unanimous consent. The 2010 Option Plan was initiated to encourage
and enable officers, directors, consultants, advisors and key employees of the Company to acquire and retain a proprietary interest in
the Company by ownership of its common stock. A total of 7,500,000 of the authorized shares of the Company’s common stock may be
subject to, or issued pursuant to, the terms of the plan. Effective January 1, 2018, the Board of Directors approved to increase the
number of authorized shares of the Company’s common stock that may be subject to, or issued pursuant to, the terms of the plan
from 7,500,000 to 30,000,000.
The
Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line
basis over the requisite service period for the entire award. Additionally, the Company’s policy is to issue new shares of common
stock to satisfy stock option exercises. The Company applied fair value accounting for all share-based payments awards. The fair value
of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model.
The
table below summarizes the Company’s stock option activities for the nine months ended June 30, 2022:
SCHEDULE OF STOCK OPTION ACTIVITY
| | |
Number of
Option Shares | | |
Exercise Price
Range Per Share | | |
Weighted Average
Exercise Price | |
| | |
| | |
| | |
| |
| Balance, September 30, 2021 | |
| 5,277,738 | | |
| $ 0.03 - 0.26 | | |
$ | 0.15 | |
| Granted | |
| - | | |
| - | | |
| - | |
| Cancelled | |
| - | | |
| - | | |
| - | |
| Exercised | |
| - | | |
| - | | |
| - | |
| Expired | |
| (850,000 | ) | |
| 0.12 - 0.26 | | |
| 0.17 | |
| Balance, June 30, 2022 | |
| 4,427,738 | | |
| $ 0.03 - 0.26 | | |
$ | 0.14 | |
| Vested and exercisable, June 30, 2022 | |
| 4,427,738 | | |
| $ 0.03 - 0.26 | | |
$ | 0.14 | |
| | |
| | | |
| | | |
| | |
| Unvested, June 30, 2022 | |
| - | | |
$ | - | | |
$ | - | |
The
following table summarizes information concerning outstanding and exercisable options as of June 30, 2022:
SCHEDULE OF OUTSTANDING AND EXERCISABLE OPTIONS BY EXERCISE PRICE RANGE
| | | |
Options Outstanding | | |
Options Exercisable | |
| Range of Exercise Prices | | |
Number
Outstanding | | |
Average
Remaining
Contractual
Life (in years) | | |
Weighted
Average
Exercise Price | | |
Number
Exercisable | | |
Average
Remaining
Contractual
Life (in years) | | |
Weighted
Average
Exercise Price | |
| | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| $ | 0.03 - 0.26 | | |
| 4,427,738 | | |
| 1.08 | | |
$ | 0.14 | | |
| 4,427,738 | | |
| 1.08 | | |
$ | 0.14 | |
| | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| $ | 0.03
- 0.26 | | |
| 4,427,738 | | |
| 1.08 | | |
$ | 0.14 | | |
| 4,427,738 | | |
| 1.08 | | |
$ | 0.14 | |
During
the nine months ended June 30, 2022, no stock compensation was recorded for the value of options vesting during the period, and as of
June 30, 2022, no unvested compensation remained that will be amortized over the remaining vesting period.
As
of June 30, 2022, there were 25,572,262 shares of stock options remaining available for issuance under the 2010 Plan. There was no intrinsic
value for option shares outstanding at June 30, 2022.
Stock
Warrants
The
table below summarizes the Company’s warrants activities for the nine months ended June 30, 2022:
SCHEDULE OF WARRANT ACTIVITY
| | |
Number
of Warrant
Shares | | |
Exercise
Price
Range
Per
Share | | |
Weighted
Average
Exercise
Price | |
| | |
| | |
| | |
| |
| Balance,
September 30, 2021 | |
| 32,032,075 | | |
$ | 0.07
- 0.40 | | |
$ | 0.16 | |
| Granted | |
| - | | |
| - | | |
| - | |
| Cancelled | |
| - | | |
| - | | |
| - | |
| Exercised | |
| - | | |
| - | | |
| - | |
| Expired | |
| (7,003,992 | ) | |
| 0.12
- 0.18 | | |
| 0.15 | |
| Balance,
June 30, 2022 | |
| 25,028,083 | | |
$ | 0.07
- 0.40 | | |
$ | 0.17 | |
| Vested
and exercisable, June 30, 2022 | |
| 25,028,083 | | |
$ | 0.07
- 0.40 | | |
$ | 0.17 | |
The
following table summarizes information concerning outstanding and exercisable warrants as of June 30, 2022:
SCHEDULE OF OUTSTANDING AND EXERCISABLE WARRANTS BY EXERCISE PRICE RANGE
| | | |
Warrants Outstanding | | |
Warrants Exercisable | |
| Range of Exercise Prices | | |
Number
Outstanding | | |
Average
Remaining
Contractual
Life (in years) | | |
Weighted
Average
Exercise Price | | |
Number
Exercisable | | |
Average
Remaining
Contractual
Life (in years) | | |
Weighted
Average
Exercise Price | |
| | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| $ | 0.07 – 0.20 | | |
| 24,078,083 | | |
| 1.45 | | |
$ | 0.16 | | |
| 24,078,083 | | |
| 1.45 | | |
$ | 0.16 | |
| | 0.21
– 0.40 | | |
| 950,000 | | |
| 0.81 | | |
| 0.33 | | |
| 950,000 | | |
| 0.81 | | |
| 0.33 | |
| | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| $ | 0.07
– 0.40 | | |
| 25,028,083 | | |
| 1.42 | | |
$ | 0.17 | | |
| 25,028,083 | | |
| 1.42 | | |
$ | 0.17 | |
There
was no aggregate intrinsic value for warrant shares outstanding at June 30, 2022.
NOTE
7 – SEGMENT REPORTING
Reportable
segments are components of an enterprise about which separate financial information is available and that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s reportable segments
are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates
a company.
The
Company operates in the following business segments:
(i)
Medical Devices: which stems from PSI, its wholly-owned subsidiary acquired on August 24, 2012, a developer, manufacturer, marketer
and distributer of targeted Ultra Violet (“UV”) phototherapy devices for the treatment of skin diseases, and for sanitation
purposes.
(ii)
Authentication and Encryption Products and Services: which stems from StealthCo, its wholly-owned subsidiary formed on March 18,
2014, which has engaged in the business of selling, licensing or otherwise providing certain authentication and encryption products and
services since acquisition of certain assets from SMI on April 4, 2014.
The
detailed segment information of the Company is as follows:
SCHEDULE OF ASSETS OF REPORTABLE SEGMENTS
Assets
By Segment
| | |
Corporate | | |
Medical Devices | | |
Authentication and Encryption | | |
Total | |
| | |
June 30, 2022 | |
| | |
Corporate | | |
Medical Devices | | |
Authentication and Encryption | | |
Total | |
| ASSETS | |
| | | |
| | | |
| | | |
| | |
| Current Assets | |
| | | |
| | | |
| | | |
| | |
| Cash | |
$ | 1,068 | | |
$ | 37,682 | | |
$ | 3,295 | | |
$ | 42,045 | |
| Inventories | |
| - | | |
| 99,741 | | |
| - | | |
| 99,741 | |
| Total current assets | |
| 1,068 | | |
| 137,423 | | |
| 3,295 | | |
| 141,786 | |
| | |
| | | |
| | | |
| | | |
| | |
| TOTAL ASSETS | |
$ | 1,068 | | |
$ | 137,423 | | |
$ | 3,295 | | |
$ | 141,786 | |
Operations
by Segment for the Three Months Ended June 30, 2022 and 2021
SCHEDULE
OF OPERATIONS OF REPORTABLE SEGMENTS
| | |
Corporate | | |
Medical Devices | | |
Authentication and Encryption | | |
Total | |
| | |
For the Three Months Ended | |
| | |
June 30, 2022 | |
| | |
Corporate | | |
Medical Devices | | |
Authentication and Encryption | | |
Total | |
| | |
| | |
| | |
| | |
| |
| Trade Sales | |
$ | - | | |
$ | 107,500 | | |
$ | - | | |
$ | 107,500 | |
| | |
| | | |
| | | |
| | | |
| | |
| Cost of goods sold | |
| - | | |
| 10,400 | | |
| - | | |
| 10,400 | |
| |
| | | |
| | | |
| | | |
| | |
| Gross profit | |
| - | | |
| 97,100 | | |
| - | | |
| 97,100 | |
| | |
| | | |
| | | |
| | | |
| | |
| Operating expenses | |
| 105,396 | | |
| 317,313 | | |
| 7,518 | | |
| 430,227 | |
| | |
| | | |
| | | |
| | | |
| | |
| Loss from operations | |
$ | (105,396 | ) | |
$ | (220,213 | ) | |
$ | (7,518 | ) | |
$ | (333,127 | ) |
| | |
WCUI | | |
PSI | | |
Stealthco | | |
| |
| | |
For the Three Months Ended | |
| | |
June 30, 2021 | |
| | |
WCUI | | |
PSI | | |
Stealthco | | |
| |
| | |
Corporate | | |
Medical Devices | | |
Authentication and Encryption | | |
Total | |
| | |
| | |
| | |
| | |
| |
| Trade Sales | |
$ | - | | |
$ | 78,620 | | |
$ | - | | |
$ | 78,620 | |
| | |
| | | |
| | | |
| | | |
| | |
| Cost of goods sold | |
| - | | |
| 10,400 | | |
| - | | |
| 10,400 | |
| | |
| | | |
| | | |
| | | |
| | |
| Gross profit | |
| - | | |
| 68,220 | | |
| - | | |
| 68,220 | |
| | |
| | | |
| | | |
| | | |
| | |
| Operating expenses | |
| 42,849 | | |
| 226,575 | | |
| 3,242 | | |
| 272,666 | |
| | |
| | | |
| | | |
| | | |
| | |
| Loss from operations | |
$ | (42,849 | ) | |
$ | (158,355 | ) | |
$ | (3,242 | ) | |
$ | (204,446 | ) |
Operations
by Segment for the Nine Months Ended June 30, 2022 and 2021
| | |
Corporate | | |
Medical Devices | | |
Authentication and Encryption | | |
Total | |
| | |
For the Nine Months Ended | |
| | |
June 30, 2022 | |
| | |
Corporate | | |
Medical Devices | | |
Authentication and Encryption | | |
Total | |
| | |
| | |
| | |
| | |
| |
| Trade Sales | |
$ | - | | |
$ | 372,042 | | |
$ | - | | |
$ | 372,042 | |
| | |
| | | |
| | | |
| | | |
| | |
| Cost of goods sold | |
| - | | |
| 46,800 | | |
| - | | |
| 46,800 | |
| | |
| | | |
| | | |
| | | |
| | |
| Gross profit | |
| - | | |
| 325,242 | | |
| - | | |
| 325,242 | |
| | |
| | | |
| | | |
| | | |
| | |
| Operating expenses | |
| 208,518 | | |
| 806,657 | | |
| 13,503 | | |
| 1,028,678 | |
| | |
| | | |
| | | |
| | | |
| | |
| Loss from operations | |
$ | (208,518 | ) | |
$ | (481,415 | ) | |
$ | (13,503 | ) | |
$ | (703,436 | ) |
| | |
WCUI | | |
PSI | | |
Stealthco | | |
| |
| | |
For the Nine Months Ended | |
| | |
June 30, 2021 | |
| | |
WCUI | | |
PSI | | |
Stealthco | | |
| |
| | |
Corporate | | |
Medical Devices | | |
Authentication and Encryption | | |
Total | |
| | |
| | |
| | |
| | |
| |
| Trade Sales | |
$ | - | | |
$ | 220,769 | | |
$ | - | | |
$ | 220,769 | |
| | |
| | | |
| | | |
| | | |
| | |
| Cost of goods sold | |
| - | | |
| 149,450 | | |
| - | | |
| 149,450 | |
| | |
| | | |
| | | |
| | | |
| | |
| Gross profit | |
| - | | |
| 71,319 | | |
| - | | |
| 71,319 | |
| | |
| | | |
| | | |
| | | |
| | |
| Operating expenses | |
| 138,619 | | |
| 791,589 | | |
| 13,217 | | |
| 943,425 | |
| | |
| | | |
| | | |
| | | |
| | |
| Loss from operations | |
$ | (138,619 | ) | |
$ | (720,270 | ) | |
$ | (13,217 | ) | |
$ | (872,106 | ) |
NOTE
8 – LEGAL MATTERS
The
Company is periodically engaged in legal proceedings arising from and relating to its business operations. Except as otherwise described
herein, 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.
The
Company continues efforts to preserve revenue and reduce operating expenses through actions including, but not limited to, facilities
consolidation and staff reductions, which it hopes to implement through negotiated transactions with lessors, employees and other third
parties. Such actions may result in disputes with and claims by such parties which, if not resolved through negotiations, may impact
negatively the Company’s ability to continue as a going concern. To date, the Company has negotiated settlement of all ex-employee
wage and benefits claims except for the claim filed with the Illinois Department of Labor asserting a violation of the Illinois Wage
Payment and Collection Act by the Company’s former CEO. That claim alleges unpaid wages in the amount of $158,715 and unpaid vacation
pay in the amount of $20,833 for a total amount of $179,548, as well as certain statutory damages including, but not limited to, 2% of
the wages due per month plus attorneys’ fees if the ex-CEO elects to file suit for a violation of the Act and is successful in
obtaining a judgment on his claim. The Company has filed its response to such claim with the Department denying the substantive allegations
therein and asserting certain factual and legal defenses, including breach of fiduciary duty, as a bar to all claimed compensation. The
claim remains pending, but as the date hereof, no suit has been filed against the Company asserting a violation of the Act based on said
claim.
As
discussed in Note 5, on or about June 29, 2020, HHE filed case number 2020L006092 in the Circuit Court of Cook County alleging failure
to pay Base Rent and abandonment of certain office space in Hoffman Estates, Illinois subject to a Commercial Lease dated May 26, 2016
(the “HHE litigation”). HHE sought at least $672,888 in base rent and other amounts under the lease, as well as treble damages
from our ex-CEO and two past Directors who were serving on our Board as of the date of the lease. On October 6, 2021, HHE and the Company
agreed to a settlement on the terms discussed in Note 5 above. On February 10, 2022, the initial payment of $125,000 was paid to HHE
(see Note 5).
On
or about January 8, 2021, Periklis Papadopoulus, a former Director who was named as an additional Defendant in the HHE litigation, filed
a counterclaim against the Company seeking indemnification for attorneys’ fees he incurred in obtaining his dismissal from the
HHE litigation. Subsequent to September 30, 2021, the Company settled the counterclaim by agreeing to pay $41,914, with $15,000 payable
on or about January 4, 2022 and the balance in sixteen monthly installments commencing June 4, 2022, each in the amount of $1,791. The
settlement amount shall be reduced to $37,000 if it is paid prior to April 1, 2022, or $39,000 if paid before July 1, 2022. The Company
agreed to entry of a judgment in the amount of $41,914 to secure payments under the settlement agreement. This amount is included in
Accounts payable and accrued expenses on the accompanying Balance Sheets. Upon payment of the settlement, Papadopoulos will provide the
Company with a satisfaction of judgment. During the nine months ended June 30, 2022, but prior to April 1, 2022, the Company made payments
totaling $37,000. This satisfied the judgment as of June 30, 2022, and the Company recorded a gain on settlement of debt of $4,914 during
the nine months ended June 30, 2022.
NOTE
9 – SUBSEQUENT EVENTS
Subsequent
to June 30, 2022, the Company borrowed $75,000 from its officers and shareholders. All of the loans are unsecured, have an interest rate
of eight percent and are due one year from the date of issuance.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward
Looking Statements
Except
for historical information, the following discussion contains forward-looking statements based upon current expectations that involve
certain risks and uncertainties. Such forward-looking statements include statements regarding, among other things, (a) our projected
sales and profitability, (b) our growth strategies, (c) anticipated trends in our industry, (d) our future financing plans, (e) our anticipated
needs for working capital, (f) our lack of operational experience and (g) the benefits related to ownership of our common stock. Forward-looking
statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use
of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,”
“believe,” “intend,” or “project” or the negative of these words or other variations on these words
or comparable terminology. This information may involve known and unknown risks, uncertainties, and other factors that may cause our
actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed
or implied by any forward-looking statements. These statements may be found under “Description of Business,” and “Analysis
of Financial Condition and Results of Operations”, as well as in this Report generally. Actual events or results may differ materially
from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined
under “Risk Factors” in our Annual Report on Form 10-K and in other Reports we have filed with the Securities and Exchange
Commission, as well as matters described in this Report generally. In light of these risks and uncertainties, there can be no assurance
that the forward-looking statements contained in this Report will in fact occur as projected.
The
following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our
results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto. This
section includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance.
You should not place undue certainty on these forward-looking statements. These forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from our predictions.
Description
of Business
Background.
Wellness
Center USA, Inc. (“WCUI” or the “Company”) was incorporated in June 2010 under the laws of the State of Nevada.
We initially engaged in online sports and nutrition supplements marketing and distribution. We subsequently expanded into additional
businesses within the healthcare and medical sectors through acquisitions, including Psoria-Shield Inc. (“PSI”) and StealthCo
Inc. (“SCI”), d/b/a Stealth Mark, Inc.
The
Company currently operates in two business segments: (i) distribution of targeted Ultra Violet (“UV”) phototherapy devices
for dermatology and sanitation purposes; and (ii) authentication and encryption products and services. The segments are conducted through
our wholly-owned subsidiaries, PSI and SCI.
PSI
PSI
was incorporated under the laws of the state of Florida on June 17, 2009. We acquired all of the issued and outstanding shares of stock
in PSI on August 24, 2012.
Joint
Ventures
In
December 2018, PSI entered into a Joint Venture Agreement with GEN2 for further development, marketing, licensing and/or sale of PSI
technology and products to be conducted through NEO Phototherapy, Inc. (“NEO”). PSI and GEN2 were the members of NEO, owning
50.5% and 36.0%, respectively. As of April 30, 2020, the Company controlled 51% of the joint venture, GEN2 controlled 39% and another
individual controlled the remaining 10%.
Effective
April 30, 2020, the joint venture with GEN2 was reorganized. GEN2 shareholders exchanged their common shares in GEN2, and the individual
exchanged his membership interests in NEO, for common shares representing 49% ownership in PSI. The Company retained its common shares
in PSI, which provides the Company a 51% economic interest in the PSI technology and products developed by the joint venture. During
the nine months ended June 30, 2022, PSI recorded a loss of $541,206 relating to its operations, of which $265,191 was allocated to the
non-controlling interest.
As
of September 30, 2020, GEN2 had received $975,000 of investments to contribute to NEO. Repayment of the $975,000 investment will begin
through and upon the date which PSI has realized and retained cumulative net income/distributable cash in the amount of $300,000. The
minority interest of PSI ownership consists of accredited investors, and investment participation of $750,000 from several WCUI officers
and directors, including Calvin R. O’Harrow, William Kingsford and Roy M. Harsch.
Protec
In
May 2020, the Company’s subsidiary, PSI, agreed to become a majority shareholder in Protec Scientific, Inc. (“Protec”),
a company formed in April 2020. As of September 30, 2020, PSI had contributed $191,000 to Protec with the Company’s share being
approximately 32%, based on its PSI ownership. The remaining 30% share is attributed to PSI’s minority shareholders. During the
nine months ended December 31, 2020, Protec received an additional $120,000 from non-affiliated investors. The additional investments
gave the non-controlling interests a 68% ownership interest in Protec. During the nine months ended June 30, 2022, Protec recorded a
loss of $6,755, of which $4,619 was allocated to the non-controlling interests.
Psoria-Light
PSI
designs, develops and markets a targeted ultraviolet (“UV”) phototherapy device called the Psoria-Light. The Psoria-Light
is designated for use in targeted PUVA photochemistry and UVB phototherapy and is designed to treat certain skin conditions including
psoriasis, vitiligo, atopic dermatitis (eczema), seborrheic dermatitis, and leukoderma.
Psoriasis,
eczema, and vitiligo, are common skin conditions that can be challenging to treat, and often cause the client significant psychosocial
stress. Clients may undergo a variety of treatments to address these skin conditions, including routine consumption of systemic and biologic
drug therapies which are highly toxic, reduce systemic immune system function, and come with a host of chemotherapy-like side effects.
Ultraviolet (UV) phototherapy is a clinically validated alternate treatment modality for these disorders.
Traditionally,
“non-targeted” UV phototherapy was administered by lamps that emitted either UVA or UVB light to both diseased and healthy
skin. While sunblocks or other UV barriers may be used to protect healthy skin, the UV administered in this manner must be low dosage
to avoid excessive exposure of healthy tissue. Today, “targeted” UV phototherapy devices administer much higher dosages of
light only to affected tissue, resulting in “clearance” in the case of psoriasis and eczema, and “repigmentation”
in the case of vitiligo, at much faster rates than non-targeted (low dosage) UV treatments.
Targeted
UV treatments are typically administered to smaller total body surface areas, and are therefore used to treat the most intense parts
of a client’s disease. Non-targeted UV treatment is typically used as a follow-up and for maintenance, capable of treating large
surfaces of the body. Excimer laser devices (UVB at 308nm) are expensive and consume dangerous chemicals (Xenon and Chlorine). Mercury
lamp devices (UVB and/or UVA) require expensive lamp replacements regularly and require special disposal (due to mercury content). Additionally,
mercury lamp devices typically deliver wavelengths of light below 300nm. While within the UVB spectrum, it has been shown that wavelengths
below 300nm produce significantly more “sunburn” type side effects than do wavelengths between 300 and 320nm without improvement
in therapeutic benefit.
The
Psoria-Light is a targeted UV phototherapy device that produces UVB light between 300 and 320 nm as well as UVA light between 350 and
395nm. It does not require consumption of dangerous chemicals or require special environmental disposal, and is cost effective for clinicians,
which should result in increased patient access to this type of treatment. It has several unique and advanced features that we believe
will distinguish it from the non-targeted and targeted UV phototherapy devices that are currently being used by dermatologists and other
healthcare providers. These features include the following: the utilization of deep narrow-band UVB (“NB-UVB”) LEDs as light
sources; the ability to produce both UVA or NB-UVB therapeutic wavelengths; an integrated high resolution digital camera and client record
integration capabilities; the ability to export to an external USB memory device a PDF file of treatment information including a patent
pending graph that includes digital images plotted against user tracked metrics which can be submitted to improve medical reimbursements;
an accessory port and ability to update software; ease of placement and portability; advanced treatment site detection safety sensor;
international language support; a warranty which includes the UV lamp(s); and a non-changeable treatment log (that does not include HIPPA
information).
The
Psoria-Light consists of three components: a base console, a color display with touchscreen control, and a hand-held delivery device
with a conduit (or tether) between the handheld device and the base console. PSI requires clearance by the United States Food and Drug
Administration (“FDA”) to market and sell the device in the United States as well as permission from TUV SUD America Inc.,
PSI’s Notified Body, to affix the CE mark to the Psoria-Light in order to market and sell the device in countries of the European
Union.
To
obtain FDA clearance and permission to affix the CE mark, PSI was required to conduct EMC and electrical safety testing, which it completed
in the second quarter of 2011. PSI received FDA clearance on February 11, 2011 (no. K103540) and was granted permission to affix the
CE mark on November 10, 2011. In its 510(k) application with the FDA (application number K103540), PSI asserted that the Psoria-Light
was “substantially equivalent” in intended use and technology to two predicate devices, the X -Trac Excimer Laser, which
has wide acceptance in the medical billing literature and has a large installed base in the U.S., and the Dualight, another competing
targeted UV phototherapy device.
PSI
has established an ISO 13485 compliant quality system for the Psoria-Light, which was first audited in the third quarter of 2011. This
system is intended to ensure PSI devices will be manufactured in a controlled and reliable environment and that its resources follow
similar practices and is required for sales in countries requiring a CE mark. PSI has also received Certified Space Technology designation
from the Space Foundation, based on PSI’s incorporation of established NASA-funded LED technology.
PSI
began Psoria-Light Beta deployment in January 2012. It is currently operating at a loss, and there is no assurance that its business
development plans and strategies will ever be successful. PSI’s success depends upon the acceptance by healthcare providers and
clients of Psoria-Light treatment as a preferred method of treatment for psoriasis and other UV-treatable skin conditions. Psoria-Light
treatment appears to have been beneficial to clients, without demonstrable harmful side effects or safety issues, as evidenced by more
than 10,000 treatments completed on more than 1,000 clients, domestically and Mexico, since 2012. In order for the Company to continue
PSI operations, it will need additional capital and it will have to successfully coordinate integration of PSI operations without materially
and adversely affecting continuation and development of other Company operations.
SCI
SCI
was incorporated under the laws of the state of Illinois on March 18, 2014. SCI acquired certain Stealth Mark assets on April 4, 2014
and operates as a wholly-owned subsidiary of the Company. It is a provider of: a) Stealth Mark encryption and authentication solutions
offering advanced technologies within the security and supply chain management vertical sectors (Intelligent Microparticles),
and b) advanced data intelligence services offering proprietary, unprecedented, and actionable technology for industries, companies,
and agencies on a global scale (ActiveDuty™).
Intelligent
Microparticles
SCI
provides clients premiere authentication technology for the protection of a variety of products and brands from illicit counterfeiting
and diversion activities. Its technology is applicable to a wide range of industries affected by counterfeiting, diversion and theft
including, but not limited to, pharmaceuticals, defense/aerospace, automotive, electronics, technology, consumer and personal care goods,
designer products, beverage/spirits, and many others.
SCI
delivers the client a complete, simple to use, easy to implement, and cost effective turnkey system that is extremely difficult to compromise.
SCI’s technology includes a combination of proprietary software and intelligent microparticle marks that are unduplicatable and
undetectable to the human eye. These taggants are created with proprietary materials that create unique numerical codes that are assigned
meaning by the client and are machine readable without the use of rare earth or chemical tracers. They have been used in covert and overt
operations with easy to implement technology and do-it-yourself in-the-field forensic caliber verification.
In
April 2018, the Company’s subsidiary, SCI, concluded licensing of a patent for technology that is the next generation of Stealth
Mark. Working with researchers at the Oak Ridge National Labs, the patent signifies development of a new technology that will generate
an invisible marking system with attributes currently unavailable in the anti-counterfeit marketplace today. The formula and techniques
have been shown through extensive testing to be resilient to manufacturing processes and can be used on a wide range of materials from
woven and non-woven fabrics, cardboard, metal, concrete, plastics, leather, wood, and paper. In addition, the complexity of the information
that can be encoded with the system makes counterfeiting difficult.
ActiveDuty™
SCI’s
ActiveDuty™ data intelligence services offer unique, unprecedented, actionable technology for industries, companies, and agencies
on a global scale. Comprised of a suite of powerful analytical tools, including artificial intelligence and social-psychology, the service
provides timely and actionable intelligence to clients. ActiveDuty™ is adaptable to a broad spectrum of illicit activities within
both private and public sectors such as, but not limited to, counterfeiting, sex and human trafficking, money laundering, and a variety
of other markets.
The
proprietary algorithmic architecture of ActiveDuty™ creates the first systemic reporting mechanism to deliver strategic and tactical
results supported by an intense worldwide analysis of patterns of human behavior. The ActiveDuty™ global framework is heuristic
in nature, capable of comprehending big data across the digital spectrum and speaks all the major languages. Up until now, there has
not existed a unified system that could actively measure this lifecycle that is a collection of discreet and seemingly random behaviors
of criminals anywhere within the digital domain. Criminals change their identities but not their basic behaviors.
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.
Inflation
Risk
The
Company does not believe that inflation has had a material effect on its operations to date, other than its impact on the general economy.
However, there is a risk that the Company’s operating costs could become subject to inflationary pressures in the future, which
would have the effect of increasing the Company’s operating costs, and which would put additional stress on the Company’s
working capital resources.
Analysis
of Financial Condition and Results of Operations
Results
of Operations for the three months ended June 30, 2022 compared to the three months ended June 30, 2021.
Revenue
and Cost of Goods Sold
Revenue
for the three months ended June 30, 2022 and 2021 was $107,500 and $78,620, respectively. The increase in revenue in 2022 related to
the increase in revenues at PSI due to the roll-out of their new Aurora medical device. Cost of sales for the three months ended June
30, 2022 and 2021 was $10,400, respectively. Gross profit for the three months ended June 30, 2022 and 2021 was $97,100 and $68,220,
respectively. The reason for the increase in gross profit in 2022 was due to increased sales at PSI.
Operating
Expenses
Operating
expenses for the three months ended June 30, 2022 and 2021 were $430,227 and $272,666, respectively. The increase in operating expenses
in 2022 was due primarily to the increase in stock-related compensation.
Other
Expenses
Other
expenses during the three months ended June 30, 2022 totaled $408,541, and consisted of $51,166 of interest expense, $4,375 of
debt discount amortization, and $353,000 of financing costs. Other expenses during the three months ended June 30, 2021 consisted of $36,230 of
interest expense.
Net
Loss
Our
net loss for the three months ended June 30, 2022 was $741,668, compared to a net loss of $240,676 for the three months ended June 30,
2021. The increase in the net loss in 2022 was primarily due to the increase in operating expenses, which primarily related to stock
compensation.
Results
of Operations for the nine months ended June 30, 2022 compared to the nine months ended June 30, 2021.
Revenue
and Cost of Goods Sold
Revenue
for the nine months ended June 30, 2022 and 2021 was $372,042 and $220,769, respectively. The increase in revenue in 2022 related to
the increase in revenues at PSI due to the roll-out of their new Aurora medical device. Cost of sales for the nine months ended June
30, 2022 and 2021 was $46,800 and $149,450, respectively. Gross profit for the nine months ended June 30, 2022 and 2021 was $325,242
and $71,319, respectively. The reason for the increase in gross profit in 2022 was due to increased sales at PSI.
Operating
Expenses
Operating
expenses for the nine months ended June 30, 2022 and 2021 were $1,028,678 and $943,425, respectively. The increase in operating expenses
in 2022 was due primarily to the increase in employee-related costs and stock compensation.
Other
Income (Expenses)
Other
expenses during the nine months ended June 30, 2022 totaled 498,628, and consisted of $137,417 of interest expense, $13,125 of
debt discount amortization, $353,000 of financing costs, offset by a gain of $4,914 on the settlement of debt. Other expenses during the nine
months ended June 30, 2021 consisted of $94,381 of interest expense.
Net
Loss
Our
net loss for the nine months ended June 30, 2022 was $1,202,064, compared to a net loss of $966,487 for the nine months ended June 30,
2021. The increase in the net loss in 2022 was primarily due to the increase in operating expenses and stock-related compensation.
Results
of Operations by Segment
The
Company currently maintains two business segments:
| (i) | Medical
Devices: which it provided through PSI, its subsidiary acquired on August 24, 2012, a
developer, manufacturer, marketer and distributer of targeted Ultra Violet (“UV”)
phototherapy devices for the treatment of skin diseases; and |
| | | |
| (ii) | Authentication
and Encryption Products and Services: which it provided through SCI, its wholly-owned
subsidiary that on April 4, 2014 acquired certain assets of SMI Holdings, Inc. d/b/a Stealth
Mark, Inc., including Stealth Mark tradenames and marks, and related encryption and authentication
solutions offering advanced product security technologies within the security and supply
chain management vertical sectors. |
The
detailed segment information of the Company is as follows:
Operations
by Segment for the Three Months Ended June 30, 2022 and 2021
| | |
For the Three Months Ended | |
| | |
June 30, 2022 | |
| | |
Corporate | | |
Medical Devices | | |
Authentication and Encryption | | |
Total | |
| | |
| | |
| | |
| | |
| |
| Trade Sales | |
$ | - | | |
$ | 107,500 | | |
$ | - | | |
$ | 107,500 | |
| | |
| | | |
| | | |
| | | |
| | |
| Cost of goods sold | |
| - | | |
| 10,400 | | |
| - | | |
| 10,400 | |
| | |
| | | |
| | | |
| | | |
| | |
| Gross profit | |
| - | | |
| 97,100 | | |
| - | | |
| 97,100 | |
| | |
| | | |
| | | |
| | | |
| | |
| Operating expenses | |
| 105,396 | | |
| 317,313 | | |
| 7,518 | | |
| 430,227 | |
| | |
| | | |
| | | |
| | | |
| | |
| Loss from operations | |
$ | (105,396 | ) | |
$ | (220,213 | ) | |
$ | (7,518 | ) | |
$ | (333,127 | ) |
| | |
For the Three Months Ended | |
| | |
June 30, 2021 | |
| | |
WCUI | | |
PSI | | |
Stealthco | | |
| |
| | |
Corporate | | |
Medical Devices | | |
Authentication and Encryption | | |
Total | |
| | |
| | |
| | |
| | |
| |
| Trade Sales | |
$ | - | | |
$ | 78,620 | | |
$ | - | | |
$ | 78,620 | |
| | |
| | | |
| | | |
| | | |
| | |
| Cost of goods sold | |
| - | | |
| 10,400 | | |
| - | | |
| 10,400 | |
| | |
| | | |
| | | |
| | | |
| | |
| Gross profit | |
| - | | |
| 68,220 | | |
| - | | |
| 68,220 | |
| | |
| | | |
| | | |
| | | |
| | |
| Operating expenses | |
| 42,849 | | |
| 226,575 | | |
| 3,242 | | |
| 272,666 | |
| | |
| | | |
| | | |
| | | |
| | |
| Loss from operations | |
$ | (42,849 | ) | |
$ | (158,355 | ) | |
$ | (3,242 | ) | |
$ | (204,446 | ) |
Revenue
for the Medical Devices segment for the three months ended June 30, 2022 and 2021 was $107,500 and $78,620, respectively. The increase
in 2022 was due to the increase in trade sales. Cost of goods sold for the three months ended June 30, 2022 and 2021 was $10,400, respectively,
and the gross profit was $97,100 and $68,220, respectively. Operating expenses for the three months ended June 30, 2022 and 2021 was
$317,313 and $226,575, respectively. The increase in operating expenses in 2022 was primarily due to the increase in employee-related
costs and contract labor. The loss from operations for the three months ended June 30, 2022 and 2021 was $220,213 and $158,355, respectively.
There
was no revenue or cost of goods sold for the Authentication and Encryption segment for the three months ended June 30, 2022 and 2021.
Operating expenses for the three months ended June 30, 2022 and 2021 was $7,518 and $3,242, respectively. The increase in operating expenses
in 2022 was primarily due to the increase in miscellaneous costs. The loss from operations for the three months ended June 30, 2022 and
2021 was $7,518 and $3,242, respectively.
The
Corporate segment primarily provides executive management services for the Company. Operating expenses for the three months ended June
30, 2022 and 2021 was $458,396 and $42,849, respectively. The increase in operating expenses in 2022 was primarily due to the increase
in stock compensation. The loss from operations for the three months ended June 30, 2022 and 2021 was $458,396 and $42,849, respectively.
Operations
by Segment for the Nine Months Ended June 30, 2022 and 2021
| | |
For the Nine Months Ended | |
| | |
June 30, 2022 | |
| | |
Corporate | | |
Medical Devices | | |
Authentication and Encryption | | |
Total | |
| | |
| | |
| | |
| | |
| |
| Trade Sales | |
$ | - | | |
$ | 372,042 | | |
$ | - | | |
$ | 372,042 | |
| | |
| | | |
| | | |
| | | |
| | |
| Cost of goods sold | |
| - | | |
| 46,800 | | |
| - | | |
| 46,800 | |
| | |
| | | |
| | | |
| | | |
| | |
| Gross profit | |
| - | | |
| 325,242 | | |
| - | | |
| 325,242 | |
| | |
| | | |
| | | |
| | | |
| | |
| Operating expenses | |
| 208,518 | | |
| 806,657 | | |
| 13,503 | | |
| 1,028,678 | |
| | |
| | | |
| | | |
| | | |
| | |
| Loss from operations | |
$ | (208,518 | ) | |
$ | (481,415 | ) | |
$ | (13,503 | ) | |
$ | (703,436 | ) |
| | |
For the Nine Months Ended | |
| | |
June 30, 2021 | |
| | |
WCUI | | |
PSI | | |
Stealthco | | |
| |
| | |
Corporate | | |
Medical Devices | | |
Authentication and Encryption | | |
Total | |
| | |
| | |
| | |
| | |
| |
| Trade Sales | |
$ | - | | |
$ | 220,769 | | |
$ | - | | |
$ | 220,769 | |
| | |
| | | |
| | | |
| | | |
| | |
| Cost of goods sold | |
| - | | |
| 149,450 | | |
| - | | |
| 149,450 | |
| | |
| | | |
| | | |
| | | |
| | |
| Gross profit | |
| - | | |
| 71,319 | | |
| - | | |
| 71,319 | |
| | |
| | | |
| | | |
| | | |
| | |
| Operating expenses | |
| 138,619 | | |
| 791,589 | | |
| 13,217 | | |
| 943,425 | |
| | |
| | | |
| | | |
| | | |
| | |
| Loss from operations | |
$ | (138,619 | ) | |
$ | (720,270 | ) | |
$ | (13,217 | ) | |
$ | (872,106 | ) |
Revenue
for the Medical Devices segment for the nine months ended June 30, 2021 was $372,042 and $220,769, respectively. The increase in 2022
was due to the increase in trade sales. Cost of goods sold for the nine months ended June 30, 2022 and 2021 was $46,800 and $149,450,
respectively, and the gross profit was $325,242 and $71,319, respectively. The increase in gross profit in 2022 was primarily due to
the increase in sales. Operating expenses for the nine months ended June 30, 2022 and 2021 was $806,657 and $791,589, respectively. The
increase in operating expenses in 2022 was primarily due to the increase in employee-related costs and contract labor. The loss from
operations for the nine months ended June 30, 2022 and 2021 was $481,415 and $720,270, respectively.
There
was no revenue or cost of goods sold for the Authentication and Encryption segment for the nine months ended June 30, 2022 and 2021.
Operating expenses for the nine months ended June 30, 2022 and 2021 was $13,503 and $13,217, respectively. There was no significant change
in operating expenses during the two periods. The loss from operations for the nine months ended June 30, 2021 and 2020 was $13,503 and
$13,217, respectively.
The
Corporate segment primarily provides executive management services for the Company. Operating expenses for the nine months ended June
30, 2022 and 2021 was $561,518 and $138,619, respectively. The increase in operating expenses in 2022 was primarily due to the increase
in stock-related compensation. The loss from operations for the nine months ended June 30, 2022 and 2021 was $561,518 and $138,619, respectively.
Liquidity
and Capital Resources
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, 2022, the Company incurred a net loss of $1,202,064 and used cash in
operations of $735,634, and had a shareholders’ deficit of $3,998,537 as of June 30, 2022. In addition, loans payable of
$1,907,250 and payroll taxes of $62,334 are past due. These factors raise substantial doubt about the Company’s ability to
continue as a going concern within one year after the date the financial statements are issued. In addition, the Company’s independent
registered public accounting firm, in its report published on our September 30, 2021 year-end financial statements, raised 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.
At
June 30, 2022, the Company had cash on hand in the amount of $42,045. 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, 2022, the Company received $601,000 through short-term loans from officers and shareholders and $304,600 from a U.S. SBA
loan payable.
No
assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to
the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the
case of debt financing or cause substantial dilution for our stockholders, in case of equity financing.
Comparison
of nine months ended June 30, 2022 and 2021
As
of June 30, 2022, we had $42,045 in cash, negative working capital of $3,693,937 and an accumulated deficit of $29,321,882.
As
of June 30, 2021, we had $41,799 in cash, negative working capital of $3,010,102 and an accumulated deficit of $28,130,835
Cash
flows used in operating activities
During
the nine months ended June 30, 2022, the Company used cash flows in operating activities of $735,634, compared to $760,521 used in the
nine months ended June 30, 2021. During the nine months ended June 30, 2022, the Company incurred a net loss of $1,202,064 and $558,086
of non-cash expenses, compared to a net loss of $966,487 and $255,725 of non-cash expenses during the nine months ended June 30, 2021.
Cash
flows used in investing activities
During
the nine months ended June 30, 2022 and 2021, the Company had no cash flows from investing activities.
Cash
flows provided by financing activities
During
the nine months ended June 30, 2022, the Company had proceeds from loans payable from officers and shareholders of $601,000 and $304,600
from a U.S. SBA loan payable, and repaid $160,000 of its loans payable from officers and shareholders. During the nine months ended June
30, 2021, the Company had proceeds from loans payable from officers and shareholders of $751,000.
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, 2021, filed with the Securities and Exchange Commission on February 15, 2022. There have been no material
changes to the Company’s critical accounting policies that impact the Company’s financial condition, results of operations
or cash flows for the nine months ended June 30, 2022.
Recently
Issued Accounting Pronouncements
See
Management’s discussion of recent accounting policies included in footnote 2 to the condensed consolidated financial statements.