UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For
the quarterly period ended
For the transition period from ___________ to ___________
(Name of small business issuer in its charter)
(State or other jurisdiction of incorporation or organization) |
Commission File Number |
(IRS Employee Identification No.) |
(Address of Principal Executive Offices)
(Issuer Telephone number)
(Former name or former address, if changed since last report)
Securities registered under Section 12(b) of the Exchange Act:
| Title of each class registered: | Name of each exchange on which registered: | |
| None | None |
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.001
(Title of class)
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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).
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 ☐ | Smaller
Reporting Company |
| 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
☐
The number of shares issued and outstanding of each of the issuer’s classes of common equity as of December 31, 2021 was .
FORM 10-Q
WELLNESS CENTER USA, INC.
DECEMBER 31, 2021
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 | 16 |
| Item 3 | Quantitative and Qualitative Disclosures About Market Risk | 22 |
| Item 4. | Control and Procedures | 22 |
| PART II— OTHER INFORMATION | ||
| Item 1 | Legal Proceedings | 23 |
| Item 1A | Risk Factors | 24 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 24 |
| Item 3. | Defaults Upon Senior Securities | 24 |
| Item 4. | Mine Safety Disclosures. | 24 |
| Item 5. | Other Information | 24 |
| Item 6. | Exhibits | 24 |
| SIGNATURE | 25 | |
| 2 |
Wellness Center USA, Inc.
Condensed Consolidated Balance Sheets
| December 31, | September 30, | |||||||
| 2021 | 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | - | |||||||
| Inventories, net | ||||||||
| Total Current Assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Payroll taxes payable, past due | ||||||||
| Lease abandonment liability | ||||||||
| Loans payable from officers and shareholders, including $ | ||||||||
| Total Current Liabilities | ||||||||
| Shareholders’ Deficit | ||||||||
| Common stock, par value $, shares authorized; and shares issued and outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Wellness Center USA shareholders’ deficit | ( | ) | ( | ) | ||||
| Non-controlling interest | ( | ) | ( | ) | ||||
| Total Shareholder’s deficit | ( | ) | ( | ) | ||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT | $ | $ | ||||||
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 | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| (Unaudited) | ||||||||
| Trade sales | $ | $ | ||||||
| Cost of goods sold | ||||||||
| Gross profit | ||||||||
| Operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other expenses: | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Amortization of debt discount | ( | ) | - | |||||
| Total other expenses | ( | ) | ( | ) | ||||
| NET LOSS | ( | ) | ( | ) | ||||
| Net loss attributable to non-controlling interest | ||||||||
| NET LOSS ATTRIBUTABLE TO WELLNESS CENTER USA, INC. | $ | ( | ) | $ | ( | ) | ||
| BASIC AND DILUTED LOSS PER SHARE | $ | ( | ) | $ | ( | ) | ||
| WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING BASIC AND DILUTED | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
Wellness Center USA, Inc.
Condensed Consolidated Statements of Shareholders’ Deficit (Unaudited)
| Common Stock | Additional Paid-in | Accumulated | Total WCUI | Non-controlling | ||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | Interest | Total | ||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||
| Fair value of common stock issued for services to officers and directors | - | - | ||||||||||||||||||||||||||
| Net loss for the three months ended December 31, 2021 | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance, December 31, 2021 (unaudited) | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||
| Fair value of vested stock options | - | - | - | - | ||||||||||||||||||||||||
| Fair value of common stock issued for services to officers and directors | - | - | ||||||||||||||||||||||||||
| Net loss for the three months ended December 31, 2020 | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance, December 31, 2020 (unaudited) | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
Wellness Center USA, Inc.
Condensed Consolidated Statements of Cash Flows
| Three Months Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| (Unaudited) | ||||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization of right-of-use asset | - | |||||||
| Amortization of debt discount | - | |||||||
| Provision for excess and slow moving inventories | - | |||||||
| Fair value of common shares issued for services | ||||||||
| Fair value of stock options issued for services | - | |||||||
| Changes in Assets and Liabilities | ||||||||
| (Increase) Decrease in: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ||||||
| (Decrease) Increase in: | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Payroll taxes payable | ( | ) | ( | ) | ||||
| Lease liability | - | ( | ) | |||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from loans payable from officers and shareholders | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash beginning of period | ||||||||
| Cash end of period | $ | $ | ||||||
| Supplemental cash flows disclosures: | ||||||||
| Interest paid | $ | $ | ||||||
| Taxes paid | $ | $ | ||||||
| Supplemental non-cash disclosures: | ||||||||
| Initial recognition of right-of-use assets and operating lease | ||||||||
| Initial recognition of right-of-use assets and operating lease liabilities upon adoption of ASC Topic 842 | $ | $ | ||||||
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 THREE MONTHS ENDED DECEMBER 31, 2021 AND 2020
NOTE 1 – BASIS OF PRESENTATION
Organization and Operations
Wellness Center USA, Inc. (“WCUI” or the “Company”) was incorporated in June 2010 under the laws of the State of Nevada. The Company initially engaged in online sports and nutrition supplements marketing and distribution. The Company subsequently expanded into additional businesses within the healthcare and medical sectors through acquisitions, including Psoria-Shield Inc. (“PSI”) and StealthCo Inc. (“SCI”), d/b/a Stealth Mark, Inc.
The Company currently operates in the following business segments: (i) distribution of targeted 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 three months ended December 31, 2021 are not necessarily indicative of the results that may be expected for the year ending September 30, 2022.
COVID-19 Considerations
During the three months ended December 31, 2021, the COVID-19 pandemic did not have a material net impact on our operating results. In the future, the pandemic may cause reduced demand for our products if, for example, the pandemic results in a recessionary economic environment which negatively effects the 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 December 31, 2021, the COVID-19 pandemic has not negatively impacted the Company’s liquidity position as of such date. Through December 31, 2021, the Company continues to generate cash flows through financing activities to meet its short-term liquidity needs, and it expects to maintain access to those shareholder loans. The Company has not observed any material impairments of its assets or a significant change in the fair value of its assets due to the COVID-19 pandemic.
Going Concern
The
accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying condensed
consolidated financial statements, the Company has not yet generated significant revenues and has incurred recurring net losses. During
the three months ended December 31, 2021, the Company incurred a net loss of $
| 7 |
At
December 31, 2021, the Company had cash on hand in the amount of $
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 wholly owned subsidiaries and the accounts of its subsidiaries for which it was determined that Company has operational and management control. The Company’s consolidated subsidiaries and/or entities are as follows:
| Name of consolidated subsidiary or entity | State or other jurisdiction of incorporation or organization | Date of incorporation or formation (date of acquisition/disposition, if applicable) | Attributable interest at December 31, 2021 | |||||
| % | ||||||||
| % | ||||||||
| % | ||||||||
All intercompany transactions are eliminated upon Consolidation. The non-controlling interests of our subsidiaries where we have operational control have been segregated on the accompanying financial statements.
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.
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 three months ended December 31, 2021 and 2020, the basic and diluted shares outstanding were the same, as potentially dilutive shares were considered anti-dilutive. At December 31, 2021 and 2020, the dilutive impact of outstanding stock options of and shares, respectively, and outstanding warrants for and shares, respectively, have been excluded because their impact on the loss per share is anti-dilutive.
| 8 |
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 three months ended December 31, 2021 and 2020, all of the Company’s products were sold through its Direct Channel.
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 the Company has significant performance obligations
for services still to be completed. The Company recognizes 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
Inventories
Inventories
are stated at the lower of cost or net realizable value. Cost is computed on a first-in, first-out basis. At December 31, 2021, primarily
all of the inventories consisted of raw materials or work-in-progress. The Company provides inventory reserves based on excess and obsolete
inventories determined primarily by future demand forecasts. The write down amount, if any, is measured as the difference between the
cost of the inventory and net realizable value based upon assumptions about future demand and charged to the provision for inventory,
which is a component of cost of sales. At the point of the loss recognition, a new, lower cost basis for that inventory is established,
and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
At December 31, 2021 and September 30, 2021, the Company recorded a reserve of $
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.
| 9 |
Recent 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 $
During
the year ended September 30, 2021, in connection with a loan in the amount of $
| 10 |
NOTE 4 – LEASE LIABILITIES
Lease settlement 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 $
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 $
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 $
An
initial payment of $
As
of December 31, 2021, the Company has recorded a lease settlement liability of $
NOTE 5 – SHAREHOLDERS’ EQUITY
Restricted Stock Grants to Officers and Directors
| Number of Restricted Shares | Fair Value | Weighted Average Grant Date Fair Value | ||||||||||
| Non-vested, September 30, 2021 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Vested | ( | ) | ( | ) | ||||||||
| Forfeited | ||||||||||||
| Non-vested, December 31, 2021 | $ | $ | ||||||||||
During the three months ended December 31, 2021, the Company recorded $ of stock compensation for the value of vested restricted common stock, and as of December 31, 2021, unvested compensation of $ remained that will be amortized over the remaining vesting period, through March 2024.
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 restricted shares of the Company’s common stock to its Officers and Directors, all of which will only be issued upon the sale or merger of the Company. No stock compensation was recorded relating to that grant as management feels it is a remote possibility that a sale or merger of the Company will happen within the next twelve months. The Company will account for the shares once they are granted to its Officers and Directors.
| 11 |
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 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 to .
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.
| Number of Option Shares | Exercise Price Range Per Share | Weighted Average Exercise Price | ||||||||||
| Balance, September 30, 2021 | $ - | $ | ||||||||||
| Granted | ||||||||||||
| Cancelled | ||||||||||||
| Exercised | ||||||||||||
| Expired | ( | ) | ||||||||||
| Balance, December 31, 2021 | $ - | $ | ||||||||||
| Vested and exercisable, December 31, 2021 | $ - | $ | ||||||||||
| Unvested, December 31, 2021 | $ | $ | ||||||||||
| 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 | ||||||||||||||||||||
| $ | - | $ | $ | |||||||||||||||||||||||
| $ | - | $ | $ | |||||||||||||||||||||||
During the three months ended December 31, 2021, stock compensation was recorded for the value of options vesting during the period, and as of December 31, 2021, unvested compensation remained that will be amortized over the remaining vesting period.
As of December 31, 2021, there were shares of stock options remaining available for issuance under the 2010 Plan. There was no aggregate intrinsic value for option shares outstanding at December 31, 2021.
| 12 |
Stock Warrants
The table below summarizes the Company’s warrants activities for the three months ended December 31, 2021:
Number of Warrant Shares | Exercise Price Range Per Share | Weighted Average Exercise Price | ||||||||||
| Balance, September 30, 2021 | $ | - | $ | |||||||||
| Granted | ||||||||||||
| Cancelled | ||||||||||||
| Exercised | ||||||||||||
| Expired | ( | ) | ||||||||||
| Balance, December 31, 2021 | $ | - | $ | |||||||||
| Vested and exercisable, December 31, 2021 | $ | - | $ | |||||||||
The following table summarizes information concerning outstanding and exercisable warrants as of December 31, 2021:
| 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 | ||||||||||||||||||||
| $ | – | $ | $ | |||||||||||||||||||||||
| – | ||||||||||||||||||||||||||
| $ | – | $ | $ | |||||||||||||||||||||||
There was aggregate intrinsic value for warrant shares outstanding at December 31, 2021.
NOTE 6 – SEGMENT REPORTING
Reportable segments are components of an enterprise about which separate financial information is available and that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
The Company operates in the following business segments:
(i) Medical Devices: which stems from PSI, its 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.
| 13 |
The detailed segment information of the Company is as follows:
Assets By Segment
| December 31, 2021 | ||||||||||||||||
| Corporate | Medical Devices | Authentication and Encryption | Total | |||||||||||||
| ASSETS | ||||||||||||||||
| Current Assets | ||||||||||||||||
| Cash | $ | $ | $ | | $ | |||||||||||
| Accounts receivable | ||||||||||||||||
| Inventories | ||||||||||||||||
| Total current assets | ||||||||||||||||
| TOTAL ASSETS | $ | $ | $ | $ | ||||||||||||
Operations by Segment for the Three Months Ended December 31, 2021 and 2020
| For the Three Months Ended | ||||||||||||||||
| December 31, 2021 | ||||||||||||||||
| Corporate | Medical Devices | Authentication and Encryption | Total | |||||||||||||
| Trade Sales | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| For the Three Months Ended | ||||||||||||||||
| December 31, 2020 | ||||||||||||||||
| Corporate | Medical Devices | Authentication and Encryption | Total | |||||||||||||
| Trade Sales | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| 14 |
NOTE 7 – LEGAL MATTERS
The Company is periodically engaged in legal proceedings arising from and relating to its business operations. Except as otherwise described herein, 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 $
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 $
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 $
NOTE 8 – SUBSEQUENT EVENTS
Subsequent
to December 31, 2021, the Company borrowed $
On
October 6, 2021, the Company and a former landlord (“HHE”) agreed to a settlement agreement providing, among other things,
that HHE will provide the Company a satisfaction of the judgment upon the payment by the Company of $
In
February 2022, the Company entered into a loan agreement with the U.S Small Business Association (SBA) in the amount of $
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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. 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.
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Joint Ventures
PSI
In December 2018, PSI entered into a Joint Venture Agreement with GEN2 for further development, marketing, licensing and/or sale of PSI technology and products to be conducted through NEO Phototherapy, Inc. (“NEO”). PSI and GEN2 were the members of NEO, owning 50.5% and 36.0%, respectively. As of April 30, 2020, the Company controlled 51% of the joint venture, GEN2 controlled 39% and another individual controlled the remaining 10%.
Effective April 30, 2020, the joint venture with GEN2 was reorganized. GEN2 shareholders exchanged their common shares in GEN2, and the individual exchanged his membership interests in NEO, for common shares representing 49% ownership in PSI. The Company retained its common shares in PSI, which provides the Company a 51% economic interest in the PSI technology and products developed by the joint venture. During the three months ended December 31, 2021, PSI recorded a loss of $123,909 relating to its operations, of which $60,716 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 three 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 three months ended December 31, 2021, Protec recorded a loss of $3,262, of which $2,231 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.
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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™).
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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.
Analysis of Financial Condition and Results of Operations
Results of Operations for the three months ended December 31, 2021 compared to the three months ended December 31, 2020.
Revenue and Cost of Goods Sold
Revenue for the three months ended December 31, 2021 and 2020 was $164,552 and $90,499, respectively. Gross profit for the three months ended December 31, 2021 and 2020 was $138,552 and $10,399, respectively. The increase in revenues and gross profit in 2021 was due to the increase in revenues and gross profit at PSI, as there was no revenue at SCI for each period.
Operating Expenses
Operating expenses for the three months ended December 31, 2021 and 2020 were $287,749 and $308,541, respectively. The decrease in operating expenses in 2021 was due primarily to the slight decrease in operating expenses at PSI, primarily labor-related costs.
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Other Expenses
Other expenses during the three months ended December 31, 2021 and 2020 consisted of $41,587 and $26,158 of interest expense, respectively, and debt discount amortization of $4,375 during the three months ended December 31, 2021.
Net Loss
Our net loss for the three months ended December 31, 2021 was $195,159, compared to a net loss of $324,300 for the three months ended December 31, 2020. The decrease in the net loss in 2021 was primarily due to the increase in sales and gross profit in 2021, and the decrease in operating expenses.
Results of Operations by Segment
The Company currently maintains two business segments:
| (i) | Medical Devices: which it provided through PSI, its wholly-owned subsidiary acquired on August 24, 2012, a developer, manufacturer, marketer and distributer of targeted Ultra Violet (“UV”) phototherapy devices for the treatment of skin diseases; and | |
| (ii) | Authentication and Encryption Products and Services: which it provided through SCI, its wholly-owned subsidiary that on April 4, 2014 acquired certain assets of SMI Holdings, Inc. d/b/a Stealth Mark, Inc., including Stealth Mark tradenames and marks, and related encryption and authentication solutions offering advanced product security technologies within the security and supply chain management vertical sectors. |
The detailed segment information of the Company is as follows:
Operations by Segment for the Three Months Ended December 31, 2021 and 2020
| For the Three Months Ended | ||||||||||||||||
| December 31, 2021 | ||||||||||||||||
| Corporate | Medical Devices | Authentication and Encryption | Total | |||||||||||||
| Trade Sales | $ | - | $ | 164,552 | $ | - | $ | 164,552 | ||||||||
| Cost of goods sold | - | 26,000 | - | 26,000 | ||||||||||||
| Gross profit | - | 138,552 | - | 138,552 | ||||||||||||
| Operating expenses | 39,990 | 244,964 | 2,795 | 287,749 | ||||||||||||
| Loss from operations | $ | (39,990 | ) | $ | (106,412 | ) | $ | (2,795 | ) | $ | (149,197 | ) | ||||
| For the Three Months Ended | ||||||||||||||||
| December 31, 2020 | ||||||||||||||||
| Corporate | Medical Devices | Authentication and Encryption | Total | |||||||||||||
| Trade Sales | $ | - | $ | 90,499 | $ | - | $ | 90,499 | ||||||||
| Cost of goods sold | - | 80,100 | - | 80,100 | ||||||||||||
| Gross profit | - | 10,399 | - | 10,399 | ||||||||||||
| Operating expenses | 49,109 | 256,471 | 2,961 | 308,541 | ||||||||||||
| Loss from operations | $ | (49,109 | ) | $ | (246,072 | ) | $ | (2,961 | ) | $ | (298,142 | ) | ||||
Revenue for the Medical Devices segment for the three months ended December 31, 2021 and 2020 was $164,552 and $90,499, respectively. The increase in sales in 2021 was due to the launch of PSI’s new FDA approved medical device named Aurora. Gross profit during the three months ended December 31, 2021 and 2020 was $138,552 and $10,399, respectively. Operating expenses for the three months ended December 31, 2021 and 2020 was $244,964 and $256,471, respectively. The decrease in operating expenses in 2021 was primarily due to the decrease in labor-related costs. The loss from operations for the three months ended December 31, 2021 and 2020 was $106,412 and $246,072, respectively.
There was no revenue or cost of sales for the Authentication and Encryption segment for the three months ended December 31, 2021 and 2020. Operating expenses for the three months ended December 31, 2021 and 2020 was $2,795 and $2,961, respectively. The loss from operations for the three months ended December 31, 2021 and 2020 was $2,795 and $2,961, respectively.
The Corporate segment primarily provides executive management services for the Company. Operating expenses for the three months ended December 31, 2021 and 2020 was $39,990 and $49,109, respectively. The decrease in operating expenses in 2021 was due primarily to the decrease in professional fees. The loss from operations for the three months ended December 31, 2021 and 2020 was $39,990 and $49,109, respectively.
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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 three months ended December 31, 2021, the Company incurred a net loss of $195,159 and used cash in operations of $68,119, and had a shareholders’ deficit of $3,497,757 as of December 31, 2021. In addition, loans payable of $1,451,250 and payroll taxes of $71,334 are past due. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its strategies. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
At December 31, 2021, the Company had cash on hand in the amount of $15,960. 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 three months ended December 31, 2021, the Company received $52,000 through short-term loans from officers and shareholders.
No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stockholders, in case of equity financing.
Comparison of three months ended December 31, 2021 and 2020
As of December 31, 2021, we had $15,960 in cash, negative working capital of $3,497,757 and an accumulated deficit of $28,521,841.
As of December 31, 2020, we had $78,523 in cash, negative working capital of $2,465,785 and an accumulated deficit of $27,764,061.
Cash flows used in operating activities
During the three months ended December 31, 2021, the Company used cash flows in operating activities of $68,119, compared to $267,797 used in the three months ended December 31, 2020. During the three months ended December 31, 2021, the Company incurred a net loss of $195,159 and $48,125 of non-cash expenses, compared to a net loss of $324,300 and $107,885 of non-cash expenses during the three months ended December 31, 2020.
Cash flows used in investing activities
During the three months ended December 31, 2021 and 2020, the Company had no cash flows from investing activities.
Cash flows provided by financing activities
During the three months ended December 31, 2021, the Company had proceeds from loans payable from officers and shareholders of $52,000. During the three months ended December 31, 2020, the Company had proceeds from loans payable from officers and shareholders of $295,000.
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 three months ended December 31, 2021.
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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 2201) 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.
We have identified material weaknesses in our disclosure controls and procedures and internal control over financial reporting.
Maintaining effective internal control over financial reporting and effective disclosure controls and procedures are necessary for us to produce reliable financial statements. We have evaluated our internal control over financial reporting and our disclosure controls and procedures and concluded that they were not effective as of December 31, 2021.
A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses we identified are (i) The Company does not have an independent audit committee; (ii) the Company does not have written documentation of its internal control policies and procedures; (iii) The Company does not have sufficient segregation of duties within its accounting functions; (iv) The Company has insufficient full-time personnel with an appropriate level of current U.S. GAAP and SEC reporting requirements to timely meet regulatory filing requirements, and (v) The Company had ineffective controls over our financial statement close and reporting process and did not provide reasonable assurance that accounts were complete and accurate and agreed to detailed support and that reconciliations of accounts were properly performed, reviewed and approved.
The Company is committed to remediating its material weaknesses as promptly as possible. However, there can be no assurance as to when these material weaknesses will be remediated or that additional material weaknesses will not arise in the future. Even effective internal control can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. Any failure to remediate the material weaknesses, or the development of new material weaknesses in our internal control over financial reporting, could result in material misstatements in our financial statements, which in turn could have a material adverse effect on our financial condition and the trading price of our common stock and we could fail to meet our financial reporting obligations. We have identified weaknesses in our internal controls, and we cannot provide assurances that these weaknesses will be effectively remediated or that additional material weaknesses will not occur in the future.
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If not remediated, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our financial statements and a failure to meet our reporting and financial obligations, each of which could have a material adverse effect on our financial condition and the trading price of our common stock.
Changes in internal control over financial reporting.
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15 (f) under the Exchange Act) during the three months ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is periodically engaged in legal proceedings arising from and relating to its business operations. 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. Upon payment of the settlement, Papadopoulos will provide the Company with a satisfaction of judgment. Subsequent to December 31, 2021, the Company made the initial payment of $15,000.
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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 | Inline XBRL Instance Document** | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema** | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase** | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase** | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase** | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase** | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* 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.
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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: March 31, 2022 | 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: March 31, 2022 | 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 | March 31, 2022 | ||
| Calvin O’Harrow | ||||
| /s/ Douglas W. Samuelson | Chief Financial Officer and Principal Accounting Officer | March 31, 2022 | ||
| Douglas W. Samuelson | ||||
| /s/ Paul D. Jones | Director, President | March 31, 2022 | ||
| Paul D. Jones | ||||
| /s/ Thomas E. Scott | Director, Secretary | March 31, 2022 | ||
| Thomas E. Scott | ||||
| /s/ William E. Kingsford | Director |
March 31, 2022 | ||
| William E. Kingsford | ||||
| /s/ Roy M. Harsch | Director, Chairman | March 31, 2022 | ||
| Roy M. Harsch |
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