10-Q 1 sector.htm 10Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
⌧
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED December 31, 2019
 
 
□
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________
 

SECTOR 10, Inc.
 (Exact name of small business issuer as specified in its charter)
 
Delaware
000-24370
33-0565710
(State or other jurisdiction of incorporation)
(Commission File No.)
(IRS Employer Identification No.)

222 South Main Street, 5th Floor
Salt Lake City, UT 84101
 (Address of principal executive offices, including zip code)

Issuer’s telephone number, including area code (206) 853-4866

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧  No □.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes □ No ⌧

As of February 10, 2020 the issuer had 305,778 shares of common stock outstanding.

Transitional Small Business Disclosure Format (check one): Yes □ No ⌧

TABLE OF CONTENTS

Sector 10, Inc.

 Part I. Financial Information
 
 
 
Item 1.
Unaudited Consolidated Financial Statements
  
 
 
 
 
Unaudited Condensed Consolidated Balance Sheets  as of December 31, 2019  and  March 31, 2019
3
 
 
 
 
Unaudited Condensed Consolidated Statements of Operations for the three months and  nine months ended December 31, 2019 and 2018 and for the period from inception, September 16, 2002 to December 31, 2019
4
 
 
 
 
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2019 and 2018 and for the period from inception, September 16, 2002, to December 31, 2019.
5
 
 
 
 
Notes to the Unaudited Consolidated Financial Statements
 6
     
Item 2.
Management’s Discussion and Analysis or Plan of Operation
9
 
 
 
Item 3
 Quantitative and Qualitative Disclosures about Market Risk
13
     
Item 4.
Controls and Procedures
13
 
 
  
Part II. Other Information
 
Item 1.
Legal Proceedings
14
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
14
 
 
 
Item 3.
Defaults Upon Senior Securities
14
 
 
  
Item 4.
Submission of Matters to a Vote of Security Holders
14
 
 
  
Item 5.
Other Information
14
 
 
  
Item 6.
Exhibits
15
     
 
Signatures
15
 
2
Item 1. FINANCIAL STATEMENTS

The financial statements, related notes and the other information included in this report have not been reviewed by the Company’s outside accountant prior to the filing of this report.

Sector 10, Inc.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

   
December 31,
2019
    
March 31,
2019
  
ASSETS
  
(Unaudited)
    
(Unaudited)
  
Current assets:
            
Cash
  
$
-
    
$
-
  
Inventory, net
    
-
      
-
  
Total current assets
    
-
      
-
  
 
                
Fixed assets –cost
    
22,250
      
22,250
  
Less: accumulated depreciation
    
(22,250
)
    
(22,250
)
Net fixed assets
    
-
      
-
  
Total assets
  
$
-
    
$
-
  
 
                
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
                
Current liabilities:
                
Accounts payable and accrued liabilities
  
$
11,224,844
    
$
10,234,025
  
Note payable - short term
    
803,615
      
803,615
  
Total current liabilities
    
12,028,459
      
11,037,640
  
Long term liabilities:
                
Note payable
    
0
      
-
  
Total long term liabilities
    
0
      
-
  
Total liabilities
    
12,028,459
      
11,037,640
  
Shareholders' equity (deficit)
                
Preferred shares - $0.001 par value; 1,000,000 authorized, no shares issued or outstanding
    
-
      
-
  
Common shares - $0.001 par value; 199,000,000 authorized; 305,778 and 305,778  shares issued and outstanding, respectively
    
306
      
306
  
Additional paid-in-capital
    
6,148,229
      
6,148,229
  
Deficit accumulated during development stage
    
(18,176,994
)
    
(17,186,175
)
Total shareholders' equity (deficit)
    
(12,028,459
)
    
(11,037,640
)
Total liabilities and shareholders' equity (deficit)
  
$
-
      
-
  

The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
Sector 10, Inc.
 (A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended December 31, 2019 and 2018 and
for the Period From Inception, September 16, 2002 to December 31, 2019

   
Three Months Ended
    
Nine Months Ended
    
Inception to
  
   
December 31,
2019
    
December 31,
2018
    
December 31,
2019
    
December 31,
2018
    
December 31,
2019
  
   
(Unaudited)
    
(Unaudited)
    
(Unaudited)
    
(Unaudited)
        
Sales
  
$
-
    
$
-
    
$
-
    
$
-
    
$
18,500
  
Cost of Sales
    
-
      
-
      
-
      
-
      
(18,032
)
Gross Profit
    
-
      
-
      
-
      
-
      
468
  
                                         
Expenses:
                                        
General and administrative
    
198,420
      
208,007
      
601,214
      
623,409
      
14,179,362
  
Depreciation
                                    
24,106
  
Research and development
                                    
226,108
  
Total expenses
    
198,420
      
208,007
      
601,214
      
623,409
      
14,429,576
  
Income (loss) from operations
    
(198,420
)
    
(208,007
)
    
(601,214
)
    
(623,409
)
    
(14,429,108
)
Interest expense
    
(133,252
)
    
(120,052
)
    
(389,605
)
    
(350,006
)
    
(3,117,091
)
Other income (expense)
    
-
      
-
      
-
      
-
      
(630,795
)
Net income (loss) before income taxes
    
(331,672
)
    
(328,059
)
    
(990,819
)
    
(973,415
)
    
(18,176,994
)
Provision for income taxes
    
-
      
-
      
-
      
-
      
-
  
Net income (loss) after income taxes
  
$
(331,672
)
  
$
(328,059
)
  
$
(990,819
)
  
$
(973,415
)
  
$
(18,176,994
)
                                         
                                         
Weighted Average Shares Outstanding - basic and diluted*
    
305,778
      
305,778
      
305,778
      
305,778
          
Basic and diluted income (loss) per share
                                        
Continuing Operations
  
$
(1.08
)
  
$
(1.07
)
  
$
(3.24
)
  
$
(3.18
)
        
                                         
Net Income (Loss)
  
$
(1.08
)
  
$
(1.07
)
  
$
(3.24
)
  
$
(3.18
)
        

The accompanying notes are an integral part of these unaudited consolidated financial statements
4
Sector 10, Inc.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended December 31, 2019and 2018 and
for the Period From Inception, September 16, 2002 to December 31, 2019

   
Nine Months Ended
    
Inception to
  
   
December 31,
2019
    
December 31,
2018
    
December 31,
2019
  
Cash Flows from Operating Activities:
                  
Net Loss
  
$
(990,819
)
  
$
(973,415
)
  
$
(18,176,994
)
Adjustments to reconcile  net loss to net cash used in operating activities:
                        
Stock for services
    
-
      
-
      
5,114,493
  
Depreciation
    
-
      
-
      
24,106
  
Net discount on convertible debt
    
-
      
-
      
206,324
  
Loss due to Impairment / Gain on restructuring
    
-
      
-
      
630,795
  
Changes in:
                        
Inventory and other current assets
    
-
      
-
      
(4,869
)
Accounts payable and accrued liabilities
    
990,819
      
973,415
      
11,738,547
  
Net cash used in operating activities
    
-
      
-
      
(467,598
)
                         
Cash Flows from Investing Activities:
                        
Fixed asset  / Other asset purchases
    
-
      
-
      
(189,541
)
Net cash used in investing activities
    
-
      
-
      
(189,541
)
                         
Cash Flows from Financing Activities:
                        
Net Proceeds from general financing
    
-
      
-
      
737,500
  
Net Proceeds (payments) from shareholder / officers
    
-
      
-
      
(113,947
)
Proceeds from issuance of common stock
    
-
      
-
      
33,586
  
Net cash provided by financing activities
    
-
      
-
      
657,139
  
                         
Net increase (decrease) in cash
    
-
      
-
      
-
  
Beginning of period - continuing operations
    
-
      
-
      
-
  
End of period - continuing operations
  
$
-
    
$
-
    
$
-
  
                         
Cash paid for interest
  
$
-
    
$
-
    
$
24,295
  
Cash paid for income taxes
  
$
-
    
$
-
    
$
-
  

The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
SECTOR 10, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - BASIS OF PRESENTATION

The accompanying unaudited consolidated condensed financial statements of Sector 10, Inc. (“Sector 10” or 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 required by Rule 10-01 of Regulation S-X. They do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation, have been included in the accompanying unaudited consolidated financial statements. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year.

Note 2 – INVENTORY

There were no sales in the nine months ended December 31, 2019.  The inventory reflected on the books was $0 for the nine months ended December 31, 2019. 

Note 3 – NOTES PAYABLE

Johnson Financing

Total interest accrued as of December 31, 2019 was $61,875 of which $7,795 was accrued during the nine month period ended December 31, 2019.

Dutro Financing:

The contingent reserve - interest includes all interest accrued on the Dutro Company note and all interest accrued after July 1, 2010 for the Vicki Davis and William Dutro note.  Interest accrued during the nine month period ended December 31, 2019 was $ 27,169 comprised of Dutro Company - $14,063, Vick Davis - $9,450 and William Dutro - $3,656. Total contingent reserve - interest for the period ended December 31, 2019 is $361,023 comprised of Dutro Company - $195,010, Vick Davis - $119,700 and William Dutro - $46,313.

Employee Agreement:

The financial statements reflect an accrual of interest on unpaid wages and other compensation in the amount of 2,237,197 of which $340,601 is accrued during the nine month period ended December 31, 2019.

Other Notes

Individuals – short term

Total interest accrued as of December 31, 2019 was $90,390 of which $10,140 was accrued during the nine month period ended December 31, 2019.

Asher Enterprises, Inc.

Total interest accrued as of December 31, 2019 was $51,202 of which $3,900 was accrued during the nine month period ended December 31, 2019.  The current period interest is included as part of other notes interest.
6
Summary of Interest and Notes Payable


Interest expense
  
December 31,
2019
    
March 31,
2019
  
             
Interest – Johnson
    
7,795
      
10,394
  
Interest – Dutro Group
    
27,169
      
36,225
  
Interest  - Employee Group
    
340,601
      
408,019
  
Interest – Other Notes
    
14,040
      
18,720
  
    Total interest expense
  
$
389,605
    
$
473,358
  


Note Payable Balance
  
December 31,
2019
    
March 31,
2019
  
             
Edward Johnson – Johnson Financing
  
$
86,615
    
$
86,615
  
Various Individuals – Other Notes
    
169,000
      
169,000
  
Asher Enterprises, Inc. – Other Notes
    
65,000
      
65,000
  
Vicki Davis -  Dutro Group
    
168,000
      
168,000
  
William Dutro – Dutro Group
    
65,000
      
65,000
  
Dutro Company – Dutro Group
    
250,000
      
250,000
  
   Total Note Payable – short term
  
$
803,615
    
$
803,615
  
   Total Note Payable – long term
    
-
    
$
-
  
                 
Total Notes Payable
  
$
803,615
    
$
803,615
  

Debt Maturity Schedule

As of December 31, 2019, the annual maturities for notes payable are scheduled as follows:

Fiscal Year
  
Amount
  
March 31, 2020
  
$
803,615
  
March 31, 2021
  
$
-
  
         
Total
  
$
803,615
  

All interest is due under the terms of the various agreements.  However future interest payments will not be made until all pending litigation is resolved and a satisfactory revised payment arrangement is completed by all parties.

Note 4 – EQUITY

During the Quarter ended: June 30, 2019:

No equity transactions occurred in the period ended June 30, 2019.

During the Quarter ended: September 30, 2019:

No equity transactions occurred in the period ended September 30, 2019.
7
During the Quarter ended: December 31, 2019:

No equity transactions occurred in the period ended December 31, 2019.

Note 5 – GOING CONCERN

The Company generated minimal revenues prior to the current fiscal year.  No revenues were generated for the nine month period ended December 31, 2019. This level of revenues is not sufficient for the Company to meet its future obligations. This factor raises substantial doubt about the Company’s ability to continue as a going concern.

The Company is in the midst of the Dutro litigation and other litigation.  The litigation has hindered the operation of the Company and have set back the ability to raise capital and develop ongoing business in order to continue forward as a going concern. It is expected that litigation will continue to hinder the ability to continue as a going concern through the end of the fiscal year ended March 31, 2020 and beyond.

Note 6 - INCOME TAX

Income taxes are accounted for using the asset and liability method. Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

The Company’s financial statements for the nine month period ended December 31, 2019 and 2018 do not include any provision for income taxes.   No income tax accrual has been recorded based on the expectation that the Company will be in a net loss position for the overall applicable fiscal year. Accordingly, deferred tax assets have been entirely offset by valuation allowances. The difference between the amounts of income tax benefit that would result from applying domestic federal statutory income tax rates to the net loss and the net deferred tax assets is related to certain nondeductible expenses, state income taxes, and the change in the valuation allowance.

The Financial Accounting Standards Board ("FASB") has issued ASC 740 for Accounting for Income Taxes that clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. ASC 740 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. As a result of the implementation of ASC 740, the Company performed a review of its material tax positions in accordance with recognition and measurement standards established by ASC 740.

The Company had no unrecognized tax benefit which would affect the effective tax rate if recognized.

The Company includes interest and penalties arising from the underpayment of income taxes in the consolidated statements of operations in the provision for income taxes.  As of December 31, 2019 the Company had no accrued interest or penalties related to uncertain tax positions.

The Company files income tax returns in the U.S. federal jurisdiction and in the states of Delaware, Utah and any other jurisdiction where required. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2016.
8
Note 7 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events per the requirements of ASC Topic 855 and has determined that the following events should be disclosed.

1)
Litigation involving Dutro Company, Reality Engineering, William Dutro, Vicki Davis, Lee Allen, Valley Inception, LLC, Incisive Software Corporation and Promixex Corporation continues and is expected to continue for the foreseeable future.  In October 2019, the Court, set a trial in this matter.   A jury trial is scheduled for 5 days from May 11, 2020 through May 15, 2020.
   
2)
The Company, its counsel and the defendants met in a Court ordered mediation on February 4, 2020.  No resolution was agreed.  The Company’s Counsel is reviewing various pre-trial legal options and preparing for trial scheduled to begin in May 2020.
   
3)
The impact of the issues surrounding the litigation impact the Company’s ability to obtain funding needed to operate the Company according to their strategic plans.
   
4)
Federal and State authorities have and will continue to be updated on the litigation issues and proceedings

Item 2. Management’s Discussion And Analysis Or Plan Of Operation

This report contains forward-looking statements within the meaning of Section 29a of the Securities Act of 1933, as amended, and Section 21e of the Securities Exchange Act of 1934, as amended. These forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from historical or anticipated results. You should not place undue reliance on such forward-looking statements, and, when considering such forward-looking statements, you should keep in mind the risk factors noted in this report, including the section of this report entitled “Risks Related to Our Business and Operations.” You should also keep in mind that all forward-looking statements are based on management’s existing beliefs about present and future events outside of management’s control and on assumptions that may prove to be incorrect. The following discussion and analysis should be read in conjunction with the Company’s financial statements and notes thereto, which are included elsewhere in this report.

Overview

Sector 10 has developed and seeks to market pre-deployed emergency and disaster response equipment with the world’s first patented Stationary Response Units (SRU) and Mobile Response Units (MRU). Sector 10 has patents issued in the United States and patent applications pending with U.S. and international agencies. Sector 10’s initial SRU and MRU design has been developed, produced, nationally test marketed and sold.

The Company’s cash balance is insufficient to satisfy the Company’s cash requirements for the next 12 months. Due to issues surrounding Dutro Group and other pending litigation, the ability to deliver products to customers has been delayed.  Litigation involving various parties continues and is expected to continue for the foreseeable future.  The impact of the issues surrounding the litigation impact the Company’s ability to obtain funding needed to operate the Company according to their strategic plans.

Going Concern Qualification

Our notes to the financial statements disclose that the cash flow of the Company has been absorbed in operating activities, has incurred net losses for the fiscal year and has a working capital deficiency. Due to the pending litigation and the current restructuring, the Company operations are not likely to produce positive cash flow until at least the end of the fiscal year ended March 31, 2020. These factors raise substantial doubt about our ability to continue as a going concern. Our going concern uncertainty may affect our ability to raise additional capital, and may also affect our relationships with suppliers and customers. Investors should carefully examine our financial statements and read the notes to the financial statements.
9
Results of Operations

Nine Months Ended December 31, 2019 as Compared to the Nine Months Ended December 31, 2018

Revenues -

The Company had no revenues for the nine months ended December 31, 2019.

The Company had no revenues for the nine months ended December 31, 2018.

Other Income-

The Company had no other income for the nine months ended December 31, 2019.

The Company had no other income for the nine months ended December 31, 2018.

Operating Expenses -

The Company had no operating expenses for the nine months ended December 31, 2019.

The Company had no operating expenses for the nine months ended December 31, 2018.

General and Administrative Expenses -

General and administrative expenses were $601,214 for the nine months ended December 31, 2019 which was made up primarily of Wages - $495,000, Payroll tax expense - $49,500, Professional fees – Legal & Accounting - $37,474, Insurance expense - $ 16,743 and other expenses of $2,497.

General and administrative expenses were $623,409 for the nine months ended December 31, 2018 which was made up primarily of Wages - $495,000, Payroll tax expense - $49,500, Professional fees – Legal & Accounting - $60,000, Insurance expense - $ 12,389, Filing fees - $4,410 and other expenses of $2,110.

Depreciation Expense –

Depreciation expense for the nine months ended December 31, 2019 was $0.

Depreciation expense for the nine months ended December 31, 2018 was $0.

Interest Expense –

Interest expense for the nine months ended December 31, 2019 was $389,605.

Interest expense for the nine months ended December 31, 2018 was $350,006.

Three Months Ended December 31, 2019 as Compared to the Three Months Ended December 31, 2018

Revenues -

The Company had no revenues for the three months ended December 31, 2019.

The Company had no revenues for the three months ended December 31, 2018.

10
Other Income-

The Company had no other income for the three months ended December 31, 2019.

The Company had no other income for the three months ended December 31, 2018.

Operating Expenses -

The Company had no operating expenses for the three months ended December 31, 2019.

The Company had no operating expenses for the three months ended December 31, 2018.

General and Administrative Expenses -

General and administrative expenses were $198,420 for the three months ended December 31, 2019 which was made up primarily of Wages - $165,000, Payroll tax expense - $16,500, Professional fees – Legal & Accounting - $11,189, Insurance expense - $5,581 and other expenses of $150.

General and administrative expenses were $208,007 for the three months ended December 31, 2018 which was made up primarily of Wages - $165,000, Payroll tax expense - $16,500, Professional fees – Legal & Accounting - $20,000, Insurance expense - $4,937, Filing Fees - $1,470 and other expenses of $100.

Depreciation Expense –

Depreciation expense for the three months ended December 31, 2019 was $0.

Depreciation expense for the three months ended December 31, 2018 was $0.

Interest Expense –

Interest expense for the three month period ended December 31, 2019 was $133,252.

Interest expense for the three month period ended December 31, 2018 was $120,052.

Liquidity and Capital Resources

As of December 31, 2019, Sector 10 had cash of $0.  This amount is not sufficient to meet the Company’s working capital requirements for the balance of the fiscal year ending March 31, 2020 or for any future period.

Total Assets -

The Company had $0 in total assets as of December 31, 2019.

Working capital -

As of this filing date, the Company is in the process of restructuring its operations in order to raise capital and continue in its efforts to manufacture and distribute its products.  The restructuring is not expected to be completed by the end of the fiscal year ended March 31, 2020.    Potential funding is not expected until litigation efforts are completed.  It is uncertain as to when such litigation will be completed.

Our auditors are of the opinion that our continuation as a going concern is in doubt. Our continuation as a going concern is dependent upon continued financial support from our shareholders and other related parties.
11
Total Liabilities -

Current liabilities as of December 31, 2019 were $12,028,459. The balance was composed of accounts payable and accrued liabilities of $11,224,844 and note payable to outside investors of $803,615.

Long term liabilities as of December 31, 2019 were $0.

Total liabilities as of December 31, 2019 were $12,028,459.

Cash flows -

   
Nine Months
 Ended
    
Nine Months
Ended
  
 
  
December 31,
    
December 31,
  
Sources and Uses of Cash
  
2019
    
2018
  
Net cash provided by / (used in)
            
Operating activities
  
$
-
    
$
-
  
Investing activities
    
-
      
-
  
Financing activities
    
-
      
-
  
 
                
Increase/(decrease) in cash and cash equivalents
  
$
-
    
$
-
  
 
                
Period ended December 31, 2019 and 2018
                
Cash and cash equivalents
  
$
-
    
$
-
  

Operating Activities -

Cash used in operations for the nine months ended December 31, 2019 was $0. Operating activities were affected by net loss – ($990,819) and change in accounts payable and accrued liabilities - $990,819.

Cash used in operations for the nine months ended December 31, 2018 was $0. Operating activities were affected by net loss – ($973,415) and change in accounts payable and accrued liabilities - $973,415.

Investing Activities –

Cash used from investing activities for the nine months ended for December 31, 2019 was $0.

Cash used from investing activities for the nine months ended for December 31, 2018 was $0.

Financing Activities -

Cash provided from financing activities for the nine months ended for December 31, 2019 was $0.

Cash provided from financing activities for the nine months ended for December 31, 2018 was $0.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Risks Related to the Company’s Business and Operations

Investing in the Common Stock involves a high degree of risk. You should carefully consider the risks described below, and all of the other information set forth in this report before deciding to invest in shares of the Company’s common stock. In addition to historical information, the information in this report contains forward-looking statements about the Company’s future business and performance. The Company’s actual operating results and financial performance may be different from what the Company’s management expects as of the date of this report. The risks described in this report represent the risks that the Company’s management has identified and determined to be material to the Company. Additional risks and uncertainties not currently known to the Company’s management, or that the Company’s management currently deems to be immaterial, may also materially harm the Company’s business operations and financial condition.

Going Concern Qualification

Our notes to the financial statements disclose that the Company has generated no revenue or cash flow, has incurred net losses for the fiscal year and has a working capital deficiency. Due to the pending litigation, the Company operations are not likely to produce positive cash flow until at least the end of the fiscal year ended March 31, 2020. These factors raise substantial doubt about our ability to continue as a going concern. Our going concern uncertainty may affect our ability to raise additional capital, and may also affect our relationships with suppliers and customers. Investors should carefully examine our financial statements and read the notes to the financial statements.

Other risk factors to be considered include the following:

•
The Company has not generated revenues and has not executed any significant contracts for the sale of the Company’s products.
   
•
The Company uses outside sources to fulfill contract obligations and has limited control over the provider’s ability to meet the Company obligations.
   
•
The directors, executive officers and principal shareholders of the Company have effective control of the Company, preventing non-affiliate shareholders from significantly influencing the Company’s direction and future.
   
•
The Company relies on outsourced manufacturers for the production of all Sector 10 products.  Litigation is pending regarding the breach of contract by the former outsourced manufacturer and other issues resulting in indefinite delays in production capability and capacity.
   
•
The market for the Company’s stock is thin and subject to manipulation.
   
•
The market price for the Common Stock is volatile and may change dramatically at any time.
   
•
Our business may be affected by increased compensation and benefits costs.
   
•
The Company has not paid dividends and does not anticipate paying dividends in the future.
   
•
The Common Stock is a “low-priced stock” or “penny stock” and subject to regulation that limits or restricts the potential market for the stock.
   
•
Compliance with existing and new regulations of corporate governance and public disclosure may result in additional expenses.

Item 4.  Controls and Procedures

(a)
Based on the evaluation of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) required by paragraph (b) of Rules 13a-15 or 15d-15, the Company’s principal executive officer and principal financial officer concluded that as of December 31, 2019, the Company’s disclosure controls and procedures were effective.
   
(b)
There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

The Company is aware of the following situation regarding litigation, pending or threatened, to which it is a party.

Dutro Group, Dutro Company & Reality Engineering
The Company has filed a claim against the Dutro Group and other defendants to seek relief for the damages incurred by Group’s actions.  The Dutro Group consists of Dutro Company, Reality Engineering, William Dutro, Vicki Davis, Lee Allen, Valley Inception, LLC, Incisive Software Corporation and Promixex Corporation.

The Company seeks relief and recovery from the breach of contract and the breakup and transfer by the parties of the technology which ended up with The ADT Corp (“ADT”) / Tyco Corp (“TYC”) under the label of “Surveillint”.
The litigation has been ongoing for multiple years and is expected to continue at least into the fiscal year ended March 31, 2020 and possibly beyond.

In June 2019, the Company became concerned about the various actions by the legal counsel representing them in the litigation (Pia Anderson Moss Hoyt).  Based on these concerns, the Company engaged the firm of Clyde Snow and Sessions to assist in reviewing the latest activities and provide guidance on alternatives in which to proceed with the Counsel.

On September 3, 2019, the 3rd District Court in Salt Lake allowed Sector 10’s Counsel (Pia Anderson Moss Hoyt) to withdraw from the case and provided the Company until September 17, 2019 to retain new Counsel by 9/17/2019.  On September 17, 2019, the Company formally engaged Dodd & Kuendig of Park City UT as new Counsel in the case.

In October 2019, the Court, set a trial in this matter.   A jury trial is scheduled for 5 days from May 11, 2020 through May 15, 2020.  The Company, its Counsel and the defendants met in a Court ordered mediation on February 4, 2020.  No resolution was agreed.  The Company’s Counsel is reviewing various pre-trial legal options and preparing for trial scheduled to begin in May 2020.

Federal and State authorities have and will continue to be updated on the litigation issues and proceedings.

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

None

Item 3.  Defaults Upon Senior Securities

None

Item 4.  Submission of Matters to a Vote of Security Holders

None

Item 5.  Other Information

None

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Item 6. Exhibits

Exhibit
    
     
31.1
  
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2
  
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
  
Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
  
Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101 INS
  
XBRL Instance Document*
     
101 SCH
  
XBRL Schema Document*
     
101 CAL
  
XBRL Calculation Linkbase Document*
     
101 DEF
  
XBRL Definition Linkbase Document*
     
101 LAB
  
XBRL Labels Linkbase Document*
     
101 PRE
  
XBRL Presentation Linkbase Document*

*  The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
Sector 10, Inc.
 
 
 
 
 
 
 
February 12,  2020
By: /s/ Pericles DeAvila
 
Date
Pericles DeAvila, President
 
 
 
 
February 12, 2020
By: /s/ Laurence A. Madison
 
Date
Laurence A. Madison
Chief Financial Officer
  

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