WELLNESS CENTER USA, INC. 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 theSecurities 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 inJune 2010 under the laws of theState 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, includingPsoria-Shield Inc. ("PSI") andStealthCo Inc. ("SCI"), d/b/aStealth 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 ofFlorida onJune 17, 2009 . We acquired all of the issued and outstanding shares of stock in PSI on August
24, 2012. Joint Ventures
InDecember 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 throughNEO Phototherapy, Inc. ("NEO"). PSI and GEN2 were the members of NEO, owning 50.5% and 36.0%, respectively. As ofApril 30, 2020 , the Company controlled 51% of the joint venture, GEN2 controlled 39% and another individual controlled the remaining 10%. 18
EffectiveApril 30, 2020 , the joint venture with GEN2 was reorganized. GEN2 shareholders exchanged their common shares in GEN2, and the individual exchanged his membership interests in NEO, for common shares representing 49% ownership in PSI. The Company retained its common shares in PSI, which provides the Company a 51% economic interest in the PSI technology and products developed by the joint venture. During the nine months endedJune 30, 2022 , PSI recorded a loss of$541,206 relating to its operations, of which$265,191 was allocated to the non-controlling interest. As ofSeptember 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, includingCalvin R. O'Harrow ,William Kingsford andRoy M. Harsch .
Protec
InMay 2020 , the Company's subsidiary, PSI, agreed to become a majority shareholder inProtec Scientific, Inc. ("Protec"), a company formed inApril 2020 . As ofSeptember 30, 2020 , PSI had contributed$191,000 to Protec with the Company's share being approximately 32%, based on its PSI ownership. The remaining 30% share is attributed to PSI's minority shareholders. During the nine months endedDecember 31, 2020 , Protec received an additional$120,000 from non-affiliated investors. The additional investments gave the non-controlling interests a 68% ownership interest in Protec. During the nine months endedJune 30, 2022 , Protec recorded a loss of$6,755 , of which$4,619 was allocated to the non-controlling interests. Psoria-Light
PSI designs, develops and markets a targeted ultraviolet ("UV") phototherapy device called the Psoria-Light. The Psoria-Light is designated for use in targeted PUVA photochemistry and UVB phototherapy and is designed to treat certain skin conditions including psoriasis, vitiligo, atopic dermatitis (eczema), seborrheic dermatitis, and leukoderma.
Psoriasis, eczema, and vitiligo, are common skin conditions that can be
challenging to treat, and often cause the client significant psychosocial
stress. Clients may undergo a variety of treatments to address these skin
conditions, including routine consumption of systemic and biologic drug
therapies which are highly toxic, reduce systemic immune system function, and
come with a host of chemotherapy-like side effects. Ultraviolet (UV)
phototherapy is a clinically validated alternate treatment modality for these
disorders.
Traditionally, "non-targeted" UV phototherapy was administered by lamps that
emitted either UVA or UVB light to both diseased and healthy skin. While
sunblocks or other UV barriers may be used to protect healthy skin, the UV
administered in this manner must be low dosage to avoid excessive exposure of
healthy tissue. Today, "targeted" UV phototherapy devices administer much higher
dosages of light only to affected tissue, resulting in "clearance" in the case
of psoriasis and eczema, and "repigmentation" in the case of vitiligo, at much
faster rates than non-targeted (low dosage) UV treatments.
Targeted UV treatments are typically administered to smaller total body surface
areas, and are therefore used to treat the most intense parts of a client's
disease. Non-targeted UV treatment is typically used as a follow-up and for
maintenance, capable of treating large surfaces of the body. Excimer laser
devices (UVB at 308nm) are expensive and consume dangerous chemicals (Xenon and
Chlorine). Mercury lamp devices (UVB and/or UVA) require expensive lamp
replacements regularly and require special disposal (due to mercury content).
Additionally, mercury lamp devices typically deliver wavelengths of light below
300nm. While within the UVB spectrum, it has been shown that wavelengths below
300nm produce significantly more "sunburn" type side effects than do wavelengths
between 300 and 320nm without improvement in therapeutic benefit.
The Psoria-Light is a targeted UV phototherapy device that produces UVB light
between 300 and 320 nm as well as UVA light between 350 and 395nm. It does not
require consumption of dangerous chemicals or require special environmental
disposal, and is cost effective for clinicians, which should result in increased
patient access to this type of treatment. It has several unique and advanced
features that we believe will distinguish it from the non-targeted and targeted
UV phototherapy devices that are currently being used by dermatologists and
other healthcare providers. These features include the following: the
utilization of deep narrow-band UVB ("NB-UVB") LEDs as light sources; the
ability to produce both UVA or NB-UVB therapeutic wavelengths; an integrated
high resolution digital camera and client record integration capabilities; the
ability to export to an external USB memory device a PDF file of treatment
information including a patent pending graph that includes digital images
plotted against user tracked metrics which can be submitted to improve medical
reimbursements; an accessory port and ability to update software; ease of
placement and portability; advanced treatment site detection safety sensor;
international language support; a warranty which includes the UV lamp(s); and a
non-changeable treatment log (that does not include HIPPA information).
19
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 ofIllinois onMarch 18, 2014 . SCI acquired certain Stealth Mark assets onApril 4, 2014 and operates as a wholly-owned subsidiary of the Company. It is a provider of: a) Stealth Mark encryption and authentication solutions offering advanced technologies within the security and supply chain management vertical sectors (Intelligent Microparticles), and b) advanced data intelligence services offering proprietary, unprecedented, and actionable technology for industries, companies, and agencies on a global scale (ActiveDuty™).
Intelligent Microparticles
SCI provides clients premiere authentication technology for the protection of a variety of products and brands from illicit counterfeiting and diversion activities. Its technology is applicable to a wide range of industries affected by counterfeiting, diversion and theft including, but not limited to, pharmaceuticals, defense/aerospace, automotive, electronics, technology, consumer and personal care goods, designer products, beverage/spirits, and many others. SCI delivers the client a complete, simple to use, easy to implement, and cost effective turnkey system that is extremely difficult to compromise. SCI's technology includes a combination of proprietary software and intelligent microparticle marks that are unduplicatable and undetectable to the human eye. These taggants are created with proprietary materials that create unique numerical codes that are assigned meaning by the client and are machine readable without the use of rare earth or chemical tracers. They have been used in covert and overt operations with easy to implement technology and do-it-yourself in-the-field forensic caliber verification. 20 InApril 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 theOak 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 byRicky 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. InNovember 2018 ,Mr. Howard passed away suddenly andMr. O'Harrow took over operations of SCI's business on an interim basis.
Inflation Risk
The Company does not believe that inflation has had a material effect on its operations to date, other than its impact on the general economy. However, there is a risk that the Company's operating costs could become subject to inflationary pressures in the future, which would have the effect of increasing the Company's operating costs, and which would put additional stress on the Company's working capital resources.
Analysis of Financial Condition and Results of Operations
Results of Operations for the three months ended
Revenue and Cost of Goods Sold
Revenue for the three months endedJune 30, 2022 and 2021 was$107,500 and$78,620 , respectively. The increase in revenue in 2022 related to the increase in revenues at PSI due to the roll-out of their new Aurora medical device. Cost of sales for the three months endedJune 30, 2022 and 2021 was$10,400 , respectively. Gross profit for the three months endedJune 30, 2022 and 2021 was$97,100 and$68,220 , respectively. The reason for the increase in gross profit in 2022 was due to increased sales at PSI.
Operating Expenses
Operating expenses for the three months ended
Other Expenses
Other expenses during the three months endedJune 30, 2022 totaled$408,541 , and consisted of$51,166 of interest expense,$4,375 of debt discount amortization, and$353,000 of financing costs. Other expenses during the three months endedJune 30, 2021 consisted of$36,230 of interest expense. 21 Net Loss Our net loss for the three months endedJune 30, 2022 was$741,668 , compared to a net loss of$240,676 for the three months endedJune 30, 2021 . The increase in the net loss in 2022 was primarily due to the increase in operating expenses, which primarily related to stock compensation.
Results of Operations for the nine months ended
Revenue and Cost of Goods Sold
Revenue for the nine months endedJune 30, 2022 and 2021 was$372,042 and$220,769 , respectively. The increase in revenue in 2022 related to the increase in revenues at PSI due to the roll-out of their new Aurora medical device. Cost of sales for the nine months endedJune 30, 2022 and 2021 was$46,800 and$149,450 , respectively. Gross profit for the nine months endedJune 30, 2022 and 2021 was$325,242 and$71,319 , respectively. The reason for the increase in gross profit in 2022 was due to increased sales at PSI.
Operating Expenses
Operating expenses for the nine months ended
Other Income (Expenses)
Other expenses during the nine months endedJune 30, 2022 totaled 498,628, and consisted of$137,417 of interest expense,$13,125 of debt discount amortization,$353,000 of financing costs, offset by a gain of$4,914 on the settlement of debt. Other expenses during the nine months endedJune 30, 2021 consisted of$94,381 of interest expense.
Net Loss
Our net loss for the nine months endedJune 30, 2022 was$1,202,064 , compared to a net loss of$966,487 for the nine months endedJune 30, 2021 . The increase in the net loss in 2022 was primarily due to the increase in operating expenses and stock-related compensation.
Results of Operations by Segment
The Company currently maintains two business segments:
(i) Medical Devices: which it provided through PSI, its subsidiary acquired on
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
certain assets of
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.
22
The detailed segment information of the Company is as follows:
Operations by Segment for the Three Months Ended
For the Three Months Ended
June 30, 2022
Medical Authentication and
Corporate Devices Encryption Total
Trade Sales $ - $ 107,500 $ - $ 107,500
Cost of goods sold - 10,400 - 10,400
Gross profit - 97,100 - 97,100
Operating expenses 105,396 317,313 7,518 430,227
Loss from operations $ (105,396 ) $ (220,213 ) $ (7,518 ) $ (333,127 )
For the Three Months Ended
June 30, 2021
WCUI PSI Stealthco
Medical Authentication and
Corporate Devices Encryption Total
Trade Sales $ - $ 78,620 $ - $ 78,620
Cost of goods sold - 10,400 - 10,400
Gross profit - 68,220 - 68,220
Operating expenses 42,849 226,575 3,242 272,666
Loss from operations $ (42,849 ) $ (158,355 ) $ (3,242 ) $ (204,446 ) Revenue for the Medical Devices segment for the three months endedJune 30, 2022 and 2021 was$107,500 and$78,620 , respectively. The increase in 2022 was due to the increase in trade sales. Cost of goods sold for the three months endedJune 30, 2022 and 2021 was$10,400 , respectively, and the gross profit was$97,100 and$68,220 , respectively. Operating expenses for the three months endedJune 30, 2022 and 2021 was$317,313 and$226,575 , respectively. The increase in operating expenses in 2022 was primarily due to the increase in employee-related costs and contract labor. The loss from operations for the three months endedJune 30, 2022 and 2021 was$220,213 and$158,355 , respectively. There was no revenue or cost of goods sold for the Authentication and Encryption segment for the three months endedJune 30, 2022 and 2021. Operating expenses for the three months endedJune 30, 2022 and 2021 was$7,518 and$3,242 , respectively. The increase in operating expenses in 2022 was primarily due to the increase in miscellaneous costs. The loss from operations for the three months endedJune 30, 2022 and 2021 was$7,518 and$3,242 , respectively. The Corporate segment primarily provides executive management services for the Company. Operating expenses for the three months endedJune 30, 2022 and 2021 was$458,396 and$42,849 , respectively. The increase in operating expenses in 2022 was primarily due to the increase in stock compensation. The loss from operations for the three months endedJune 30, 2022 and 2021 was$458,396 and$42,849 , respectively. 23 Operations by Segment for the Nine Months EndedJune 30, 2022 and 2021 For the Nine Months Ended June 30, 2022 Medical Authentication and Corporate Devices Encryption Total Trade Sales $ -$ 372,042 $ -$ 372,042 Cost of goods sold - 46,800 - 46,800 Gross profit - 325,242 - 325,242 Operating expenses 208,518 806,657 13,503 1,028,678 Loss from operations$ (208,518 ) $ (481,415 ) $ (13,503 )$ (703,436 ) For the Nine Months Ended June 30, 2021 WCUI PSI Stealthco Medical Authentication and Corporate Devices Encryption Total Trade Sales $ -$ 220,769 $ -$ 220,769 Cost of goods sold - 149,450 - 149,450 Gross profit - 71,319 - 71,319 Operating expenses 138,619 791,589 13,217 943,425 Loss from operations$ (138,619 ) $ (720,270 ) $ (13,217 )$ (872,106 )
Revenue for the Medical Devices segment for the nine months endedJune 30, 2021 was$372,042 and$220,769 , respectively. The increase in 2022 was due to the increase in trade sales. Cost of goods sold for the nine months endedJune 30, 2022 and 2021 was$46,800 and$149,450 , respectively, and the gross profit was$325,242 and$71,319 , respectively. The increase in gross profit in 2022 was primarily due to the increase in sales. Operating expenses for the nine months endedJune 30, 2022 and 2021 was$806,657 and$791,589 , respectively. The increase in operating expenses in 2022 was primarily due to the increase in employee-related costs and contract labor. The loss from operations for the nine months endedJune 30, 2022 and 2021 was$481,415 and$720,270 , respectively. There was no revenue or cost of goods sold for the Authentication and Encryption segment for the nine months endedJune 30, 2022 and 2021. Operating expenses for the nine months endedJune 30, 2022 and 2021 was$13,503 and$13,217 , respectively. There was no significant change in operating expenses during the two periods. The loss from operations for the nine months endedJune 30, 2021 and 2020 was$13,503 and$13,217 , respectively. The Corporate segment primarily provides executive management services for the Company. Operating expenses for the nine months endedJune 30, 2022 and 2021 was$561,518 and$138,619 , respectively. The increase in operating expenses in 2022 was primarily due to the increase in stock-related compensation. The loss from operations for the nine months endedJune 30, 2022 and 2021 was$561,518 and$138,619 , respectively.
Liquidity and Capital Resources
Going Concern
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, the Company has not yet generated significant revenues and has incurred recurring net losses. During the nine months endedJune 30, 2022 , the Company incurred a net loss of$1,202,064 and used cash in operations of$735,634 , and had a shareholders' deficit of$3,998,537 as ofJune 30, 2022 . In addition, loans payable of$1,907,250 and payroll taxes of$62,334 are past due. These factors raise substantial doubt about the Company's ability to continue as a going concern within one year after the date the financial statements are issued. In addition, the Company's independent registered public accounting firm, in its report published on ourSeptember 30, 2021 year-end financial statements, raised substantial doubt about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company's ability to raise additional funds and implement its strategies. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. AtJune 30, 2022 , the Company had cash on hand in the amount of$42,045 . The ability to continue as a going concern is dependent on the Company attaining and maintaining profitable operations in the future and raising additional capital soon to meet its obligations and repay its liabilities arising from normal business operations when they come due. Since inception, we have funded our operations primarily through equity and debt financings and we expect to continue to rely on these sources of capital in the future. During the nine months endedJune 30, 2022 , the Company received$601,000 through short-term loans from officers and shareholders and$304,600 from aU.S. SBA loan payable. 24 No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stockholders, in case of equity financing.
Comparison of nine months ended
As of
As of
Cash flows used in operating activities
During the nine months endedJune 30, 2022 , the Company used cash flows in operating activities of$735,634 , compared to$760,521 used in the nine months endedJune 30, 2021 . During the nine months endedJune 30, 2022 , the Company incurred a net loss of$1,202,064 and$558,086 of non-cash expenses, compared to a net loss of$966,487 and$255,725 of non-cash expenses during the nine months endedJune 30, 2021 .
Cash flows used in investing activities
During the nine months ended
Cash flows provided by financing activities
During the nine months endedJune 30, 2022 , the Company had proceeds from loans payable from officers and shareholders of$601,000 and$304,600 from aU.S. SBA loan payable, and repaid$160,000 of its loans payable from officers and shareholders. During the nine months endedJune 30, 2021 , the Company had proceeds from loans payable from officers and shareholders of$751,000 .
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Summary of Critical Accounting Policies.
The Company has identified critical accounting policies that, as a result of the judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operations involved could result in material changes to its financial condition or results of operations under different conditions or using different assumptions. The Company's most critical accounting policies include, but are not limited to, those related to fair value of financial instruments, revenue recognition, stock-based compensation for obtaining employee services, and equity instruments issued to parties other than employees for acquiring goods or services. Details regarding the Company's use of these policies and the related estimates are described in the Company's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2021 , filed with theSecurities and Exchange Commission onFebruary 15, 2022 . There have been no material changes to the Company's critical accounting policies that impact the Company's financial condition, results of operations or cash flows for the nine months endedJune 30, 2022 .
Recently Issued Accounting Pronouncements
See Management's discussion of recent accounting policies included in footnote 2 to the condensed consolidated financial statements.
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