The Company currently operates in the following business segments: (i) distribution of targeted Ultra Violet ("UV") phototherapy devices for dermatology; and (ii) authentication and encryption products and services. The segments are operated, respectively, through PSI and SCI.

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, 2017 are not necessarily indicative of the results that may be expected for the year ending September 30, 2018.

Going Concern

The accompanying 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 consolidated financial statements, the Company has not yet generated significant revenues and has incurred recurring net losses. During the three months ended December 31, 2017, the Company incurred a net loss from continuing operations of $398,002 and used cash in operations from continuing operations of $147,189, and had a shareholders’ deficit of $556,537 as of December 31, 2017. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its strategies. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

In addition, the Company's independent registered public accounting firm, in its report on the Company's September 30, 2017 financial statements, has raised substantial doubt about the Company's ability to continue as a going concern.

At December 31, 2017, the Company had cash on hand in the amount of $23,594. 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, 2017, the Company received $141,114 through debt financing and the exercise of stock warrants.

No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case of equity financing.

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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation

The Company's consolidated subsidiaries and/or entities are as follows:

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 inventory and obsolescence and valuations of stock-based compensation calculations, among others. Actual results could differ from these estimates.

Income (Loss) Per Share

Basic loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of outstanding common shares during the period. Diluted loss per share is computed by dividing the net loss applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. For the three months ended December 31, 2017 and 2016, the basic and diluted shares outstanding were the same, as potentially dilutive shares were considered anti-dilutive. At December 31, 2017 and 2016, the dilutive impact of outstanding stock options of 6,822,000 and 5,785,000 shares, respectively, and outstanding warrants for 62,716,019and 64,208,158 shares, respectively, have been excluded because their impact on the loss per share is anti-dilutive.

Revenue Recognition

The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. In addition to the aforementioned general policy, the following are the specific revenue recognition policies for each major category of revenue:

(i)Sale of products: The Company derives its revenues from sales contracts with customers with revenues being generated upon the shipment of merchandise. Persuasive evidence of an arrangement is demonstrated via sales invoice or contract; product delivery is evidenced by warehouse shipping log as well as a signed bill of lading from the vessel or rail company and title transfers upon shipment, based on free on board (“FOB”) warehouse terms; the sales price to the customer is fixed upon acceptance of the signed purchase order or contract and there is no separate sales rebate, discount, or volume incentive. When the Company recognizes revenue, no provisions are made for returns because, historically, there have been very few sales returns and adjustments that have impacted the ultimate collection of revenues. 

Payments received before the relevant criteria for revenue recognition are satisfied are recorded as deferred revenue. Deferred revenue at December 31, 2017 and 2016 was $52,348 and $55,098, respectively.

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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Non-controlling Interest

Non-controlling interest represents the non-controlling interest holder’s proportionate share of the equity of the Company’s majority-owned subsidiary, PDC. Non-controlling interest is adjusted for the non-controlling interest holder’s proportionate share of the earnings or losses and other comprehensive income (loss), if any, and the non-controlling interest continues to be attributed its share of losses even if that attribution results in a deficit non-controlling interest balance.

Stock-Based Compensation

The Company periodically grants stock options and warrants to employees and non-employees in non-capital raising transactions as compensation for services rendered. The Company accounts for stock option and stock warrant grants to employees based on the authoritative guidance provided by the Financial Accounting Standards Board where the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and stock warrant grants to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board where the value of the stock compensation is determined based upon the measurement date at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option or warrant grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

The fair value of the Company’s common stock option and warrant grants are estimated using a Black-Scholes Merton option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the common stock options, estimated forfeitures and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes option pricing model, and based on actual experience. The assumptions used in the Black-Scholes Merton option pricing model could materially affect compensation expense recorded in future periods.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

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NOTE 3 – DISCONTINUED OPERATIONS

On August 11, 2017, the Company entered into an agreement with Dr. Jay Joshi to sell 100% of the issued and outstanding shares of NPC Inc. (“NPC”) to Dr. Joshi. As part of the agreement, Dr. Joshi and NPC released the Company from any and all liabilities, claims and obligations of the Company in favor of Dr. Joshi or NPC and arising from or relating to the operation of the NPC business. Also as part of the agreement, Dr. Joshi’s employment agreement with NPC was terminated and all assets and liabilities of NPC were transferred to Dr. Joshi as of the date of the agreement, including $365,459 of accrued compensation and shareholder advances owed to Dr. Joshi by NPC. The Company agreed to sell NPC to Dr. Joshi so that it could focus on its other business segments, PSI and Stealth Mark, which are technology companies, while NPC was a service business. Further, the elimination of the underlined NPC liabilities to Dr. Joshi will significantly improve Wellness Center Inc.’s financial position. As part of the agreement, the Company agreed to issue Dr. Joshi stock options to purchase 500,000 shares of its common stock with an exercise price of $0.25 per share. Dr. Joshi continued to serve on the Company’s board of directors until February 5, 2018. During the year ended September 30, 2017, the Company recorded a $252,508 gain relating to this transaction.

Components of the statement of operations relating to NPC for the three months ended December 31, 2016 were as follows:

NOTE 4 – LOANS PAYABLE FROM SHAREHOLDERS

Loans payable of $59,000 at September 30, 2017 consist of two unsecured note agreements issued in 2014 totaling to $9,000, and two short-term unsecured loans issued in fiscal 2017 totaling to $50,000. The loans have no stated interest rate and are due on demand. During the three months ended December 31, 2017, the Company borrowed $30,500 under three short-term unsecured loans. The loans have no stated interest rate and are due on demand. As of December 31, 2017, loans payable of $89,500 were outstanding.

NOTE 5 – CONVERTIBLE NOTE AGREEMENT

In July 2017, the Company entered into a Convertible Note Payable Agreement with an individual under which the Company borrowed $165,000. Net proceeds received by the Company under the agreement were $150,000. In connection with the agreement, the Company issued the individual 165,000 restricted shares of its common stock and warrants to purchase 330,000 shares of its common stock, which vested upon grant. The warrants expire five years from the date of grant and have an exercise price of $0.50 per share. The note payable accrues interest at eight percent per annum, is unsecured and is convertible at any time after the 90^th day from the issue date into the Company’s common stock at the fixed conversion price of $0.25 per share. The note matures in February 2018, but may be extended at the option of the individual. The Company may prepay the note at any time immediately following the issue date upon seven days’ prior written notice.

On the date of the agreement, the closing price of the common stock was $0.31 per share. As the conversion price embedded in the note agreement was below the trading price of the common stock on the date of issuance, a beneficial conversion feature (BCF) was recognized at the date of issuance. The Company recognized a debt discount at the date of issuance in the aggregate amount of $150,000 related to the relative fair value of the warrants and beneficial conversion features, which comprised $94,704 related to the intrinsic value of beneficial conversion features and $55,296 related to the relative fair value of the warrants. The aggregate fair value of the warrants of $87,582 was based on a probability effected Black-Scholes option pricing model with a stock price of $0.31, volatility of 139.98% and risk-free rate of 1.28%. The unamortized balance of the debt discount at September 30, 2017 was $115,116. During the three months ended December 31, 2017, the Company amortized $70,046 of debt discount, leaving an unamortized balance of $119,930 at December 31, 2017.

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NOTE 6 – SHAREHOLDERS’ EQUITY

Common shares issued for Services

During the three months ended December 31, 2017, the Company issued 120,000 shares of its common stock valued at $21,000 for services provided by accounting and PSI consultants. The shares were valued at the trading price of the common stock at the date of issuance.

Stock Options

On December 22, 2010, effective retroactively as of June 30, 2010, the Company’s board of directors approved the adoption of the “2010 Non-Qualified Stock Option Plan” (“2010 Option Plan”) by unanimous consent. The 2010 Option Plan was initiated to encourage and enable officers, directors, consultants, advisors and key employees of the Company to acquire and retain a proprietary interest in the Company by ownership of its common stock. A total of 7,500,000 of the authorized shares of the Company’s common stock may be subject to, or issued pursuant to, the terms of the plan.

The table below summarizes the Company’s stock option activities for the three months ended December 31, 2017:

The aggregate intrinsic value for option shares outstanding at December 31, 2017 was $119,688.

The following table summarizes information concerning outstanding and exercisable options as of December 31, 2017:

As of December 31, 2017, there were 677,500 shares of stock options remaining available for issuance under the 2010 Plan.

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NOTE 6 – SHAREHOLDERS’ EQUITY (CONTINUED)

Stock Warrants

During the three months ended December, 31, 2017, warrants to purchase 924,286 shares of the Company’s common stock were exercised for $110,914.

The table below summarizes the Company’s warrants activities for the three months ended December 31, 2017:

The aggregate intrinsic value for warrant shares outstanding December 31, 2017 was $1,811,221.

The following table summarizes information concerning outstanding and exercisable warrants as of December 31, 2017:

NOTE 7 – SEGMENT REPORTING

Reportable segments are components of an enterprise about which separate financial information is available and that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. During the year ended September 30, 2017, the Company discontinued operations of its NPC segment (see Note 3).

The Company operates in the following business segments:

(i) Medical Devices: which it stems from PSI, its wholly-owned subsidiary it acquired on August 24, 2012, a developer, manufacturer, marketer and distributer of targeted Ultra Violet ("UV") phototherapy devices for the treatment of skin diseases.

(ii) Authentication and Encryption Products and Services: which it stems from StealthCo, its wholly-owned subsidiary formed on March 18, 2014. StealthCo engages in the business of selling, licensing or otherwise providing certain authentication and encryption products and services upon acquisition of certain assets from SMI.

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NOTE 7 – SEGMENT REPORTING (CONTINUED)

The detailed segment information of the Company is as follows:

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NOTE 7 – SEGMENT REPORTING (CONTINUED)

NOTE 8 – LEGAL MATTERS

The Company is periodically engaged in legal proceedings arising from and relating to its business operations. We currently are not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our Company, our common stock, any of our subsidiaries or of our Company’s or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect on our financial condition or results of operations.

In June, 2015, the Company and its CEO received a formal order of investigation from the Chicago Regional Staff of the SEC. The Company and its CEO cooperated and delivered requested documents, testimony, and tolling agreements.

In May, 2017, the Staff issued a Wells Notice stating its preliminary determination to recommend an enforcement action against the Company and its CEO based on possible violations of Section 17(a) of the Securities Act, Sections 15 (a) and 10(b) of the Exchange Act, and Rule 10b-5 thereunder. The Staff would allege, among other things, that periodic reports issued during 2013 and 2014 were misleading because they failed to disclose or mischaracterized as “salary”, “prepayments” or “loans,” several payments totaling $450,000 made to our CEO during those years without prior Board approval; that two press releases issued in 2015 touted shipments of several Psoria-Light devices that were not closed sales; and that we used an unregistered broker-dealer to identify and solicit potential investors during 2013, 2015 and 2017.

Subsequent discussions resulted in our submission of an Offer of Settlement (“Offer”) through an administrative cease and desist action on November 17, 2017. Pursuant to the Offer, we neither admit nor deny any of the proposed allegations, but are enjoined from violating the above-referenced Sections and Rule. The Offer imposes no financial penalties or sanctions against the Company, and is subject to final SEC approval. The CEO did not join in the Offer and may contest any action that may be asserted against him.

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NOTE 9 – SUBSEQUENT EVENTS

In January 2018, the Company entered into a promissory note payable agreement with one of its investors. Under the agreement, the Company borrowed $50,000. The note accrued interest at 8% per annum, is unsecured and is due in January 2019.

In February 2018, the Company entered into a promissory note payable agreement with one of its investors. Under the agreement, the Company borrowed $37,500. The note accrued interest at 8% per annum, is unsecured and is due in February 2019.

In February 2018, the Company entered into a promissory note payable agreement with one of its investors. Under the agreement, the Company borrowed $30,000. The note accrued interest at 8% per annum, is unsecured and is due in February 2019.

Subsequent to December 31, 2017, the Company issued 30,000 shares of its common stock for services provided by a PSI consultant. The shares were valued at the trading price of the common stock at the date of issuance.

Subsequent to December 31, 2017, warrants were exercised to purchase 416,667 shares of the Company’s common stock for $50,000.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

Except for historical information, the following discussion contains forward-looking statements based upon current expectations that involve certain risks and uncertainties. Such forward-looking statements include statements regarding, among other things, (a) our projected sales and profitability, (b) our growth strategies, (c) anticipated trends in our industry, (d) our future financing plans, (e) our anticipated needs for working capital, (f) our lack of operational experience and (g) the benefits related to ownership of our common stock. Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found under “Description of Business,” and “Analysis of Financial Condition and Results of Operations”, as well as in this Report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” in our Annual Report on Form 10-K and in other Reports we have filed with the Securities and Exchange Commission, as well as matters described in this Report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Report will in fact occur as projected.

The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto. This section includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. You should not place undue certainty on these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our predictions.

Description of Business

Background

Wellness Center USA, Inc. ("WCUI" or the “Company”) was incorporated in June 2010 under the laws of the State of Nevada. The Company initially engaged in online sports and nutrition supplements marketing and distribution. The Company subsequently expanded into additional businesses within the healthcare and medical sectors through acquisitions, including Psoria-Shield Inc. (“PSI”), National Pain Centers, Inc. (“NPC”) and StealthCo Inc. (“SCI”), d/b/a Stealth Mark, Inc. On August 11, 2017, the Company entered into an agreement to sell 100% of the issued and outstanding shares of NPC, which has been accounted for as a discontinued operation on the condensed consolidated financial statements for the three months ended December 31, 2016. See Note 3 for details relating to the sale.

The Company currently operates in the following business segments: (i) distribution of targeted Ultra Violet ("UV") phototherapy devices for dermatology; and (ii) authentication and encryption products and services. The segments are operated, respectively, through PSI and SCI.

PSI

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

PSI designs, develops and markets a targeted ultraviolet (“UV”) phototherapy device called the Psoria­Light. The Psoria­Light 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 chemotherapy­like side effects. Ultraviolet (UV) phototherapy is a clinically validated alternate treatment modality for these disorders.

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Traditionally, “non-targeted” UV phototherapy was administered by lamps that emitted either UVA or UVB light to both diseased and healthy skin. While sunblocks or other UV barriers may be used to protect healthy skin, the UV administered in this manner must be low dosage to avoid excessive exposure of healthy tissue. Today, “targeted” UV phototherapy devices administer much higher dosages of light only to affected tissue, resulting in “clearance” in the case of psoriasis and eczema, and “repigmentation” in the case of vitiligo, at much faster rates than non-targeted (low dosage) UV treatments.

Targeted UV treatments are typically administered to smaller total body surface areas, and are therefore used to treat the most intense parts of a client’s disease. Non-targeted UV treatment is typically used as a follow-up and for maintenance, capable of treating large surfaces of the body. Excimer laser devices (UVB at 308nm) are expensive and consume dangerous chemicals (Xenon and Chlorine). Mercury lamp devices (UVB and/or UVA) require expensive lamp replacements regularly and require special disposal (due to mercury content). Additionally, mercury lamp devices typically deliver wavelengths of light below 300nm. While within the UVB spectrum, it has been shown that wavelengths below 300nm produce significantly more “sunburn” type side effects than do wavelengths between 300 and 320nm without improvement in therapeutic benefit.

The Psoria-Light is a targeted UV phototherapy device that produces UVB light between 300 and 320 nm as well as UVA light between 350 and 395nm. It does not require consumption of dangerous chemicals or require special environmental disposal, and is cost effective for clinicians, which should result in increased patient access to this type of treatment. It has several unique and advanced features that we believe will distinguish it from the non-targeted and targeted UV phototherapy devices that are currently being used by dermatologists and other healthcare providers. These features include the following: the utilization of deep narrow-band UVB (“NB-UVB”) LEDs as light sources; the ability to produce both UVA or NB-UVB therapeutic wavelengths; an integrated high resolution digital camera and client record integration capabilities; the ability to export to an external USB memory device a PDF file of treatment information including a patent pending graph that includes digital images plotted against user tracked metrics which can be submitted to improve medical reimbursements; an accessory port and ability to update software; ease of placement and portability; advanced treatment site detection safety sensor; international language support; a warranty which includes the UV lamp(s); and a non-changeable treatment log (that does not include HIPPA information).

The Psoria-Light consists of three components: a base console, a color display with touchscreen control, and a hand-held delivery device with a conduit (or tether) between the handheld device and the base console. PSI requires clearance by the United States Food and Drug Administration (“FDA”) to market and sell the device in the United States as well as permission from TUV SUD America Inc., PSI’s Notified Body, to affix the CE mark to the Psoria-Light in order to market and sell the device in countries of the European Union.

To obtain FDA clearance and permission to affix the CE mark, PSI was required to conduct EMC and electrical safety testing, which it completed in the second quarter of 2011. PSI received FDA clearance on February 11, 2011 (no. K103540) and was granted permission to affix the CE mark on November 10, 2011. In its 510(k) application with the FDA (application number K103540), PSI asserted that the Psoria-Light was “substantially equivalent” in intended use and technology to two predicate devices, the X -Trac Excimer Laser, which has wide acceptance in the medical billing literature and has a large installed base in the U.S., and the Dualight, another competing targeted UV phototherapy device.

PSI has established an ISO 13485 compliant quality system for the Psoria-Light, which was first audited in the third quarter of 2011. This system is intended to ensure PSI devices will be manufactured in a controlled and reliable environment and that its resources follow similar practices and is required for sales in countries requiring a CE mark. PSI has also received Certified Space Technology designation from the Space Foundation, based on PSI’s incorporation of established NASA-funded LED technology.

PSI began Psoria-Light Beta deployment in January 2012. It is currently operating at a loss, and there is no assurance that its business development plans and strategies will ever be successful. PSI’s success depends upon the acceptance by healthcare providers and clients of Psoria-Light treatment as a preferred method of treatment for psoriasis and other UV-treatable skin conditions. Psoria-Light treatment appears to have been beneficial to clients, without demonstrable harmful side effects or safety issues, as evidenced by more than 10,000 treatments completed on more than 1,000 clients, domestically and Mexico, since 2012. In order for the Company to continue PSI operations it will need additional capital and it will have to successfully coordinate integration of PSI operations without materially and adversely affecting continuation and development of other Company operations.

SCI

SCI was incorporated under the laws of the state of Illinois on March 18, 2014. SCI acquired certain Stealth Mark assets on April 4, 2014 and operates as a wholly-owned subsidiary of the Company. It is a Tennessee-based provider of: a) Stealth Mark encryption and authentication solutions offering advanced technologies within the security and supply chain management vertical sectors (Microparticles), and b) advanced data intelligence services offering proprietary, unprecedented, and actionable technology for industries, companies, and agencies on a global scale (ActiveDuty^TM).

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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.

ActiveDuty^TM

The proprietary algorithmic architecture of ActiveDuty^TM 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^TM 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 is managed by its CEO, Ricky Howard. Mr. Howard has 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 joined Stealth Mark as V.P. of Operations at the early stage of development in 2006 and 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.

Analysis of Financial Condition and Results of Operations

Results of Operations for the three months ended December 31, 2017 compared to the three months ended December 31, 2016.

Revenue and Cost of Goods Sold

Revenue for the three months ended December 31, 2017 and 2016 was $26,500 and $103,125, respectively. The decrease of $76,625 was due to the decrease in revenues at PSI, as they had no revenue during the three months ended December 31, 2017, but had $84,000 of revenue during the three months ended December 31, 2016. Cost of sales for the three months ended December 31, 2017 and 2016, was $16,992 and $60,500, respectively. Gross profit for the three months ended December 31, 2017 and 2016, was $9,508 and $42,625, respectively. The gross profit decrease of $33,117 was primarily due to the decrease in revenues of PSI during the three months ended December 31, 2017.

In June 2017, PSI entered into a pilot program agreement with a Chicago government healthcare organization under which the customer purchased one Psoria Light (PL 1000) to conduct therapy and evaluate the device's efficacy and functionality for a period of 60 days. Under the agreement, at the end of the pilot program, if the customer was satisfied with the first unit, PSI would receive a purchase order for an additional 15 units. PSI shipped the first unit to the customer in early August 2017, it passed their electrical safety inspection and they were ready to commence training.

The pilot program has been extended and continues. If concluded favorably, units would be supplied to individual clinics on a scheduled basis predicated upon in-service and educational program coordination. The objective would be to have all selected hospital system clinics equipped with the PL 1000 as medical staff become properly trained to treat previously identified skin conditions, but there can be no assurance this will occur.

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Operating Expenses

Operating expenses for the three months ended December 31, 2017 and 2016 were $334,163 and $416,563, respectively. The decrease in operating expenses of $82,400 was due primarily to the reduction of consulting and professional fees during the three months ended December 31, 2017.

Other Income

Other expenses during the three months ended December 31, 2017 consisted of $70,047 of amortization of debt discount and $3,300 of interest expense. There was no other income or expense during the three months ended December 31, 2016.

Net Loss from Continuing Operations

Our net loss from continuing operations for the three months ended December 31, 2017 was $398,002, compared to a net loss from continuing operations of $373,938 for the three months ended December 31, 2016. The increase in the net loss of $24,064 was due to the decrease in revenues and gross profit and the increase in other expenses, offset by 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:

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Revenue for the Medical Devices segment for the three months ended December 31, 2016 was $84,000. The Medical Devices segment had no revenue, cost of sales or gross profit for the three months ended December 31, 2017. Cost of goods sold for the three months ended December 31, 2016 was $40,033. Gross profit for the three months ended December 31, 2016 was $43,967. Operating expenses for the three months ended December 31, 2017 and 2016 was $92,672 and $65,656, respectively. The increase in operating expenses of $27,016 in fiscal 2017 was due primarily to the increase in consulting fees. The loss from operations for the three months ended December 31, 2017 and 2016 was $92,672 and $21,689, respectively.

Revenue for the Authentication and Encryption segment for the three months ended December 31, 2017 and 2016 was $26,500 and $19,125, respectively. The increase of $7,375 was due to the increase in trade sales during fiscal 2017. Cost of goods sold for the three months ended December 31, 2017 and 2016 was $16,992 and $20,467, respectively, and the gross profit (loss) was $9,508 and $(1,342), respectively. The gross profit increase in fiscal 2017 was primarily due to the increase in sales in fiscal 2017. Operating expenses for the three months ended December 31, 2017 and 2016 was $80,086 and $114,002, respectively. The decrease in operating expenses of $33,916 in fiscal 2017 was due primarily to the decrease in consulting costs. The loss from operations for the three months ended December 31, 2017 and 2016 was $70,578 and $115,344, respectively.

The Corporate segment primarily provides executive management services for the Company. Operating expenses for the three months ended December 31, 2017 and 2016 was $161,405 and $236,905, respectively. The decrease in operating expenses of $75,500 in fiscal 2017 was due primarily to the decrease in professional and consulting fees. The loss from operations for the three months ended December 31, 2017 and 2016 was $161,405 and $236,905, respectively.

Liquidity and Capital Resources

Liquidity is the ability of a company to generate adequate amounts of cash to meet its cash needs.

The accompanying 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 consolidated financial statements, the Company has not yet generated significant revenues and has incurred recurring net losses. During the three months ended December 31, 2017, the Company incurred a net loss from continuing operations of $398,002 and used cash in operations of $147,189, and had a shareholders’ deficit of $556,537 as of December 31, 2017. 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.

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As of December 31, 2017, our cash balance was $23,594. Our current cash on hand is not sufficient to maintain our daily operations for the next 12 months unless the Company is able to generate positive cash flows from operating activities. If needed, management intends to raise additional capital through equity financing to fund our daily operations through next 12 months and during the three months ended December 31, 2017, received $141,414 through debt financing and the exercise of stock warrants. However no assurance can be given that we will be successful in raising sufficient capital through debt or equity financing, or that we will be able to raise the required working capital on terms favorable, or that such working capital will be available on any terms when needed during next 12 months. Any failure to secure sufficient debt or equity financing may force the Company to modify its business plan. In addition, we have incurred recurring losses from inception and such losses are expected to continue for the foreseeable future and until such time, if ever, as the Company is able to attain sales levels sufficient to support its operations.

No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case of equity financing.

The Company’s independent registered public accounting firm, in their report on the Company’s consolidated financial statements for the year ended September 30, 2017, has expressed substantial doubt about the Company’s ability to continue as a going concern.

Comparison of three months years ended December 31, 2017 and 2016

As of December 31, 2017, we had $23,594 in cash, negative working capital of $577,409 and an accumulated deficit of $19,484,590.

As of December 31, 2016, we had $154,724 in cash, negative working capital of $855,180 and an accumulated deficit of $17,950,799.

Cash flows used in operating activities

During the three months ended December 31, 2017, the Company used cash flows in continuing operating activities of $147,189 compared to $231,092 used in the three months ended December 31, 2016. During the three months ended December 31, 2017, the Company incurred a net loss of $398,002 and $92,060 of non-cash expenses compared to a net loss of $415,500 and $40,851 of non-cash expenses during the three month period ended December 31, 2016.

Cash flows used in investing activities

During the three months ended December 31, 2016, we had purchases of property and equipment of $2,250. We had no cash flows from investing activities during the three months ended December 31, 2017.

Cash flows provided by financing activities

During the three months ended December 31, 2017, we had proceeds from loans payable of $30,500 and proceeds of $110,914 from the exercise of stock warrants. During the three months ended December 31, 2016, we had proceeds from common stock issuable of $309,000.

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, 2017, filed with the Securities and Exchange Commission on February 20, 2018. 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, 2017.

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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 No. 2) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

1.The Company does not have written documentation of its internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act which is applicable to the Company. Management evaluated the impact of its failure to have written documentation of its internal controls and procedures on its assessment of its disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.  

2.The Company’s board of directors has no audit committee, independent director or member with financial expertise which causes ineffective oversight of the Company’s external financial reporting and internal control over financial reporting.  

3.The Company does not have sufficient segregation of duties within its accounting functions, which is a basic internal control. Due to its size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of its failure to have segregation of duties on its assessment of its disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.  

4.The Company does not have sufficient segregation of duties so that one person can initiate, authorize and execute transactions.  

5.Lack of Board of Director approval of debt and equity instruments before issuance.  

6.Weaknesses in the controls over press releases before being disseminated.  

7.Absence of a compensation committee to approve all officer compensation.  

In light of the material weaknesses, the management of the Company performed additional analysis and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with the accounting principles generally accepted in the United States of America. Accordingly, we believe that our consolidated financial statements included herein fairly present, in all material respects, our consolidated financial condition, consolidated results of operations and cash flows as of and for the reporting periods then ended.

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Remediation of Material Weaknesses

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

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

•All Debt agreements must be approved by the Board  

•All Equity grants must be approved by the Board  

•All Officers must have an agreement approved by the Board  

•All employees must have a written agreement  

•Consultant agreements with payments totaling over $20,000 must be approved by the Board  

•Create a Board compensation plan  

•Create an Audit Committee with an Audit Committee Charter  

•Create a policy for Board approval on cash disbursements over $20,000  

•Create a policy to ensure no one at any entity can initiate a payment to themselves  

•Create controls over all Press Releases  

•Ensure the Company will only work with licensed dealer/brokers relating to the sale of equity instruments  

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officer and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:

•Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;  

•only in accordance with authorizations of management and directors of the issuer; and Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the Company are being made  

•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements.  

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

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As of the end of our most recent fiscal year, management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") and SEC guidance on conducting such assessments. Based on that evaluation, they concluded that, as of September 30, 2017, such internal control over financial reporting was not effective. This was due to deficiencies that existed in the design or operation of our internal control over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.

The matters involving internal control over financial reporting that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; (2) inadequate segregation of duties consistent with control objectives of having segregation of the initiation of transactions, the recording of transactions and the custody of assets; and (3) ineffective controls over period end financial disclosure and reporting processes. The aforementioned material weaknesses were identified by our Chief Executive Officer in connection with the review of our financial statements as of September 30, 2017.

To address the material weaknesses set forth in items (2) and (3) discussed above, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.

This Report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to the rules of the SEC that permit the Company to provide only the management's report in this Report.

Management's Remediation Initiatives

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

Changes in internal control over financial reporting.

There have been no changes in our internal control over financial reporting that occurred during the quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The Company is periodically engaged in legal proceedings arising from and relating to its business operations. We are currently 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 companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

In May, 2017, the Staff issued a Wells Notice stating its preliminary determination to recommend an enforcement action against the Company and its CEO based on possible violations of Section 17(a) of the Securities Act, Sections 15 (a) and 10(b) of the Exchange Act, and Rule 10b-5 thereunder. The Staff would allege, among other things, that periodic reports issued during 2013 and 2014 were misleading because they failed to disclose or mischaracterized as “salary”, “prepayments” or “loans,” several payments totaling $450,000 made to our CEO during those years without prior Board approval; that two press releases issued in 2015 touted shipments of several Psoria-Light devices that were not closed sales; and that we used an unregistered broker-dealer to identify and solicit potential investors during 2013, 2015 and 2017.

Subsequent discussions resulted in our submission of an Offer of Settlement (“Offer”) through an administrative cease and desist action on November 17, 2017. Pursuant to the Offer, we neither admit nor deny any of the proposed allegations, but are enjoined from violating the above-referenced Sections and Rule. The Offer imposes no financial penalties or sanctions against the Company, and is subject to final SEC approval. The CEO did not join in the Offer and may contest any action that may be asserted against him.

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

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* 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.

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.

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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.

Thomas E. Scott

William E. Kingsford

Roy M. Harsch

Calvin R. O’Harrow

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