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EX-32.2 - Wellness Center USA, Inc.ex32-2.htm
EX-32.1 - Wellness Center USA, Inc.ex32-1.htm
EX-31.2 - Wellness Center USA, Inc.ex31-2.htm
EX-31.1 - Wellness Center USA, Inc.ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended September 30, 2018

 

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ___________

 

WELLNESS CENTER USA, INC.

(Name of small business issuer in its charter)

 

NEVADA   333-173216   27-2980395

(State or other jurisdiction of

incorporation or organization)

  Commission
File Number
  (IRS Employee
Identification No.)

 

2500 West Higgins Road, Ste. 780, Hoffman Estates, IL, 60169

(Address of Principal Executive Offices)

 

 

 

(847) 925-1885

(Issuer Telephone number)

 

Not Applicable

(Former name or former address, if changed since last report)

 

 

 

Securities registered under Section 12(b) of the Exchange Act:
   
Title of each class registered: Name of each exchange on which registered:
None None

 

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, par value $0.001

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its Corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer [  ] Accelerated filer [  ]
         
 

Non-accelerated filer

(Do not check if a smaller reporting company)

[  ] Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]

 

There is no established public trading market for our common stock.

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant’s most recently completed fiscal quarter ended March 31, 2018: $10,313,724.

 

As of September 30, 2018, the registrant had 100,952,569 shares of its common stock issued and outstanding.

 

Documents Incorporated by Reference: See Item 15.

 

 

 

 
 

 

TABLE OF CONTENTS

 

    PAGE
  PART I  
ITEM 1. Business 3
ITEM 1A. Risk Factors 5
ITEM 2. Properties 14
ITEM 3. Legal Proceedings 14
ITEM 4. Mine Safety Disclosures 14
     
  PART II  
ITEM 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities 15
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation 16
ITEM7A. Quantitative and Qualitative Disclosures About Market Risk 24
ITEM 8. Financial Statements and Supplementary Data 24
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 24
ITEM 9A. Controls and Procedures 24
     
  PART III  
ITEM 10. Directors, Executive Officers and Corporate Governance 27
ITEM 11. Executive Compensation 28
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters 29
ITEM 13. Certain Relationships and Related Transactions, and Director Independence 30
ITEM 14 Principal Accounting Fees and Services 30
     
  PART IV  
ITEM 15. Exhibits, Financial Statement Schedules 32
   
SIGNATURES 34

 

 2 

 

 

PART I

 

ITEM 1. 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. Later, the Company 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. During the period covered by this Report, the Company operated in the following business segments: (i) distribution of targeted Ultra Violet (“UV”) phototherapy devices for dermatology; (ii) management of top-tier medical practices in the interventional and multi-modal pain management sector; and (iii) authentication and encryption products and services. The segments were operated, respectively, through PSI, NPC and SCI.

 

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 consolidated financial statements for the years ended September 30, 2018 and 2017.

 

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 wholly-owned subsidiary of the Company.

 

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).

 

 3 

 

 

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.

 

NPC

 

NPC was incorporated under the laws of the state of Nevada on January 24, 2014. It is an Illinois-based management services provider. It was acquired by the Company on February 28, 2014 and was operated as a wholly-owned subsidiary of the Company.

 

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 consolidated financial statements for the years ended September 30, 2018 and 2017.

 

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™).

 

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™

 

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.

 

 4 

 

 

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.

 

During the period covered by this Report, SCI was managed by its CEO, Ricky Howard. Mr. Howard brought to SCI 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. In November 2018, Mr. Howard passed away suddenly and Mr. O’Harrow took over operations of SCI’s business on an interim basis.

 

ITEM 1A. RISK FACTORS

 

An investment in our securities involves an exceptionally high degree of risk and is extremely speculative in nature. The risks described below are the ones we believe are most important for you to consider. These risks are not the only ones that we face. If events anticipated by any of the following risks actually occur, our business, operating results or financial condition could suffer and the price of our common stock could decline.

 

WE HAVE RECEIVED A GOING CONCERN OPINION FROM OUR AUDITORS AND WE ARE CURRENTLY OPERATING AT A LOSS, WHICH RAISES SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.

 

We have received a “Going Concern” opinion from our auditors. As reflected in the accompanying consolidated financial statements, the Company had an accumulated deficit at September 30, 2018, a net loss and net cash used in operating activities for the fiscal year then ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Company is attempting to generate sufficient revenue; however, the Company’s cash position may not be sufficient enough to support the Company’s daily operations. While the Company believes in the viability of its strategy to generate sufficient revenue and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate sufficient revenues.

 

IT IS MOST LIKELY THAT WE WILL NEED TO SEEK ADDITIONAL FINANCING THROUGH SUBSEQUENT FUTURE PRIVATE OFFERING OF OUR SECURITIES.

 

Because the Company does not currently have any financing arrangements, and may not be able to secure favorable terms for future financing, the Company may need to raise capital through the sale of its common stock. The sale of additional equity securities will result in dilution to our shareholders.

 

UNFAVORABLE PUBLICITY OR CLIENT REJECTION OF OUR PRODUCTS OR SERVICES GENERALLY COULD REDUCE OUR SALES.

 

We will be highly dependent upon client acceptance of the safety, efficacy and quality of our products and services, as well as similar products or services offered by other companies. Client acceptance of products or services can be significantly influenced by scientific research or findings, national media attention and other publicity about product use or services. A product or service may be received favorably, resulting in high sales associated with that product or service that may not be sustainable as client preferences change. Future scientific research or publicity could be unfavorable to our industry or any of our particular products and services and may not be consistent with earlier favorable research or publicity. A future research report or publicity that is perceived by our consumers as less than favorable or that question earlier favorable research or publicity could have a material adverse effect on our ability to generate revenue. Adverse publicity in the form of published scientific research, statements by regulatory authorities or otherwise, whether or not accurate, that associates consumption or use of our products or services, or any other similar products and services, with illness or other adverse effects, or that questions the benefits of our or similar products or services, or claims that they are ineffective, could have a material adverse effect on our business, reputation, financial condition or results of operations.

 

 5 

 

 

COMPLYING WITH NEW AND EXISTING GOVERNMENT REGULATION, BOTH IN THE U.S. AND ABROAD, COULD SIGNIFICANTLY INCREASE OUR COSTS AND LIMIT OUR ABILITY TO MARKET OUR PRODUCTS AND SERVICES.

 

The production, packaging, labeling, advertising, distribution, licensing and/or sale of our products and services may be subject to regulation by several U.S. federal agencies, including the FDA, the Federal Trade Commission, the Consumer Product Safety Commission, and the Environmental Protection Agency, as well as various state, local and international laws and agencies of the localities in which our products and services are offered or are sold. Government regulations may prevent or delay the introduction or require design modifications of our products. Regulatory authorities may not accept the evidence of safety we present for existing or new products or services that we wish to market, or they may determine that a particular product or service presents an unacceptable health risk. If that occurs, we could be required to cease distribution of and/or recall products or terminate marketing of services that present such risks. Authorities may also determine that certain advertising and promotional claims, statements or activities are not in compliance with applicable laws and regulations and may determine that a particular statement is unacceptable as a “health claim.” Failure to comply with any regulatory requirements could prevent us from marketing particular existing or new products or services, or subject us to administrative, civil or criminal penalties.

 

WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY, AND OUR FAILURE TO COMPETE EFFECTIVELY COULD ADVERSELY AFFECT OUR MARKET SHARE, FINANCIAL CONDITION AND GROWTH PROSPECTS.

 

The U.S. healthcare solutions industry is a large and highly fragmented industry. The principle elements of competition in the industry are price, selection and distribution channel offerings. We believe the market is highly sensitive to the introduction of new products and services, which may rapidly capture a significant share of the market. We will compete for sales with heavily advertised national brands offered by large and well-funded companies. In addition, as certain products or services gain market acceptance, we may experience increased competition for those products or services as more participants enter the market. To the extent that we manufacture or engage third party manufacturers to produce any product, our manufacturing capabilities may not be adequate or sufficient to compete with large scale, direct or third-party manufacturers. Certain of our potential competitors are much larger than us and have longer operating histories, larger customer bases, greater brand recognition and greater resources for marketing, advertising and promotion of their products and services. They may be able to secure inventory from vendors on more favorable terms, operate with a lower cost structure or adopt more aggressive pricing policies. In addition, our potential competitors may be more effective and efficient in introducing new products or services. We may not be able to compete effectively, and our attempt to do so may require us to increase marketing and/or reduce our prices, which may result in lower margins. Failure to effectively compete could adversely affect our market share, financial condition and growth prospects.

 

OUR DECISIONS TO ACQUIRE PSI AND SCI WERE BASED UPON ASSUMPTIONS WHICH MAY PROVE TO BE ERRONEOUS.

 

Our decisions to acquire PSI and SCI were based upon assumptions regarding their respective existing and prospective operations, products and services, the potential market for their respective products and services, and our ability to integrate their respective operations in a manner that would enable us to launch the marketing and sale of their respective products and services. Our decisions were based upon information available to management, and assumptions made by management, at the time of each respective acquisition, regarding the potential viability of such products and services and our ability to integrate operations.

 

Our assumptions may prove to be erroneous. Each company is a small development stage company with a limited operating history. Each is currently operating at a loss, and there is no assurance that its business development plans and strategies will ever be successful, or that their respective products and services will be favorably perceived and accepted by our assumed potential customer populations.

 

PSI PROVIDES AN ALTERNATIVE APPROACH TO SKIN TREATMENT THAT IS NOVEL.

 

Psoriasis, eczema, and vitiligo, are common skin conditions that can be challenging to treat, and often cause clients significant psychosocial stress. Clients may elect 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 has been clinically validated as an alternate treatment modality for these disorders.

 

“Non-targeted” UV phototherapy may be administered by lamps that emit either UVA or UVB light to both diseased and healthy skin, with sun blocks and other UV barriers used to protect healthy skin. Non-targeted UV must be low dosage to avoid excessive exposure of healthy tissue. “Targeted” UV phototherapy may be administered at 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.

 

 6 

 

 

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.

 

Psoria-Light treatment provides a targeted UV phototherapy that produces UVB light between 300 and 320 nm and UVA light between 350 and 395nm. It does not require consumption of dangerous chemicals or special environmental disposal, and is cost effective for clinicians. We believe these factors will increase client access to this type of treatment. We also believe that Psoria-Light treatment offers several unique and advanced features that 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 patient record integration capabilities; the ability to export to an external USB memory device a PDF file of patient 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).

 

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. While Psoria-Light treatment appears to have been beneficial to clients, without demonstrable harmful side effects or safety issues, there can be no assurance that we will be able to achieve and maintain such market acceptance by healthcare providers or clients.

 

WE RELY UPON PSI AND SCI PERSONNEL TO OPERATE THEIR RESPECTIVE BUSINESSES AND THE LOSS OF KEY PERSONNEL COULD HAVE A MATERIALLY ADVERSE AFFECT ON OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS.

 

We rely upon the current executive management of PSI and SCI to operate their respective business operations. Employment agreements with any key management personnel will not guarantee that any such personnel will remain affiliated with us.

 

If any of our key personnel were to cease their affiliation with us, our operating results could suffer. Further, we do not maintain key person life insurance on any executive officer. If we lose or are unable to obtain the services of key personnel, our business, financial condition or results of operations could be materially and adversely affected.

 

PSI AND SCI HAVE LIMITED EXPERIENCE IN MARKETING THEIR RESPECTIVE PRODUCTS AND SERVICES.

 

PSI and SCI each has undertaken initial, limited marketing efforts for their respective products and services. Their sales and marketing personnel will compete against the experienced and well-funded sales organizations of competitors. Their revenues and ability to achieve profitability will depend largely on the effectiveness of their respective sales and marketing personnel. Each will face significant challenges and risks related to marketing its services, including, but not limited to, the following:

 

  the ability to obtain access to or persuade adequate numbers of healthcare providers or clients to purchase and use their respective products and services;
  the ability to recruit, properly motivate, retain, and train adequate numbers of qualified sales and marketing personnel;
  the costs associated with hiring, training, maintaining, and expanding an effective sales and marketing team; and
  assuring compliance with applicable government regulatory requirements.

 

In addition, PSI plans to establish a network of distributors in selected foreign markets to market, sell and distribute the Psoria-Light device. If PSI fails to select or use appropriate foreign distributors, or if the sales and marketing strategies of such distributors prove ineffective in generating sales of the device, our revenues would be adversely affected and we might never become profitable.

 

 7 

 

 

COMMERCIALIZATION OF PRODUCTS AND SERVICES WILL REQUIRE US TO BUILD AND MAINTAIN SOPHISTICATED SALES AND MARKETING TEAMS.

 

None of our subsidiaries has any prior experience with commercializing their respective products and services. To successfully commercialize their products and services we will need to establish and maintain sophisticated sales and marketing teams. Experienced sales representatives may be difficult to locate and retain, and all new sales representatives will need to undergo extensive training. There is no assurance that we will be able to recruit and retain sufficiently skilled sales representatives, or that any new sales representatives will ultimately become productive. If we are unable to recruit and retain qualified and productive sales personnel, our ability to commercialize our products and services, and to generate revenues, will be impaired, and our business will be harmed.

 

WE FACE SIGNIFICANT COMPETITION FROM COMPANIES WITH GREATER RESOURCES AND WELL-ESTABLISHED SALES CHANNELS, WHICH MAY MAKE IT DIFFICULT FOR US TO ACHIEVE MARKET PENETRATION.

 

The markets for our subsidiaries’ respective products and services are highly competitive and are significantly affected by new treatment and product introductions. Direct competitors may enjoy competitive advantages, including:

 

  established service and product lines with proven results;
  brand awareness;
  name recognition;
  established product acceptance by healthcare providers and clients;
  established relationships with healthcare providers and clients;
  integrated distribution networks; and
  greater financial resources for product development, sales and marketing, and patent litigation.

 

Many competitors may have significantly greater funds to spend on the research, development, promotion and sale of new and existing services and products. These resources can enable them to respond more quickly to new or emerging technologies and changes in the market.

 

WE MAY BECOME INVOLVED IN FUTURE LITIGATION OR CLAIMS THAT MAY NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS.

 

Healthcare providers and clients that use our subsidiaries’ products or services may bring product liability or other claims against us. To limit such exposure, each subsidiary plans to develop a comprehensive training and education program for persons using their respective products and services. There can be no assurance that such training and education programs will help avoid complications resulting from any provision of products or services. In addition, although they may provide such training and education, they may not be able to ensure proper provision of products or services in each instance and may be unsuccessful at avoiding significant liability exposure as a result. While we may currently maintain and plan to continue to maintain liability insurance in amounts we consider sufficient, such insurance may prove insufficient to provide coverage against any or all asserted claims. In addition, experience ratings and general market conditions may change at any time so as to render us unable to obtain or maintain insurance on acceptable terms, or at all. In addition, regardless of merit or eventual outcome, product liability and other claims may result in:

 

  the diversion of management’s time and attention from our business and operations;
  the expenditure of large amounts of cash on legal fees, expenses and payment of settlements or damages;
  decreased demand for our products and services; and
  negative publicity and injury to our reputation.

 

Each and every one of the foregoing consequences of claims and litigation could have a material adverse effect on us, our subsidiaries, and our business operations and financial condition.

 

 8 

 

 

HEALTHCARE PROVIDERS MAY BE UNABLE TO OBTAIN COVERAGE OR REIMBURSEMENT FROM THIRD-PARTY PAYORS FOR PSORIA-LIGHT TREATMENTS, WHICH COULD LIMIT OUR ABILITY TO MARKET PSI PRODUCTS AND SERVICES.

 

We expect that healthcare providers will bill various third-party payers, such as Medicare, Medicaid, other governmental programs, and private insurers, for Psoria-Light treatments. We believe that the cost of Psoria-Light treatments is generally already reimbursable under governmental programs and most private plans. Accordingly, we believe that healthcare providers will generally not require new billing authorizations or codes in order to be compensated for performing medically necessary procedures using Psoria-Light treatments. There can be no assurance, however, that coverage, coding and reimbursement policies of third-party payers will not change in the future. PSI’s success in selected foreign markets will also depend upon the eligibility of the Psoria-Light device for coverage and reimbursement by government-sponsored healthcare payment systems and third-party payers. In both the United States and foreign markets, healthcare cost-containment efforts are prevalent and are expected to continue. Prospective clients’ failure to obtain sufficient reimbursement could limit our ability to market PSI products and services and decrease our ability to generate revenue.

 

WE PLAN TO RELY ON THIRD PARTY DISTRIBUTORS FOR PSI SALES, MARKETING AND DISTRIBUTION ACTIVITIES IN FOREIGN COUNTRIES.

 

Although we plan to market and sell our products and services directly through sales representatives in the domestic market, we plan to rely on third party distributors to sell, market, and distribute the Psoria-Light device in selected international markets. Because we intend to rely on third party distributors for sales, marketing and distribution activities in international markets, we will be subject to a number of risks associated with our dependence on these third party distributors, including:

 

  lack of day-to-day control over the activities of third-party distributors;
  third-party distributors may not fulfill their obligations to us or otherwise meet our expectations;
  third-party distributors may terminate their arrangements with us on limited or no notice or may change the terms of these arrangements in a manner unfavorable to us for reasons outside of our control; and
  disagreements with our distributors could require or result in costly and time-consuming litigation or arbitration.

 

If we fail to establish and maintain satisfactory relationships with third-party distributors, we may be unable to sell, market and distribute the Psoria-Light device in international markets, our revenues and market share may not grow as anticipated, and we could be subject to unexpected costs which would harm our results of operations and financial condition.

 

TO THE EXTENT WE ENGAGE IN MARKETING AND SALES ACTIVITIES OUTSIDE THE UNITED STATES, WE WILL BE EXPOSED TO RISKS ASSOCIATED WITH EXCHANGE RATE FLUCTUATIONS, TRADE RESTRICTIONS AND POLITICAL, ECONOMIC AND SOCIAL INSTABILITY.

 

If we follow through with our plans to sell the Psoria-Light device in foreign markets, we will be subject to various risks associated with conducting business abroad. A foreign government may require us to obtain export licenses or may impose trade barriers or tariffs that could limit our ability to build our international presence. Our operations in some markets also may be adversely affected by political, economic and social instability in foreign countries. We may also face difficulties in managing foreign operations, longer payment cycles, problems with collecting accounts receivable, and limits on our ability to enforce our intellectual property rights. In addition, for financial reporting purposes, our foreign sales will be translated from local currency into U.S. dollars based on exchange rates and, if we do not hedge our foreign currency transactions, we will be subject to the risk of changes in exchange rates. If we are unable to adequately address the risks of doing business abroad, our business may be harmed.

 

THE PSORIA-LIGHT AND ANY FUTURE MEDICAL DEVICE PRODUCTS ARE SUBJECT TO A LENGTHY AND UNCERTAIN DOMESTIC REGULATORY PROCESS.

 

PSI’s Psoria-Light device and future medical device products, if any, are subject to extensive regulation in the United States by the FDA. The FDA regulates the research, testing, manufacturing, safety, labeling, storage, record keeping, promotion, distribution and production of medical devices in the United States to ensure that medical products distributed domestically are safe and effective for their intended uses. In order for us to market the Psoria-Light for use in the United States, we were required to first obtain clearance from the FDA pursuant to Section 510(k) of the Federal Food, Drug, and Cosmetic Act (the “FFDCA”).

 

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Clearance under Section 510(k) requires demonstration that a new device is substantially equivalent to another device with 510(k) clearance or grandfather status. If the FDA agrees that a device is substantially equivalent to a predicate device, it will grant clearance to commercially market the device. The FDA has a statutory 90-day period to respond to a 510(k) submission. As a practical matter, clearance often takes longer. The FDA may require further information, including clinical data, to make a determination regarding substantial equivalence. If the FDA determines that a device, or its intended use, is not “substantially equivalent,” the FDA will place the device, or the particular use of the device, into Class III, and the device sponsor must then fulfill much more rigorous pre-marketing requirements.

 

If the FDA does not act favorably or quickly in its review of a 501(k) submission, the submitting party may encounter significant difficulties and costs in its efforts to obtain FDA clearance or approval, all of which could delay or preclude the sale of a device. The FDA may request additional data or require the submitting party to conduct further testing or compile more data, including clinical data and clinical studies, in support of a 510(k) submission. Instead of accepting a 510(k) submission, the FDA may require the submitting party to submit a pre-market approval application (“PMA”), which is typically a much more complex and burdensome application than a 510(k). To support a PMA, the FDA may require that the submitting party conduct one or more clinical studies to demonstrate that the device is safe and effective. In addition, the FDA may place significant limitations upon the intended use of a device as a condition to a 510(k) clearance or PMA approval. Product applications can also be denied or withdrawn due to failure to comply with regulatory requirements or the occurrence of unforeseen problems following clearance or approval. Any delays or failure to obtain FDA clearance or approvals of any future medical device products we develop, any limitations imposed by the FDA on product use, or the costs of obtaining FDA clearance or approvals could have a material adverse effect on our business, financial condition and results of operations.

 

PSI submitted its 510(k) for the Psoria-Light to the FDA and on December 3, 2010 was assigned application number K103540. The 510(k) application for Psoria-Light was a traditional application and asserted that the Psoria-Light is “substantially equivalent” in intended use and technology to two predicate devices, the X-Trac Excimer Laser and the Dualight, which are competing targeted UV phototherapy devices. PSI began regulatory testing of the Psoria-Light in December 2010 for EMC and electrical safety (required for FDA and CE mark sales), and completed that testing in the second quarter of 2011. PSI received FDA clearance of the Psoria-Light on February11, 2011 (no. K103540). If and as the Psoria-Light is significantly modified subsequent to its FDA clearance, the FDA may require submission of a separate 510(k) or PMA for the modified product before it may be marketed in the United States.

 

If we develop any future medical device products we will be required to seek and obtain FDA approval prior to any marketing or sales in the United States and in accordance with the 510(k) or PMA process.

 

THE PSORIA-LIGHT WILL BE SUBJECT TO VARIOUS INTERNATIONAL REGULATORY PROCESSES AND APPROVAL REQUIREMENTS. IF WE DO NOT OBTAIN AND MAINTAIN THE NECESSARY INTERNATIONAL REGULATORY APPROVALS, WE WILL NOT BE ABLE TO MARKET AND SELL OUR PRODUCTS IN FOREIGN COUNTRIES.

 

To be able to market and sell PSI’s Psoria-Light device in other countries, we must obtain regulatory approvals and comply with the regulations of those countries. These regulations, including the requirements for approvals and the time required for regulatory review, vary from country to country. Obtaining and maintaining foreign regulatory approvals are expensive, and we cannot be certain that we will receive regulatory approvals in any foreign country in which we plan to market our product. If we fail to obtain or maintain regulatory approval in any foreign country in which we plan to market our product, our ability to generate revenue will be harmed.

 

The European Union requires that manufacturers of medical products obtain the right to affix the CE mark to their products before selling them in member countries of the European Union. The CE mark is an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. In order to obtain the right to affix the CE mark to products, a manufacturer must obtain certification that its processes meet certain European quality standards.

 

PSI began regulatory testing of the Psoria-Light in December 2010 for EMC and electrical safety (required for FDA and CE mark sales), and completed that testing in the second quarter of 2011. PSI was granted permission to affix the CE mark to the Psoria-Light in the fourth quarter of 2011. If and as we modify the Psoria-Light product or develop other new products in the future, we would expect to apply for permission to affix the CE mark to such products. In addition, we would be subject to annual regulatory audits in order to maintain any CE mark permissions we may obtain. We do not know whether PSI will be able to obtain permission to affix the CE mark to its initial, future or modified products or that it will continue to meet the quality and safety standards required to maintain any permission it may receive. If we are unable to obtain permission to affix the CE mark to any of our products, we will not be permitted to sell our products in member countries of the European Union, which will have a material adverse effect on our business, financial condition and results of operations. In addition, if after receiving permission to affix the CE mark to any products, we are unable to maintain such permission, we will no longer be able to sell such products in member countries of the European Union.

 

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OUR ABILITY TO ACHIEVE COMMERCIAL SUCCESS WILL DEPEND IN PART ON OBTAINING AND MAINTAINING PATENT PROTECTION (IF ANY) AND TRADE SECRET PROTECTION RELATING TO OUR PRODUCTS, THE TECHNOLOGY ASSOCIATED WITH OUR PRODUCTS, AND ANY OTHER PRODUCTS AND TECHNOLOGY WE MAY DEVELOP, AS WELL AS SUCCESSFULLY DEFENDING OUR PATENT(S) (IF ANY) AND LICENSED PATENTS (IF ISSUED) AGAINST THIRD PARTY CHALLENGES. IF WE ARE UNABLE TO OBTAIN AND MAINTAIN PROTECTION FOR OUR INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY, THE VALUE OF OUR PRODUCTS WILL BE ADVERSELY AFFECTED, AND WE WILL NOT BE ABLE TO PROTECT SUCH TECHNOLOGY FROM UNAUTHORIZED USE BY THIRD PARTIES.

 

Our commercial success will depend largely on our ability to obtain and maintain patent protection and intellectual property protection covering certain aspects of the technology that we intend to utilize in the development and commercialization of PSI’s initial medical device product, the Psoria-Light, and existing and future SCI products, to obtain and maintain patent and intellectual property protection for any other products that we may develop and seek to market. In order to protect our competitive position for the Psoria-Light, SCI products, and any other products that we may develop and seek to market, we, or our executive officers, as the case may be, will have to:

 

  prevent others from successfully challenging the validity or enforceability of our issued, pending, or licensed patents (if any);
  prevent others from infringing upon, our issued, pending, or licensed patents (if any) and our other proprietary rights;
  operate our business, including the production, sale and use of the Psoria-Light, SCI encryption products, and any other products, without infringing upon the proprietary rights of others;
  successfully enforce our rights to issued, pending, or licensed patents (if any) against third parties when necessary and appropriate; and
  obtain and protect commercially valuable patents or the rights to patents both domestically and abroad.

 

PSI was issued one patent on its Psoria-Light technology on July 9th 2013, US 8,481,982, covering a unique patient safety feature. No other patents have been issued for PSI products or methods, or any of the other technology associated with such products, and we cannot guarantee that any other patents will be issued for such products or any of the technology associated with such products.

 

Stealth Mark devoted substantial effort and resources to develop and advance micro-particle security technologies in support of its business activities. Protection of the acquired Stealth Mark intellectual property is maintained through, among other things, six patents issued between November 18, 2003 and July 17, 2012 as US 6,647,649; 7,720,254; 7,831,042; 7,885,428; 8,033,450 and 8,223,964, and two pending European Applications.

 

Protection of intellectual property in the markets in which we compete is highly uncertain and involves complex legal and scientific questions. It may be difficult to obtain patents relating to our products or technology. Furthermore, any changes in, or unexpected interpretations of, the patent laws may adversely affect our ability to enforce our patent position.

 

WE EXPECT TO RELY ON TRADEMARKS, TRADE SECRET PROTECTIONS, KNOW-HOW AND CONTRACTUAL SAFEGUARDS TO PROTECT OUR NON-PATENTED INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY.

 

We expect to rely on trademarks, trade secret protections, know-how and contractual safeguards to protect our non-patented intellectual property and proprietary technology. Current employees, consultants and advisors have entered into, and future employees, consultants and advisors will be required to enter into, confidentiality agreements that prohibit the disclosure or use of confidential information. We also intend to enter into confidentiality agreements to protect our confidential information delivered to third parties for research and other purposes. There can be no assurance that we will be able to effectively enforce these agreements or that the subject confidential information will not be disclosed, that others will not independently develop substantially equivalent confidential information and techniques or otherwise gain access to our confidential information or that we can meaningfully protect our confidential information.

 

Costly and time-consuming litigation could be necessary to enforce and determine the scope and protect ability of confidential information, and failure to maintain the confidentiality of confidential information could adversely affect our business by causing us to lose any competitive advantage maintained through such confidential information.

 

The protection of proprietary technology through claims of trade secret status has been the subject of increasing claims and litigation by various companies, both to protect proprietary rights and for competitive reasons, even where proprietary claims are unsubstantiated. The prosecution of proprietary claims or the defense of such claims is costly and uncertain given the uncertainty and rapid development of the principles of law pertaining to this area.

 

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Disputes may arise in the future with respect to the ownership of rights to any technology developed with consultants, advisors or collaborators. These and other possible disagreements could lead to delays in the collaborative research, development or commercialization of our products, or could require or result in costly and time-consuming litigation that may not be decided in our favor. Any such event could have a material adverse effect on our business, financial condition and results of operations by delaying or preventing our commercialization of innovations or by diverting our resources away from revenue-generating projects.

 

OUR ABILITY TO MARKET PRODUCTS IN FOREIGN COUNTRIES MAY BE IMPAIRED BY THE ACTIVITIES AND INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES.

 

We may elect to market and sell products in select international markets. Except for certain pending Stealth Mark European Applications, neither the Company nor any of our officers or directors has filed (nor does the Company or any of our officers or directors currently have an intention to file) for any international patent protection for any of our products or any of the technology associated with our products. However, to successfully enter into these international markets and achieve desired revenues internationally, we may need to enforce our patent and trademark rights (if any) against third parties that we believe may be infringing on our rights. The laws of some foreign countries do not protect intellectual property, including patents, to as great an extent as do the laws of the United States. Policing unauthorized use of our intellectual property is difficult, and there is a risk that despite the expenditure of significant financial resources and the diversion of management attention, any measures that we take to protect our intellectual property may prove inadequate in these countries. Our competitors in these countries may independently develop similar technology or duplicate our products, thus likely reducing our potential sales in these countries. Furthermore, our future patent rights (if any) may be limited in enforceability to the United States or certain other select countries, which may limit our intellectual property rights abroad.

 

NO MARKET CURRENTLY EXISTS FOR OUR SECURITIES AND WE CANNOT ASSURE YOU THAT SUCH A MARKET WILL EVER DEVELOP, OR IF DEVELOPED, WILL BE SUSTAINED.

 

Our common stock is not currently eligible for trading on any stock exchange and there can be no assurance that our common stock will be listed on any stock exchange in the future. We presently are listed on the NASD OTCQB Bulletin Board trading system pursuant to Rule 15c2-11 of the Securities Exchange Act of 1934, but there can be no assurance we will maintain such a listing. The bulletin board tends to be highly illiquid, in part because there is no national quotation system by which potential investors can track the market price of shares except through information received or generated by a limited number of broker-dealers that make a market in particular stocks. There is a greater chance of market volatility for securities that trade on the bulletin board as opposed to a national exchange or quotation system. This volatility may be caused by a variety of factors, including: the lack of readily available price quotations; the absence of consistent administrative supervision of “bid” and “ask” quotations; lower trading volume; and general market conditions. If no market for our shares materializes, you may not be able to sell your shares or may have to sell your shares at a significantly reduced price.

 

IF OUR SHARES OF COMMON STOCK ARE ACTIVELY TRADED ON A PUBLIC MARKET, THEY WILL IN ALL LIKELIHOOD BE PENNY STOCKS.

 

Broker-dealer practices in connection with transactions in “penny stocks” are regulated by certain penny stock rules adopted by the SEC. Penny stocks generally are equity securities with a price per share of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ Stock Market, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally require that prior to a transaction in a penny stock the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules.

 

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WE WILL INCUR ONGOING COSTS AND EXPENSES FOR SEC REPORTING AND COMPLIANCE, AND WITHOUT REVENUE WE MAY NOT BE ABLE TO REMAIN IN COMPLIANCE, MAKING IT DIFFICULT FOR INVESTORS TO SELL THEIR SHARES, IF AT ALL.

 

We have a very limited number of market makers and are quoted on the OTC Electronic Bulletin Board. To be eligible for quotation, issuers must remain current in their filings with the SEC. In order for us to remain in compliance we will require future revenues to cover the cost of these filings, which could comprise a substantial portion of our available cash resources. If we are unable to generate sufficient revenues to remain in compliance it may be difficult for you to resell any shares you may purchase, if at all.

 

FAILURE TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND STOCK PRICE.

 

Section 404 of the Sarbanes-Oxley Act of 2002 (“the Sarbanes-Oxley Act”) requires that we establish and maintain an adequate internal control structure and procedures for financial reporting and include a report of management on our internal control over financial reporting in our annual report on Form 10-K. That report must contain an assessment by management of the effectiveness of our internal control over financial reporting and must include disclosure of any material weaknesses in internal control over financial reporting that we have identified. During the period covered by this Report, the Company had three or fewer directors, with only one that was independent; accordingly, during such period, we could not establish board committees with independent members to oversee certain functions such as compensation or audit issues for internal control and reporting purposes. Until a majority of our board is comprised of independent members, if ever, there will be limited oversight of our management’s decisions and activities and little ability of shareholders to challenge or reverse those activities and decisions, even if they are not in the best interests of our shareholders.

 

THE MARKET PRICE FOR OUR COMMON SHARES IS PARTICULARLY VOLATILE GIVEN OUR STATUS AS A RELATIVELY UNKNOWN COMPANY WITH A SMALL AND THINLY TRADED PUBLIC FLOAT, LIMITED OPERATING HISTORY AND LACK OF PROFITS WHICH COULD LEAD TO WIDE FLUCTUATIONS IN OUR SHARE PRICE. YOU MAY BE UNABLE TO SELL YOUR COMMON SHARES AT OR ABOVE YOUR PURCHASE PRICE, WHICH MAY RESULT IN SUBSTANTIAL LOSSES TO YOU.

 

The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. First, as noted above, our common shares are sporadically and thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative or “risky” investment due to our limited operating history and lack of profits to date, and uncertainty of future market acceptance for our potential products and services. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. Many of these factors are beyond our control and may decrease the market price of our common shares, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain their current market prices, or as to what effect that the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price.

 

WE DO NOT PAY DIVIDENDS ON OUR COMMON STOCK.

 

We have not paid any dividends on our common stock and do not anticipate paying dividends in the foreseeable future. We plan to retain earnings, if any, to finance the development and expansion of our business.

 

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ITEM 2. PROPERTIES

 

Our principal executive offices are located at 2500 West Higgins Road, Ste. 780, Hoffman Estates, IL, 60169. Our telephone number is (847) 925-1885. We occupy approximately 11,625 square feet of office space pursuant to a lease executed as of May 26, 2016, for a period of ninety-two (92) months, with an initial base rent of $5,090.32 per month, and subject to annual escalation after month twelve (12), resulting in an ultimate monthly base rent of $13,574.17 during months eighty-five (85) through ninety-two (92).

 

PSI offices are located at 6408 West Linebaugh Avenue, Suite 103, Tampa, Florida 33625. PSI’s telephone number is (866) 725-0969. PSI occupies the office space pursuant to a lease executed as of July 7, 2014, for an initial period of six months and thereafter extended on a month-to-month basis, with monthly base rent of $2,140, subject to additional rent in the form of a pro-rata share of common area maintenance operating and maintenance expenses. Suite 103 comprises approximately 2,000 square feet and included office space, a sales area, space for inventory, manufacturing and receiving operations, as well as an engineering lab and video conferencing room.

 

SCI offices are located at 273 Midway Lane, Oak Ridge, Tennessee 37830. Its telephone number is 651-765-9560. SCI occupies approximately 6,400 square of office space pursuant to a lease executed as of September 19, 2016, for a period of sixty (60) months, with an initial monthly base rent of $3,930.83, and subject to escalation after month twenty-four (24), resulting in an ultimate monthly base rent of $4,049.94 during months forty-nine (49) through sixty (60).

 

ITEM 3. LEGAL PROCEEDINGS

 

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. However, we recently decided to attempt to preserve revenue and reduce operating expenses through actions including, but not limited to, facilities consolidation and staff reductions, which we hope to implement through negotiated transactions with lessors, employees and other third parties. Such actions may result in disputes with and claims by such parties which, if not resolved through negotiations, may impact negatively the Company’s ability to continue as a going concern.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

No Public Market for Our Common Stock

 

The market price of our common stock is subject to significant fluctuations in response to variations in our quarterly operating results, general trends in the market, and other factors, over many of which we have little or no control. In addition, broad market fluctuations, as well as general economic, business and political conditions, may adversely affect the market for our common stock, regardless of our actual or projected performance.

 

Common Stock

 

During the year ended September 30, 2016, the Company was authorized by its Articles of Incorporation to issue up to 75,000,000 shares of common stock, par value $0.001 per share. Holders of shares of common stock have full voting rights, one vote for each share held of record. Shareholders are entitled to receive dividends as may be declared by the Board out of funds legally available therefore and share pro rata in any distributions to shareholders upon liquidation. Shareholders have no conversion, pre-emptive or subscription rights. All outstanding shares of common stock are fully paid and non-assessable. During the year ended September 30, 2017, the Company amended its Articles of Incorporation to authorize it to issue up to 185,000,000 shares of common stock, par value $0.001 per share, through a filing of a Certificate of Amendment on January 12, 2017. As of September 30, 2018 and 2017 there were 100,952,569 and 90,284,916 shares of common stock issued and outstanding, respectively.

 

Preferred Stock

 

The Company does not have any Preferred Stock authorized.

 

Dividends

 

We have not paid any cash dividends to our shareholders. The declaration of any future cash dividends is at the discretion of our board of directors and depends upon our earnings, if any, our capital requirements and financial position, and other pertinent conditions. It is our present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations.

 

Options

 

2010 Non-Qualified Stock Option Plan (“2010 Option Plan”)

 

On December 22, 2010, effective retroactively as of June 30, 2010, the Company’s Board of Directors approved the adoption of the “2010 Non-Qualified Stock Option Plan” (“2010 Option Plan”) by unanimous consent. The 2010 Option Plan was initiated to encourage and enable officers, directors, consultants, advisors and key employees of the Company to acquire and retain a proprietary interest in the Company by ownership of its common stock. A total of 7,500,000 of the authorized shares of the Company’s common stock may be subject to, or issued pursuant to, the terms of the plan. Effective January 1, 2018, the Board of Directors approved to increase the number of authorized shares of the Company’s common stock that may be subject to, or issued pursuant to, the terms of the plan from 7,500,000 to 30,000,000.

 

As of September 30, 2018 and 2017, 17,946,667 and 6,822,500 shares, respectively, were outstanding under the 2010 Option Plan.

 

Transfer Agent and Registrar

 

The transfer agent and registrar for our common stock is Action Stock Transfer Corp., having an office situated at 2469 E. Fort Union Blvd, Suite 214, Salt Lake City, UT 84121 and its telephone number is (801) 274-1088.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATIONS.

 

Forward Looking Statements

 

Except for historical information, the following Plan of Operation 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 “Management’s Discussion and Analysis or Plan of Operations” and “Description of Business,” 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” and 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.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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. Forward-looking statements are often identified by words like believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. 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.

 

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. Later, the Company 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. During the period covered by this Report, the Company operated in the following business segments: (i) distribution of targeted Ultra Violet (“UV”) phototherapy devices for dermatology; (ii) management of top-tier medical practices in the interventional and multi-modal pain management sector; and (iii) authentication and encryption products and services. The segments were operated, respectively, through PSI, NPC and SCI.

 

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 consolidated financial statements for the years ended September 30, 2018 and 2017.

 

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 wholly-owned subsidiary of the Company. During the period covered by this Report, PSI was 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”). In December 2018, the PDC Joint Venture Agreement was terminated. Further development, marketing, licensing and/or sales of PSI Technology and products is expected to be conducted through NEO, the joint venture between the Company, PSI and PSI Gen 2 Funding, Inc., an Illinois corporation (“GEN2”).

 

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.

 

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Psoriasis, eczema, and vitiligo, are common skin conditions that can be challenging to treat, and often cause the client significant psychosocial stress. Clients may undergo a variety of treatments to address these skin conditions, including routine consumption of systemic and biologic drug therapies which are highly toxic, reduce systemic immune system function, and come with a host of chemotherapy-like side effects. Ultraviolet (UV) phototherapy is a clinically validated alternate treatment modality for these disorders.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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In November, 2018, the Company and PSI entered into a Joint Venture Agreement, effective as of November 15, 2018, with Gen 2, to further development, marketing, licensing and/or sale of PSI technology and products. The Joint Venture will be conducted through NEO PHOTOTHERAPY, LLC, a recently formed Illinois limited liability company (“NEO”).

 

PSI and GEN2 will be members of NEO, owning 58.5% and 28.0%, respectively, of the limited liability interests (“Units”) issued in connection with the organization of NEO. An additional 13.5% of such Units will be reserved for issuance as incentives for key employees and consultants retained from time to time by NEO in connection with the Venture. PSI and GEN2 will manage NEO’s day-to-day operations. PSI will contribute PSI Technology to NEO and GEN2 will contribute $700,000.00, through the period ending January 31, 2019. No distributions will be made prior to the date upon which NEO has realized and retained cumulative Net Income/Distributable Cash in the amount of $300,000.00. Thereafter, such distributions will be made only to GEN2, through and including the date upon which GEN2 has received cumulative distributions in the amount of $700,000.00. Distributions thereafter will be made to PSI, GEN2 and other members in proportion to their respective Unit ownership, at the times and in the manner determined from time to time by the managers, in their sole discretion.

 

GEN2 shareholders include several Company shareholders, officers and directors, including Calvin R. O’Harrow and Roy M. Harsch. The Joint Venture Agreement governs the transactions described therein and the discussion set forth herein is qualified in its entirety by reference thereto.

 

NPC

 

NPC was incorporated under the laws of the state of Nevada on January 24, 2014. It is an Illinois-based management services provider. It was acquired by the Company on February 28, 2014 and is operated as a wholly-owned subsidiary of the Company.

 

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 consolidated financial statements for the years ended September 30, 2018 and 2017.

 

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™).

 

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™

 

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.

 

During the period covered by this Report, SCI was managed by its CEO, Ricky Howard. Mr. Howard brought to SCI 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. In November 2018, Mr. Howard passed away suddenly and Mr. O’Harrow took over operations of SCI’s business on an interim basis.

 

 18 

 

 

Management

 

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 Chief Accounting Officer (CAO), and appointed Douglas Samuelson as CFO and CAO. In April 2018, Mr. Kandalepas resigned as Chief Executive Officer (CEO) and in May 2018, the Board approved the permanent appointment of Calvin O’Harrow as CEO.

 

Calvin O’Harrow started his career as a successful entrepreneur and moved on to a 34-year tenure as financial advisor at a prominent national wirehouse and wealth management firm, where he established unique team concepts designed to reward team members for their continued relationships with longstanding clients. Beyond this success, he has also been involved in several non-profit organizations and held a variety of positions in finance, sales and management. Mr. O’Harrow has a B.S. from the University of Wisconsin, Madison.

 

Doug Samuelson, CPA, brings over 20 years of experience in public accounting, including serving as CFO, Director and Controller in both private and publicly traded companies. In the past, he provided contract CFO services and assisted public companies with their Sarbanes-Oxley (SOX) compliance. He has worked for major accounting firms, including Arthur Andersen LLP and Cohn Reznick LLP. Mr. Samuelson received his B.S. degree in Accounting from the University of Utah and his M.S. degree in Computer Science from California State University, Northridge.

 

On January 12, 2015, the Company entered into the PDC Joint Venture Agreement with TMA to further develop, market, license and/or sell PSI technology and products. In December 2018, the PDC Joint Venture Agreement was terminated. Further development, marketing, licensing and/or sales of PSI Technology and products is expected to be conducted through NEO, the joint venture between the Company, PSI and GEN2.

 

During the period covered by this Report, Mr. Ricky Howard managed SCI’s business. Mr. Howard brought to SCI 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. In November 2018, Mr. Howard passed away suddenly and Mr. O’Harrow took over operations of SCI’s business on an interim basis.

 

Results of Operations for the year ended September 30, 2018 compared to the year ended September 30, 2017

 

Revenue and Cost of Goods Sold

 

Revenue for the years ended September 30, 2018 and 2017 was $213,723 and $272,724, respectively. The decrease of $59,001 was due to the decrease in trade sales in 2018 in the Medical Devices segment. Reported sales in 2018 and 2017 are also affected by the sale of NPC Inc. during 2017, which has been accounted for as a discontinued operation.

 

Cost of sales for the years ended September 30, 2018 and 2017, was $79,960 and $146,944, respectively. Gross profit for the years ended September 30, 2018 and 2017, was $133,763 and $125,780, respectively. The gross profit increase of $7,983 in 2018 was due to the Medical Device segment not having cost of sales relating to their sales, as their inventory had been written-off in previous years.

 

Operating Expenses

 

Operating expenses for the years ended September 30, 2018 and 2017 was $2,226,362 and $2,129,184, respectively. The increase in operating expenses of $97,178 was due to the increase in operating expenses at SCI and at the corporate segment, offset by the decrease in operating expenses at the Medical Device segment. The increase in expenses at SCI and at the corporate segment primarily related to the increase in stock compensation expenses. Stock compensation expenses totaled to $612,503 and $326,359 during the years ended September 30, 2018 and 2017, respectively.

 

We recently decided to attempt to preserve revenue and reduce operating expenses through actions including, but not limited to, facilities consolidation and staff reductions, which we hope to implement through negotiated transactions with lessors, employees and other third parties. Such actions may result in disputes with and claims by such parties which, if not resolved through negotiations, may impact negatively the Company’s ability to continue as a going concern. 

 

Other Income (Expenses)

 

Other expenses during the year ended September 30, 2018 consisted of $318,038 of amortization of debt discount, $158,400 relating to a loss on the modification of the conversion price on a convertible note payable, $5,445 relating to a loss on the modification of the exercise price on warrants in connection with the convertible note payable, $891,583 of financing costs, primarily relating to the fair value of warrants issued upon conversion of loans payable to officers and shareholders, and $27,354 of interest expense. There was no other income during the year ended September 30, 2018. Other income during the year ended September 30, 2017 consisted of $288,777 relating to a gain on the extinguishment of debt. Other expenses during the year ended September 30, 2017 consisted of $49,884 of amortization of debt discount, $51,150 of financing costs and $2,351 of interest expense.

 

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Loss from Continuing Operations

 

Our loss from continuing operations for the years ended September 30, 2018 and 2017 was $3,493,419 and $1,818,012, respectively. The increase in the net loss from continuing operations of $1,675,407 was primarily due to total other income in 2017 of $185,392, compared to total other expenses in 2018 of $1,400,820, relating to non-cash charges.

 

Segment Information

 

The Company maintained two (2) business segments through the end of the period covered by this Report, as the Company sold its NPC segment during 2017:

 

  (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:

 

Wellness Center USA, Inc.

Operations by Segments

 

   For the Year Ended 
   September 30, 2018 
   Corporate   Medical Devices   Authentication and Encryption   Total 
Sales:                
Trade  $-   $45,000   $95,023   $140,023 
Consulting services   -    -    73,700    73,700 
Total Sales   -    45,000    168,723    213,723 
                     
Cost of goods sold   -    -    79,960    79,960 
                     
Gross profit   -    45,000    88,763    133,763 
                     
Operating expenses   1,179,937    224,196    822,229    2,226,362 
                     
Loss from operations  $(1,179,937)  $(179,196)  $(733,466)  $(2,092,599)

 

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Wellness Center USA, Inc.

Operations by Segments

 

   For the Year Ended 
   September 30, 2017 
   Corporate   Medical Devices   Authentication and Encryption   Total 
Sales:                
Trade  $-   $180,999   $28,600   $209,599 
Consulting services   -    -    63,125    63,125 
Total Sales   -    180,999    91,725    272,724 
                     
Cost of goods sold   -    71,827    75,117    146,944 
                     
Gross profit   -    109,172    16,608    125,780 
                     
Operating expenses   1,066,227    436,557    626,400    2,129,184 
                     
Loss from operations  $(1,066,227)  $(327,385)  $(609,792)  $(2,003,404)

 

Revenue for the Medical Devices segment for the years ended September 30, 2018 and 2017 was $45,000 and $180,999, respectively. The decrease of $135,999 was due to the decrease in sales of their Psoria-Light devices. Cost of sales for the year ended September 30, 2017 was $71,827. There were no cost of sales for the year ended September 30, 2018, as their inventory had been written-off in previous years. Gross profit for the years ended September 30, 2018 and 2017 was $45,000 and $109,172, respectively. The decrease in gross profit of $64,172 was due to the decreased sales in 2018. Operating expenses for the years ended September 30, 2018 and 2017 was $224,196 and $436,557, respectively. The decrease in operating expenses of $212,361 in 2018 was due primarily to the decrease in consulting fees and contract labor. The loss from operations for the years ended September 30, 2018 and 2017 was $179,196 and $327,385, respectively.

 

Revenue for the Authentication and Encryption segment for the years ended September 30, 2018 and 2017 was $168,723 and $91,725, respectively. The increase of $76,998 was primarily due to the increase in trade sales. Cost of goods sold for the years ended September 30, 2018 and 2017 was $79,960 and $75,117, respectively. Gross profit for the years ended September 30, 2018 and 2017 was $88,763 and $16,608, respectively. The increase in gross profit of $72,155 was primarily due to the increase in sales. Operating expenses for the years ended September 30, 2018 and 2017 was $822,229 and $626,400, respectively. The increase in operating expenses of $195,829 was due primarily to the increase in consulting costs and professional fees in 2018. The loss from operations for the years ended September 30, 2018 and 2017 was $733,466 and $609,792, respectively.

 

The Corporate segment primarily provides executive management services for the Company. Operating expenses for the years ended September 30, 2018 and 2017 was $1,179,937 and $1,066,227, respectively. The increase in operating expenses in 2018 of $113,710 was primarily due to the increase in stock compensation expenses. The loss from operations for the years ended September 30, 2018 and 2017 was $1,179,937 and $1,066,227, respectively.

 

Liquidity and Capital Resources

 

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 year ended September 30, 2018, the Company incurred a loss from continuing operations of $3,493,419 and used cash in operations from continuing operations of $1,037,073, and had a shareholders’ deficit of $825,160 as of September 30, 2018. 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.

 

 21 

 

 

At September 30, 2018, the Company had cash on hand in the amount of $4,210. 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 year ended September 30, 2018, the Company received $1,032,414 through the issuance of its common stock, the exercise of stock warrants and through debt offerings.

 

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.

 

Our independent registered public accounting firm issued a going concern opinion. This means that they expressed substantial doubt that we can continue as an on-going business for the next twelve months unless we obtain additional capital.

 

Comparison of years ended September 30, 2018 and 2017

 

As of September 30, 2018, we had $4,210 in cash, negative working capital of $844,539 and an accumulated deficit of $22,974,740.

 

As of September 30, 2017, we had $29,369 in cash, negative working capital of $312,335 and an accumulated deficit of $19,132,557.

 

Cash flows used in operating activities

 

During the year ended September 30, 2018, the Company used cash flows in operating activities from continuing operations of $1,037,073, compared to $1,634,176 used in the year ended September 30, 2017. During the year ended September 30, 2018, the Company incurred a net loss of $3,493,419 and had non-cash expenses of $2,099,776, compared to a net loss of $1,712,980 and non-cash expenses of $183,209 during the year ended September 30, 2017.

 

Cash flows used in investing activities

 

During the year ended September 30, 2017, we had purchases of property and equipment from continuing operations of $1,945. During the year ended September 30, 2018, we had no cash flows from investing activities.

 

Cash flows provided by financing activities

 

During the year ended September 30, 2018, we had proceeds from loans payable from officers and shareholders of $434,500, from convertible notes payable of $250,000, from the sale of common stock and warrants of $177,000 and from the exercise of stock warrants of $170,914. We used cash to repay loans payable from officers and shareholders of $20,500. During the year ended September 30, 2017, we had proceeds from loans payable from officers and shareholders of $50,000, from a convertible note payable of $150,000, from the sale of common stock and warrants of $884,600 and from the exercise of stock warrants of $626,622. We used cash to repay advances from a related party of $13,041.

 

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.

 

Patents, Trademarks, Franchises, Concessions, Royalty Agreements, or Labor Contracts

 

PSI received FDA clearance for the Psoria-Light on February 11, 2011 (no. K103540) and was granted permission to affix the CE mark for the Psoria-Light in the fourth quarter of 2011.

 

PSI’s founder and past president filed a provisional patent application covering certain aspects of the technology that we intend to utilize in the development and commercialization of the Psoria-Light, including handheld ergonomics, emitter platform and LED arrangements, methods for treatment site detection, cooling methods, useful information displays, collection of digital images and graphical correlation to quantitative metrics, and base console designs. Two non-provisional patent applications were submitted claiming the prior filing date of the initial provisional application.

 

 22 

 

 

The first non-provisional application describes a unique distance sensor located at the tip of the Psoria-Light hand-piece, which detects the treatment site based on a projected field. The sensor can detect electrolytic/conductive surfaces, such as human skin, without requiring any physical or direct electrical contact. Further, the unique sensor can sense the treatment site at any point about the tip of the hand-piece and without causing any attenuation of the therapeutic UV light output.

 

The second non-provisional application describes the integration and use of a digital camera in the Psoria-Light, including the location of the digital camera and how and when it is used to conveniently correspond to real-life treatment routines, how images are displayed and captured to memory, and how the images are arranged in patient records are illustrated. Additionally, the second non-provisional application describes the inclusion of clinician defined variables, such as health-related quality of life scores, and their placement into a graphical arrangement relative to treatment site images.

 

Both the initial provisional patent application and the two non-provisional patent applications are owned by PSI’s past president, who has granted PSI the sole and exclusive, worldwide, paid-up, royalty-free, perpetual license under the initial provisional patent application, any non-provisional patent applications filed by him covering the technology described in the initial provisional patent application, and associated know-how, technical data, and improvements to develop and commercialize the Psoria-Light.

 

PSI’s past president filed a second provisional patent application containing concepts for the improvement of microelectronics packages and thermal management solutions, the improvement of handheld phototherapy devices in general (either used on humans, animals, or plants, or used on inanimate objects), and replacement of laser therapy devices with LED devices. PSI was granted the sole and exclusive, worldwide, paid-up, royalty-free, perpetual license under this second provisional patent application, any non-provisional patent applications covering the technology described in the second provisional patent application, and associated know-how, technical data, and improvements to develop and commercialize the Psoria-Light.

 

In addition to the foregoing, Stealth Mark devoted substantial effort and resources to develop and advance micro-particle security technologies in support of its business activities. Protection of the acquired Stealth Mark intellectual property is maintained through a combination of Patents, Trademarks, and Trade Secrets consisting of the following:

 

U.S. Patent   Issued   “Title” – Summary
         
No. 6,647,649   November 18, 2003  

“Micro-particle Taggant Systems”

- Generation of Micro-particle codes from marks containing encrypted Micro-particles.

         
No. 7,720,254   May 18, 2010  

“Automatic Micro-particle Mark Reader”

- Automatic readers for interrogating Micro-particle marks.

         
No. 7,831.042   November 9, 2010  

“Three-Dimensional Authentication Of Micro-particle Mark

- Validation of 3D nature of micro-particle mark to protect against counterfeiting of mark.

         
No. 7,885,428   February 8, 2011  

“Automatic Micro-particle Mark Reader”

- Automatic readers for interrogating micro-particle marks (broadened protection).

         
No. 8,033,450   October 11, 2011  

“Expression Codes For Micro-particle Marks Based On Signature Strings”

- Generation of expression codes (“fingerprints”) unique to each micro-particle mark to protect against counterfeiting of marks.

         
No. 8,223,964   July 17, 2012  

“Three-Dimensional Authentication Of Micro-particle Mark

- Validation of 3D nature of micro-particle mark to protect against counterfeiting of marks (broadened protection).

 

Europe

WO/EP Patent

  Issued   “Title” – Summary
         
Appl. No. 07753043.4   Pending  

“Expression Codes For Micro-particle Marks Based On Signature Strings”

- Generation of expression codes (“fingerprints”) unique to each micro-particle mark to protect against counterfeiting of marks.

         
Appl. No. 07753034.3   Pending  

“Three-Dimensional Authentication Of Micro-particle Mark

- Validation of 3D nature of Micro-particle mark to protect against counterfeiting of mark.

 

 23 

 

 

Trademarks   Type   Countries
         
Stealth Mark®   Registered  

United States

European Community

Australia

         
StealthFire   Not Registered  

United States

European Community

         
ActiveDuty™   Not Registered  

United States

 

Trade Secrets

 

Stealth Mark proprietary technologies and capabilities being maintained as Trade Secrets include, but are not limited to:

 

  Micro-particle Manufacturing
  Micro-particle Color Systems
  Technology advancements providing improvements in Automatic Reader performance
  Software solutions supporting Micro-particle security solutions
  Algorithms, artificial intelligence, and technologies related to Data Intelligence

 

We will assess the need for any additional patent, trademark or copyright applications, franchises, concessions royalty agreements or labor contracts on an ongoing basis.

 

Employees

 

We currently employ our executive officers. PSI has several independent contractors; SCI has one part-time employee and independent contractors.

 

Summary of Significant Accounting Policies.

 

The Company’s significant accounting policies are presented in the Notes to the Consolidated Financial Statements (see Note 2 of the audited consolidated financial statements included herein).

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable to a smaller reporting company.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Our consolidated financial statements are contained in pages F-1 through F-27 which appear at the end of this annual report.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. 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.

 

 24 

 

 

The Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of September 30, 2017, the end of the period covered by this report. Based upon that evaluation, the Company’s CEO concluded that the Company’s disclosure controls and procedures are not effective at the reasonable assurance level due to the material weaknesses described below:

 

  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.

 

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.

 

Remediation of Material Weaknesses

 

We intend to remediate the material weaknesses in our disclosure controls and procedures identified above by adding independent directors or members with financial expertise, and/or hiring an experienced employee with SEC reporting experience to assist the CFO, in the future when working capital permits and by working with our independent registered public accounting firm and refining our disclosure controls and procedures. To date, we have not been successful in reducing the number of audit adjustments, but will continue our efforts in the coming fiscal year as more fully detailed below.

 

Management’s Report on Internal Control over Financial Reporting

 

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, 2018, 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; and (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. The aforementioned material weaknesses were identified by our Chief Executive Officer in connection with the review of our financial statements as of September 30, 2018.

 

To address the material weaknesses set forth in item (2) 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, the following series of measures:

 

We will increase our personnel resources and technical accounting expertise within the accounting function, when funds are available to us. First, we will create a position to segregate duties consistent with control objectives of having separate individuals perform (i) the initiation of transactions, (ii) the recording and review of transactions and financial statements, and (iii) the custody of assets. Second, we will create an accounting position to focus on standardizing and documenting our accounting procedures with the goal of increasing the effectiveness of the internal controls in preventing and detecting misstatements of accounting information. Third, we plan to appoint one or more outside directors to our board of directors who shall be appointed to an audit committee resulting in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls and procedures such as reviewing and approving estimates and assumptions made by management when funds are available to us.

 

Management believes that the appointment of one or more outside directors, who shall be appointed to a fully functioning audit committee, will remedy the lack of a functioning audit committee and a lack of a majority of outside directors on our Board.

 

We anticipate that these initiatives will be at least partially, if not fully, implemented by September 2019, when funding is available. Additionally, we plan to test our updated controls and remediate our deficiencies by September 2020.

 

Changes in internal controls

 

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15 (f) under the Exchange Act) during the fourth quarter of our fiscal year 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

 

Directors, Executive Officer and Control Persons

 

The following table sets forth the names and ages of our directors and executive officers during the period covered by this Report. Also the principal offices and positions with us held by each person and the date such person became a director or executive officer. Each executive officer was appointed by our Board of Directors. Our directors serve until the earlier occurrence of the election of his or her successor at the next meeting of shareholders, death, resignation or removal by the Board of Directors. There are no family relationships among our directors, and executive officers.

 

Name   Age   Position   Date
             
Calvin R. O’Harrow   69   Chief Executive Officer, Chief Operating Officer, Director   May 2018
             
Douglas W. Samuelson   59   Chief Financial Officer   Feb 2018
             
Paul D. Jones   74   Director, President   Dec 2017
             
Thomas E. Scott   61   Director, Secretary   Dec 2017
             
William E. Kingsford   75   Director   Dec 2017
             
Roy M. Harsch   72   Director, Chairman   Dec 2017
             
Andrew J. Kandalepas   67   Former Chairman, CEO and CFO   June 2010
             
Dr. Jay Joshi, M.D.   42   Former Director, Secretary, President, NPC   Feb. 2014
             
Ricky Howard (1)   65   Former President and CEO, SCI   April 2014

 

(1) Ricky Howard passed away suddenly in November 2018.

 

Audit Committee

 

During the period covered by this Report, the Board of Directors determined not to establish an audit committee because our limited resources and limited operating activities do not warrant the formation of an audit committee or the expense of doing so. We do not have a financial expert serving on the Board of Directors who meets the criteria for a financial expert under Item 401(e) of Regulation S-B due to our limited financial resources.

 

Certain Legal Proceedings

 

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. However, we recently decided to attempt to preserve revenue and reduce operating expenses through actions including, but not limited to, facilities consolidation and staff reductions, which we hope to implement through negotiated transactions with lessors, employees and other third parties. Such actions may result in disputes with and claims by such parties which, if not resolved through negotiations, may impact negatively the Company’s ability to continue as a going concern.

 

In periodic reports on Forms 10-K and 10-Q for the periods ending September 30, 2017 and December 31, 2017, respectively, the Company disclosed that on May 25, 2017, the SEC’s Chicago Regional Office informed it that it had made a preliminary determination to recommend filing of an enforcement action against the Company and its CEO based on possible violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act, and Section 15(a) of the Exchange Act. Subsequent discussions resulted in the submission of an Offer of Settlement (“Settlement”) through an administrative cease and desist action on November 17, 2017, which was accepted by the SEC on April 12, 2018, as disclosed on Form 8-K filed April 18, 2018. Pursuant to the Settlement, the Company neither admitted nor denied any of the allegations, but was enjoined from violating the above-referenced Sections and Rule. The Settlement imposed no financial penalties or sanctions against the Company.

 

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The Form 8-K also disclosed that on April 13, 2018, the SEC filed a separate complaint against the CEO in the U.S. District Court for the Northern District of Illinois, asserting the allegations noted above, as well as allegations that he manipulated the price of company shares through undisclosed trading, realizing more than $130,000 from such trading. On the date of filing, the CEO voluntarily resigned as an officer and director of the Company. Without admitting or denying the allegations, the CEO consented to the entry of the judgment, which was entered on September 26, 2018 by the U.S. District Court for the Northern District of Illinois. The judgment permanently enjoined him from violating the anti-fraud provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and the broker registration provisions of Section 15(a) of the Exchange Act. It also bars him from serving as an officer or director of a public company and from participating in penny stock offerings, and ordered disgorgement and interest and penalties to be determined by the court.

 

Compliance with Section 16(A) Of the Exchange Act.

 

Section 16(a) of the Exchange Act requires the Company’s officers and directors, and persons who beneficially own more than 10% of a registered class of the Company’s equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and are required to furnish copies to the Company.

 

ITEM 11. EXECUTIVE COMPENSATION

 

Executive Compensation

 

Summary Compensation Table

 

Name and Position 

Year

($)

 

Salary

($)

  

Other Annual

Compensation

Bonus ($)

  

Restricted

Stock

(Shares)

  

Options

Awards

(Shares)

  

LTIP

SARs ($)

  

Payouts

($)

  

All Other

Compensation

($)

 
                                
Calvin R. O’Harrow  2018   0    0    0    1,800,000    0    0    0 
Chief Executive Officer, Director  2017   0    0    0    0    0    0    0 
                                       
Douglas W. Samuelson  2018   0    0    0    1,730,000    0    0    0 
Chief Financial Officer  2017   0    0    0    30,000    0    0    0 
                                       
Paul D. Jones  2018   0    0    0    1,050,000    0    0    0 
Director, President  2017   0    0    0    0    0    0    0 
                                       
Thomas E. Scott  2018   0    0    0    750,000    0    0    0 
Director, Secretary  2017   0    0    0    0    0    0    0 
                                       
William E. Kingsford  2018   0    0    0    600,000    0    0    0 
Director  2017   0    0    0    0    0    0    0 
                                       
Roy M. Harsch  2018   0    0    0    750,000    0    0    0 
Director, Chairman  2017   0    0    0    0    0    0    0 
                                       
Andrew J. Kandalepas,  2018   182,375    0    0    1,300,000    0    0    0 
Former Chairman and CEO (1)  2017   250,000    0    0    0    0    0    0 
                                       
Dr. Jay Joshi, Director,  2018   -    0    0    -    0    0    0 
Former President, NPC, Inc. (2)  2017   200,000    0    0    500,000    0    0    0 
                                       
Rick Howard, President,  2018   130,000    0    0    1,150,000    0    0    0 
Former CEO of StealthCo  2017   120,000    0    0    250,000    0    0    0 

 

  (1) Upon formation, the Company issued to the Company’s founder (i) 3,665,000 shares of its common stock valued at par, or $3,665 and (ii) an option to purchase 1,600,000 shares of its common stock with an exercise price of $0.01 per share expiring five (5) years from the date of issuance valued at nil, on the date of grant, as officer’s compensation. In 2016, the Company determined a loan due from the Chairman was impaired and the remaining outstanding amount of $187,163 was considered as additional compensation to the Chairman.
  (2) On August 11, 2017, the Company entered into an agreement to sell 100% of the issued and outstanding shares of NPC, Inc. In February 2018, Dr. Joshi was removed from the Company’s Board of Directors.

 

There are no annuity, pension or retirement benefits proposed to be paid to officers, directors or employees in the event of retirement at normal retirement date pursuant to any presently existing plan provided or contributed to by the Company or any of its subsidiaries, if any.

 

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Employment Agreements

 

On July 1, 2014, the Company entered into an employment agreement (the “Agreement”) with Ricky Howard, (the “Executive”). The Executive’s employment under this Agreement commenced on the date thereof, and continued in effect until January 1, 2018 at which time it was extended for a period of three years. The Executive was engaged to serve as the Chief Executive Officer of the Company’s wholly-owned Subsidiary “StealthCo,” with a base annual salary of $130,000, beginning January 1, 2018, subject to increase, but not decrease, from time to time by the CEO and/or the Board of Directors of the Company. In November 2018, Mr. Howard passed away suddenly and Mr. O’Harrow took over operations of SCI’s business on an interim basis.

 

Stock Option Plan

 

On December 22, 2010, effective retroactively as of June 30, 2010, the Company’s Board of Directors approved the adoption of the “2010 Non-Qualified Stock Option Plan” (“2010 Option Plan”) by unanimous consent. The 2010 Option Plan was initiated to encourage and enable officers, directors, consultants, advisors and key employees of the Company to acquire and retain a proprietary interest in the Company by ownership of its common stock. A total of 7,500,000 of the authorized shares of the Company’s common stock may be subject to, or issued pursuant to, the terms of the plan. Effective January 1, 2018, the Board of Directors approved to increase the number of authorized shares of the Company’s common stock that may be subject to, or issued pursuant to, the terms of the plan from 7,500,000 to 30,000,000.

 

The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. Additionally, the Company’s policy is to issue new shares of common stock to satisfy stock option exercises. The Company applied fair value accounting for all share based payments awards. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

Principal Shareholders

 

The following table presents certain information regarding the beneficial ownership of all shares of common stock at the date of this Report, for each executive officer and director of our Company and for each person known to us who owns beneficially more than five percent (5%) of the issued and outstanding shares of our common stock, during the period covered by this Report.

 

Name and Address of Beneficial Owner (1) 

Number of

Shares (2)

  

Options to Acquire Number of

Shares (2)

  

Warrants to Acquire Number of

Shares (2)

  

Number of

Shares Inclusive of Options and Warrants

  

Percentage

(%) of Security Ownership

 
Calvin R. O’Harrow, CEO, COO and Director   9,183,000    300,000    11,791,112    21,274,112    11.8%
                          
Douglas W. Samuelson, CFO   250,000    480,000    400,000    1,130,000    0.6%
                          
Paul D. Jones, President, Director   1,263,305    175,000    1,111,111    2,549,416    1.4%
                          
Thomas E. Scott, Secretary, Director   849,710    125,000    463,333    1,438,043    0.8%
                          
William E. Kingsford, Director   1,933,778    100,000    2,338,731    4,372,509    2.4%
                          
Roy M. Harsch, Director, Chairman   1,553,254    125,000    1,605,397    3,283,651    1.8%
                          
Officers and Directors as a group   15,033,047    1,305,000    17,709,684    34,047,731    18.8%
                          
Total issued and outstanding   100,952,569    11,693,095    67,907,728    180,553,392    100.00%

 

  (1) Except as otherwise noted below, the address of each of the persons shown in the above table is c/o Wellness Center USA, Inc. 2500 West Higgins Road, Ste. 780, Hoffman Estates, IL, 60169.
  (2) Includes, where applicable, shares of common stock issuable upon the exercise of options or warrants to acquire common stock held by such person that may be exercised within sixty (60) days after September 30, 2018. Also includes unvested shares of restricted stock as to which such person has voting power but no dispositive power. Unless otherwise indicated, we believe that all persons named in the table above have sole voting power and/or investment power with respect to all shares of common stock beneficially owned by them.

 

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Related Party Transactions

 

During the period covered by this Report, related parties with whom the Company had transactions were:

 

Loans from Officers and Shareholders

 

During the year ended September 30, 2017, the Company borrowed $20,000 and $30,000 from two separate shareholders. The short-term loans are unsecured, have no stated interest rate and are due on demand. As of September 30, 2017, loans payable to shareholders of $59,000 were outstanding.

 

During the year ended September 30, 2018, the Company borrowed $434,500 under 22 short-term, unsecured loans. The loans have an interest rate of eight percent and are due one year from the date of issuance. During the year ended September 30, 2018, the Company repaid $20,500 of the loans payable and $407,000 were converted into 2,800,713 shares of the Company’s common stock. In connection with the conversion of the loans payable, the Company issued warrants to purchase 6,038,336 shares of common stock to the holders as an inducement to convert. The warrants expire five years from the date of grant and have exercise prices of $0.14 and $0.18 per share. The fair value of the warrants of $689,934 was recorded as financing costs during the year ended September 30, 2018 and was based on a probability affected Black-Scholes Merton option pricing model with stock prices of $0.13 and $0.14, volatility of 124.60% and 124.73% and risk-free rates of 2.37% and 2.43%. In addition to the warrants, the Company offered certain loan holders, who were not officers or directors, to convert at a rate below the market price of the stock on the date of conversion. An aggregate of 218,452 additional common shares were issued to these loan holders with a value of $30,583 on the date of conversion. The Company recorded the amount as financing costs during the year ended September 30, 2018. As of September 30, 2018, loans payable from officers and shareholders of $66,000 were outstanding.

 

Common shares issued for cash from Officer

 

During the year ended September 30, 2018, the Company received $30,000 from the sale of 200,000 shares of its common stock from one of its officers. In connection with the sale, the Company issued a warrant to the officer to purchase 400,000 shares of the Company’s common stock. The warrants expire five years from the date of grant and has an exercise price of $0.18 per share.

 

Compensation of Former Chairman and Chief Executive Officer

 

During the years ended September 30, 2018 and 2017, the Company’s former Chairman and Chief Executive Officer, Andrew J. Kandalepas, was paid compensation of $182,375 and $250,000, respectively. During the year ended September 30, 2018, he was also granted stock options to purchase 1,300,000 shares of the Company’s common stock at an exercise price of $0.14 per share. The options expire five years from the date of grant and the shares will vest in various periods. Mr. Kandalepas resigned as an officer and director in April 2018. As of September 30, 2018 and 2017, $81,965 and $13,440 of accrued compensation was owed to Mr. Kandalepas.

 

Director Independence

 

Currently, the Company does not have a policy that its directors or a majority of its directors be independent of management. The Company intends to implement a policy that a majority of the Board members be independent of the Company’s management as the members of the board of director’s increases.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Audit Fees

 

The following table sets forth the fees billed to the Company for professional services rendered by the Company’s independent registered public accounting firm, for the years ended September 30, 2018 and 2017:

 

Fees  2018   2017 
         
Audit fees  $90,000   $90,000 
Audit Related Fees  $-   $- 
Tax fees  $-   $- 
All other fees  $-   $- 
           
Total Fees  $90,000   $90,000 

 

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Audit Fees. Consist of fees billed for professional services rendered for the audits of our financial statements and reviews of our interim consolidated financial statements included in quarterly reports.

 

Tax Fees. Our auditors did not provide us with professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and local tax compliance and consultation in connection with various transactions and acquisitions.

 

Pre-approval of All Services from the Independent Auditors

 

Effective May 6, 2003, the Securities and Exchange Commission adopted rules that require that before our auditor is engaged by us or our subsidiaries to render any auditing or permitted non-audit related service, the engagement be:

 

  approved by our audit committee; or
     
  entered into pursuant to pre-approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular service, the audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee’s responsibilities to management.

 

We do not have an audit committee, however our board of directors acts as the audit committee, established pre-approval policies and procedures as to the particular service which do not include delegation of the audit committee’s responsibilities to management. Our board of directors pre-approves all services provided by our independent auditors and is informed of each service.

 

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PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

 

a) Documents filed as part of this Annual Report

 

1. Financial Statements

 

2. Financial Statement Schedules

 

3. Exhibits

 

Exhibit

Number

  Description of Document  

Filed

Herewith

  Incorporated by Reference To:
             
2.2   Exchange Agreement dated June 21, 2012 by and between Psoria-Shield Inc. and Wellness Center USA, Inc.       Exhibit 2.2 to the Registrant’s Amended Current Report on Form 8-KA3 filed on January 22, 2013.
             
2.4   Exchange Agreement dated February 28, 2014 by and between National Pain Centers, Inc. and Wellness Center USA, Inc.       Exhibit 2.4 to the Registrant’s Current Report on Form 8-K filed on February 28, 2014.
             
2.5   Purchase Agreement dated March 31, 2014 by and between SMI Holdings, Inc. d/b/a Stealth Mark, Inc. and Stealthco, Inc., a wholly-owned subsidiary of Wellness Center USA, Inc.       Exhibit 2.5 to the Registrant’s Current Report on Form 8-K filed on April 9, 2014.
             
3.1   Articles of Incorporation of the Registrant as filed with the Secretary of State of Nevada.       Exhibits 3.2 to the Registrant’s Amended Registration Statement on Form S-1A1 filed on July 7, 2011.
             
3.2   Bylaws of the registrant.       Exhibits 3.2 to the Registrant’s Amended Registration Statement on Form S-1A1 filed on July 7, 2011.
             
3.3   Certificate of Amendment as filed with the Secretary of State of Nevada on January 12, 2017.        
             
4.1   Subscription Agreement       Exhibits 99.1 to the Registrant’s Amended Registration Statement on Form S-1A1 filed on July 7, 2011.
             
4.2   Form of warrant       Exhibits 99.2 to the Registrant’s Amended Registration Statement on Form S-1A1 filed on July 7, 2011.
             
4.3   2010 Non-Qualified Stock Compensation Plan       Exhibits 99.3 to the Registrant’s Amended Registration Statement on Form S-1A1 filed on July 7, 2011.
             
5.4   Employment Agreement dated as of February 28, 2014 by and between Jay Joshi, M.D. and Wellness Center USA, Inc.       Exhibit 5.4 to the Registrant’s Current Report on Form 8-K filed on February 28, 2014.
             
5.5   Employment Agreement dated as of July 1, 2014 by and between Rick Howard and Wellness Center USA, Inc.       Exhibit 5.5 to the Registrant’s Annual Report on Form 10-K filed on January 15, 2015.
             
5.6   Employment Agreement dated as of January 1, 2018 by and between Rick Howard and Wellness Center USA, Inc.     Exhibit 5.6 to the Registrant’s Annual Report on Form 10-K filed on February 20, 2018.
             
5.7   Employment Agreement dated as of January 1, 2018 by and between Lee Anne Patterson and Wellness Center USA, Inc.     Exhibit 5.7 to the Registrant’s Annual Report on Form 10-K filed on February 20, 2018.
             
5.8   Employment Agreement dated as of January 1, 2018 by and between Richard Neal and Wellness Center USA, Inc.     Exhibit 5.8 to the Registrant’s Annual Report on Form 10-K filed on February 20, 2018.

 

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10.4   License Agreement dated as of August 25, 2009 by and between Psoria-Shield Inc. and Scot L. Johnson.       Exhibit 10.4 to the Registrant’s Amended Current Report on Form 8-KA3 filed on January 22, 2013.
             
10.5   License Agreement dated as of December 11, 2010 by and between Psoria-Shield Inc. and Scot L. Johnson.       Exhibit 10.5 to the Registrant’s Amended Current Report on Form 8-KA3 filed on January 22, 2013.
             
10.6   Management Service Agreement dated as of February 28, 2014 by and between National Pain Centers, Inc. and National Pain Centers, LLC       Exhibit 10.6 to the Registrant’s Annual Report on Form 10-K filed on January 15, 2015
             
10.7   Agency Agreement dated as of October 24, 2014 by and between The Medical Alliance, Inc., Psoria-Shield, Inc. and Wellness Center USA, Inc.       Exhibit 10.7 to the Registrant’s Annual Report on Form 10-K filed on January 15, 2015
             
10.8   Joint Venture Agreement dated as of January12, 2015 by and between The Medical Alliance, Inc., Psoria-Shield, Inc. and Wellness Center USA, Inc.       Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K filed on January 15, 2015

 

10.9

 

 

Joint Venture Agreement dated as of November 15, 2018 by and between PSI Gen 2 Funding, Inc., Psoria-Shield, Inc. and Wellness Center USA, Inc.

     

 

Exhibit 10.9 to the Registrant’s Form 8-K filed on November 15, 2018

 

21.1

 

 

List of subsidiaries of the Registrant

     

 

Exhibit 21.1 to the Registrant’s Annual Report on Form 10-K filed on January 15, 2015

             
31.1   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (*)   X    
             
31.2   Certification of Principal Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (*)   X    
             
32.1   Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (*)   X    
             
32.2   Certification of Principal Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (*)   X    
             
101.INS   XBRL Instance Document **   X    
             
101. SCH   XBRL Taxonomy Extension Schema Linkbase Document **   X    
             
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document **   X    
             
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document **   X    
             
101.LAB   XBRL Taxonomy Extension Label Linkbase Document **   X    
             
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document **   X    

 

(*) 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.

 

 33 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.

 

  WELLNESS CENTER USA, INC.
     
Date: January 15, 2019 By: /s/ Paul D. Jones
    Paul D. Jones
    President
    (Duly Authorized Principal Executive Officer)

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.

 

  WELLNESS CENTER USA, INC.
     
Date: January 15, 2019 By: /s/ Douglas W. Samuelson
    Douglas W. Samuelson
    Chief Financial Officer and Chief Accounting Officer
    (Duly Authorized Principal Accounting Officer)

 

POWER OF ATTORNEY

 

Each person whose signature appears below hereby constitutes and appoints severally Paul D. Jones, his true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

SIGNATURE   TITLE   DATE
         
/s/ Calvin R. O’Harrow   Chief Executive Officer, Chief Operating Officer, Director   January 15, 2019

Calvin R. O’Harrow

       
         
/s/ Douglas W. Samuelson   Chief Financial Officer, Chief Accounting Officer   January 15, 2019

Douglas W. Samuelson

       
         
/s/ Paul D. Jones   Director, President   January 15, 2019
Paul D. Jones        
         
/s/ Thomas E. Scott   Director, Secretary   January 15, 2019
Thomas E. Scott        
         
/s/ William E. Kingsford   Director   January 15, 2019
William E. Kingsford        
         
/s/ Roy M. Harsch   Director   January 15, 2019
Roy M. Harsch        

 

 34 

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

 

Wellness Center USA, Inc.

September 30, 2018 and 2017

Index to the Consolidated Financial Statements

 

  Page
   
Report of Independent Registered Public Accounting Firm F-2
   
Consolidated Balance Sheets at September 30, 2018 and 2017 F-3
   
Consolidated Statements of Operations for the Years Ended September 30, 2018 and 2017 F-4
   
Consolidated Statements of Shareholders’ Deficit for the Years Ended September 30, 2018 and 2017 F-5
   
Consolidated Statements of Cash Flows for the Years Ended September 30, 2018 and 2017 F-6
   
Notes to the Consolidated Financial Statements F-7

 

 F-1 
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors

Wellness Center USA, Inc.

Chicago, Illinois

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Wellness Center USA, Inc. (the “Company”) as of September 30, 2018 and 2017, the related consolidated statements of operations, shareholders’ deficit, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of September 30, 2018 and 2017, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company had a shareholders’ deficit at September 30, 2018, and incurred a net loss and utilized cash in operating activities during the year ended September 30, 2018. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1 to the financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

We have served as the Company’s auditor since 2016.

 

/s/ Weinberg & Company, P.A.  
Weinberg & Company, P.A.  
Los Angeles, California  
January 15, 2019  

 

 F-2 
 

 

Wellness Center USA, Inc.

Consolidated Balance Sheets

 

   September 30, 
   2018   2017 
ASSETS        
Current Assets          
Cash  $4,210   $29,369 
Accounts receivable   -    24,999 
Inventories   -    12,335 
Prepaid expenses and other current assets   1,550    1,751 
Total Current Assets   5,760    68,454 
           
Property and equipment, net   2,619    5,126 
Other assets   16,760    16,760 
Total Other Assets   19,379    21,886 
           
TOTAL ASSETS  $25,139   $90,340 
           
LIABILITIES AND SHAREHOLDERS’ DEFICIT          
Current Liabilities          
Accounts payable and accrued expenses  $572,753   $203,367 
Accrued payroll - officers   -    13,440 
Deferred revenue   8,624    55,098 
Convertible notes payable   202,922    49,884 
Loans payable from officers and shareholders   66,000    59,000 
Total Current Liabilities   850,299    380,789 
           
Shareholders’ Deficit          
Common stock, par value $0.001, 185,000,000 shares authorized; 100,952,569 and 90,284,916 shares issued and outstanding, respectively   100,952    90,285 
Additional paid-in capital   22,450,252    19,069,211 
Accumulated deficit   (22,974,740)   (19,132,557)
Total Wellness Center USA shareholders’ equity (deficit)   (423,536)   26,939 
           
Non-controlling interest   (401,624)   (317,388)
Total Shareholder’s deficit   (825,160)   (290,449)
           
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT  $25,139   $90,340 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 F-3 
 

 

Wellness Center USA, Inc.

Consolidated Statements of Operations

 

   Year Ended 
   September 30, 
   2018   2017 
Sales:        
Trade  $140,023   $209,599 
Consulting services   73,700    63,125 
Total Sales   213,723    272,724 
           
Cost of goods sold   79,960    146,944 
           
Gross profit   133,763    125,780 
           
Operating expenses   2,226,362    2,129,184 
           
Loss from operations   (2,092,599)   (2,003,404)
           
Other income (expenses)          
Amortization of debt discount   (318,038)   (49,884)
Gain on extinguishment of debt   -    288,777 
Loss on modification of conversion price on convertible note payable   (158,400)   - 
Loss on modification of exercise price on warrants in connection with convertible note payable   (5,445)   - 
Financing costs   (891,583)   (51,150)
Interest expense   (27,354)   (2,351)
Total other income (expenses)   (1,400,820)   185,392 
           
LOSS FROM CONTINUING OPERATIONS   (3,493,419)   (1,818,012)
           
DISCONTINUED OPERATIONS          
Loss from discontinued operations   -    (147,476)
Gain from sale of discontinued operations   -    252,508 
Income (loss) from discontinued operations   -    105,032 
           
NET LOSS   (3,493,419)   (1,712,980)
           
Net loss attributable to non-controlling interest   84,236    122,250 
           
NET LOSS ATTRIBUTABLE TO WELLNESS CENTER USA, INC.   (3,409,183)   (1,590,730)
           
Deemed dividend relating to settlement with shareholder   (433,000)   - 
           
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS  $(3,842,183)  $(1,590,730)
           
BASIC AND DILUTED LOSS PER SHARE          
Loss per share from continuing operations  $(0.04)  $(0.02)
Income (loss) per share from discontinued operations  $-   $0.00 
Net loss per share  $(0.04)  $(0.02)
           
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING BASIC AND DILUTED   94,475,383    86,002,821 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 F-4 
 

 

Wellness Center USA, Inc.

Consolidated Statement of Shareholders’ Deficit

 

   Common Stock   Additional Paid-in    Shares to be Issued   Accumulated   Total WCUI   Non-controlling     
   Shares   Amount   Capital   Shares   Amount   Deficit   Deficit   Interest   Total 
                                     
Balance, September 30, 2016   74,968,352   $74,969   $16,464,896    5,048,650   $442,400   $(17,541,827)  $(559,562)  $(195,138)   (754,700)
                                              
Issuance of common stock issuable   5,048,650    5,048    437,352    (5,048,650)   (442,400)   -    -    -    - 
                                              
Common stock issued for cash   5,837,500    5,837    878,763    -    -    -    884,600    -    884,600 
                                              
Exercise of stock warrants   4,065,414    4,066    622,556    -    -    -    626,622    -    626,622 
                                              
Retirement of common stock in legal settlement   (250,000)   (250)   250    -    -    -    -    -    - 
                                              
Fair value of vested stock options   -    -    326,359    -    -    -    326,359    -    326,359 
                                              
Fair value of common stock issued for services   450,000    450    138,050    -    -    -    138,500    -    138,500 
                                              
Fair value of common stock issued in connection with convertible note payable   165,000    165    50,985    -    -    -    51,150    -    51,150 
                                              
Discount on convertible note payable due to beneficial conversion and warrants   -    -    150,000    -    -    -    150,000    -    150,000 
                                              
Net loss for the year ended September 30, 2017   -    -    -    -    -    (1,590,730)   (1,590,730)   (122,250)   (1,712,980)
                                              
Balance, September 30, 2017   90,284,916    90,285    19,069,211    -    -    (19,132,557)   26,939    (317,388)   (290,449)
                                              
Common stock issued for cash   1,614,286    1,614    175,386    -    -    -    177,000    -    177,000 
                                              
Exercise of stock warrants   1,407,619    1,407    169,507    -    -    -    170,914    -    170,914 
                                              
Fair value of common stock issued for services   770,000    770    110,530    -    -    -    111,300    -    111,300 
                                              
Shares issued upon conversions of note payable   1,745,631    1,746    172,817    -    -    -    174,563    -    174,563 
                                              
Shares issued upon conversion of loans payable from officers and shareholders   2,800,713    3,019    403,981    -    -    -    407,000    -    407,000 
                                              
Fair value of additional shares issued upon conversion of loans payable from officers and shareholders   218,452    -    30,583    -    -    -    30,583    -    30,583 
                                              
Fair value of warrants issued as an inducement for conversion of loans payable from officers and shareholders   -    -    689,934    -    -    -    689,934    -    689,934 
                                              
Fair value of vested stock options   -    -    612,503    -    -    -    612,503    -    612,503 
                                              
Fair value of common stock issued in connection with convertible note payable   747,751    748    113,591    -    -    -    114,339    -    114,339 
                                              
Fair value of shares and warrants issued upon settlement of favored nation clause   1,066,667    1,067    431,933    -    -    (433,000)   -    -    - 
                                              
Fair value of shares and warrants issued to a stockholder upon settlement   296,534    296    56,431    -    -    -    56,727    -    56,727 
                                              
Discount on convertible note payable due to beneficial conversion and warrants   -    -    250,000    -    -    -    250,000    -    250,000 
                                              
Loss on modification of conversion price and exercise price on warrants in connection with convertible note payable   -    -    163,845    -    -    -    163,845    -    163,845 
                                              
Net loss for the year ended September 30, 2018   -    -    -    -    -    (3,409,183)   (3,409,183)   (84,236)   (3,493,419)
                                              
Balance, September 30, 2018   100,952,569   $100,952   $22,450,252    -   $-   $(22,974,740)  $(423,536)  $(401,624)  $(825,160)

 

The accompanying notes are an integral part of these consolidated financial statements. 

 

 F-5 
 

 

Wellness Center USA, Inc.

Condensed Consolidated Statements of Cash Flows

 

   Year Ended 
   September 30, 
   2018   2017 
Cash Flows from Operating Activities          
Net loss  $(3,493,419)  $(1,712,980)
           
Adjustments to reconcile net loss to net cash used in operating activities from continuing operations:          
Gain from sale of discontinued operations        (252,508)
Loss from discontinued operations   -    147,476 
Depreciation expense   2,507    11,125 
Amortization of debt discount   318,038    49,884 
Gain on extinguishment of debt   -    (288,777)
Fair value of common shares issued for services   111,300    138,500 
Fair value of common stock issued in connection with convertible note payable        51,150 
Fair value of stock options and warrants issued for services   612,503    326,359 
Fair value of additional shares issued upon conversion of loans payable from officers and shareholders   30,583    - 
Fair value of warrants issued upon conversion of loans payable from officers and shareholders   689,934    - 
Loss on modification of conversion price on convertible note payble   158,400    - 
Loss on modification of exercise price on warrants in connection          
 with convertible note payble   5,445    - 
Fair value of common stock issued in connection with convertible note payable   114,339    - 
Fair value of additional shares and warrants issued to a stockholder   56,727    - 
Changes in Assets and Liabilities          
(Increase) Decrease in:          
Accounts receivable   24,999    (24,999)
Inventories   12,335    66,834 
Prepaid expenses and other current assets   201    24,883 
(Decrease) Increase in:          
Accounts payable and accrued expenses   378,948    (102,959)
Accrued payroll taxes   -    (37,436)
Accrued payroll - officers   (13,440)   (8,451)
Deferred revenue   (46,473)   (22,277)
Net cash used in operating activities from continuing operations   (1,037,073)   (1,634,176)
Net cash used in operating activities from discontinued operations   -    (112,466)
Net cash used in operating activities   (1,037,073)   (1,746,642)
           
Cash Flows from Investing Activities          
Purchases of property and equipment   -    (1,945)
Net cash used in investing activities from continuing operations   -    (1,945)
Net cash used in investing activities from discontinued operations   -    (1,704)
Net cash used in investing activities   -    (3,649)
           
Cash Flows from Financing Activities          
Proceeds from loans payable from officers and shareholders   434,500    50,000 
Repayment of loans payable from officers and shareholders   (20,500)   - 
Proceeds from convertible note payable   250,000    150,000 
Repayment of advances from related party   -    (13,041)
Common stock issued for cash   177,000    884,600 
Exercise of stock options and warrants   170,914    626,622 
Net cash provided by financing activities   1,011,914    1,698,181 
           
Net decrease in cash   (25,159)   (52,110)
           
Cash beginning of period   29,369    81,749 
Cash end of period  $4,210   $29,639 
           
Supplemental cash flows disclosures:          
Interest paid  $-   $- 
Taxes paid  $-   $- 
           
Supplemental non-cash financing disclosures:          
Debt discount on convertible note payable  $250,000   $150,000 
Conversion of convertible note payable and accrued interest into common shares  $174,563   $- 
Conversion of loans payable from officers and shareholders into common shares  $407,000   $- 
Non-controlling interest’s share in losses of a subsidiary  $84,236   $122,250 
Conversion of accrued interest into common shares  $9,563   $- 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 F-6 
 

 

WELLNESS CENTER USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED SEPTEMBER 30, 2018 and 2017

 

NOTE 1 – BASIS OF PRESENTATION

 

Organization and Operations

 

Wellness Center USA, Inc. (“WCUI” or the “Company”) was incorporated in June 2010 under the laws of the State of Nevada. The Company initially engaged in online sports and nutrition supplements marketing and distribution. The Company subsequently expanded into additional businesses within the healthcare and medical sectors through acquisitions, including Psoria-Shield Inc. (“PSI”), 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 consolidated statement of operations for the year ended September 30, 2017. 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.

 

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 year ended September 30, 2018, the Company incurred a loss from continuing operations of $3,493,419 and used cash in operations from continuing operations of $1,037,073, and had a shareholders’ deficit of $825,160 as of September 30, 2018. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its strategies. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

At September 30, 2018, the Company had cash on hand in the amount of $4,210. 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 year ended September 30, 2018, the Company received $1,032,414 through the sale of its common stock, the exercise of stock warrants and from debt offerings.

 

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.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Consolidation

 

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

 

Name of consolidated subsidiary or entity   State or other jurisdiction of incorporation or organization  

Date of incorporation or formation

(date of acquisition/disposition, if applicable)

  Attributable interest
             
Psoria-Shield Inc. (“PSI”)   The State of Florida  

June 17, 2009

(August 24, 2012)

  100%
             

StealthCo, Inc. (“StealthCo”)

  The State of Illinois   March 18, 2014   100%
             

Psoria Development Company LLC. (“PDC”)

  The State of Illinois   January 15, 2015   50%

 

 F-7 
 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in the valuation of accounts receivable and allowance for uncollectible amounts, inventory and obsolescence reserves, accruals for potential liabilities, valuations of stock-based compensation, realization of deferred tax assets, among others. Actual results could differ from these estimates.

 

Income (Loss) Per Share

 

Basic loss per share is computed by dividing net loss applicable to common shareholders 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 shareholders 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 years ended September 30, 2018 and 2017, the basic and diluted shares outstanding were the same, as potentially dilutive shares were considered anti-dilutive. At September 30, 2018 and 2017, the dilutive impact of outstanding stock options for 17,946,667 and 6,822,500 shares, respectively, and outstanding warrants for 67,907,728 and 64,161,304 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, provisions are made for returns, if necessary. Historically, there have been very few sales returns and adjustments that have impacted the ultimate collection of revenues.
     
  (ii) Consulting services: Revenue is recognized in the period services are rendered and earned under service arrangements with clients where service fees are fixed or determinable and collectability is reasonably assured.

 

Payments received before the relevant criteria for revenue recognition are satisfied are recorded as deferred revenue. Deferred revenue at September 30, 2018 and 2017 was $8,624 and $55,098, respectively.

 

Accounts Receivable

 

The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s historical losses and an overall assessment of past due trade accounts receivable outstanding.

 

The allowance for doubtful accounts and returns is established through a provision reducing the carrying value of receivables. At September 30, 2018 and 2017, no allowance for doubtful accounts and returns was considered necessary.

 

 F-8 
 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Inventories

 

Inventories are stated at the lower of cost or market. Cost is computed on a first-in, first-out basis. At September 30, 2017, primarily all of the inventories totaling to $12,335 consisted of finished goods. At September 30, 2018, the Company’s net inventories had no value. The Company provides inventory reserves based on excess and obsolete inventories determined primarily by future demand forecasts. The write down amount is measured as the difference between the cost of the inventory and market based upon assumptions about future demand and charged to the provision for inventory, which is a component of cost of sales. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. During the year ended September 30, 2018, the Company provided a reserve of $12,335 that is included in cost of goods sold to account for its estimate of slow moving and obsolete inventory.

 

Property and Equipment

 

Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The Company has determined the estimated useful lives of its property and equipment, as follows:

 

Computer equipment 5 years
Medical equipment 5 years
Furniture and fixtures 7 years
Vehicles 3 years
Software 3 years

 

Maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the related accounts and the resulting gain or loss is reflected in the statements of operations.

 

Management assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value.

 

Income Taxes

 

Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized. The Company recorded a valuation allowance against its deferred tax assets as of September 30, 2018 and 2017.

 

The Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50 percent likely of being realized upon settlement. The Company classifies the liability for unrecognized tax benefits as current to the extent that the Company anticipates payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes.

 

 F-9 
 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Fair Value measurements

 

The Company determines the fair value of its assets and liabilities based on the exchange price in U.S. dollars that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:

 

Level 1 — Quoted prices in active markets for identical assets or liabilities.
   
Level 2 — Inputs, other than Level 1, that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
   
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The carrying amounts of financial instruments such as cash, accounts receivable, inventories, and accounts payable and accrued liabilities, approximate the related fair values due to the short-term maturities of these instruments.

 

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 but does not believe the adoption of this standard will have a material effect on the Company, if any.

 

 F-10 
 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Recently Issued Accounting Pronouncements (continued)

 

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.

 

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. 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 with a fair value of $106,350. 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.

 

   Year Ended 
   September 30, 2017 
     
Total Sales  $83,826 
      
Operating expenses   231,302 
      
Loss from discontinued operations  $(147,476)
      
Other income     
Gain from sale of discontinued operations  $252,508 

 

NOTE 4 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following at September 30, 2018 and 2017:

 

   September 30,
2018
   September 30,
2017
 
         
Vehicles  $15,000   $15,000 
Computer equipment   10,456    10,456 
Furniture and fixtures   23,998    23,998 
Medical equipment   18,889    18,889 
Software   23,207    23,207 
Leasehold improvements   15,170    15,170 
    106,720    106,720 
Less: accumulated depreciation and amortization   (104,101)   (101,594)
Property and equipment, net  $2,619   $5,126 

 

Depreciation expense for the years ended September 30, 2018 and 2017 was $2,507 and $11,125, respectively.

 

 F-11 
 

 

NOTE 5 – LOANS PAYABLE FROM OFFICERS AND SHAREHOLDERS

 

As of September 30, 2016, loans payable from officers and shareholders of $9,000 were outstanding. During the year ended September 30, 2017, the Company borrowed $20,000 and $30,000 from two separate shareholders. The short-term loans are unsecured, have no stated interest rate and are due on demand. As of September 30, 2017, loans payable to shareholders of $59,000 were outstanding.

 

During the year ended September 30, 2018, the Company borrowed $434,500 under 22 short-term, unsecured loans. The loans have an interest rate of eight percent and are due one year from the date of issuance. During the year ended September 30, 2018, the Company repaid $20,500 of the loans payable and $407,000 were converted into 2,800,713 shares of the Company’s common stock. In connection with the conversion of the loans payable, the Company issued warrants to purchase 6,038,336 shares of common stock to the holders as an inducement to convert. The warrants expire five years from the date of grant and have exercise prices of $0.14 and $0.18 per share. The fair value of the warrants of $689,934 was recorded as financing costs during the year ended September 30, 2018 and was based on a probability affected Black-Scholes Merton option pricing model with stock prices of $0.13 and $0.14, volatility of 124.60% and 124.73% and risk-free rates of 2.37% and 2.43%. In addition to the warrants, the Company offered certain loan holders, who were not officers or directors, to convert at a rate below the market price of the stock on the date of conversion. An aggregate of 218,452 additional common shares were issued to these loan holders with a value of $30,583 on the date of conversion. The Company recorded the amount as a financing cost during the year ended September 30, 2018. As of September 30, 2018, loans payable from officers and shareholders of $66,000 were outstanding.

 

NOTE 6 – CONVERTIBLE NOTE AGREEMENTS

 

   September 30,
2018
   September 30,
2017
 
         
Convertible note payable (a)  $-   $165,000 
Convertible note payable (b)   165,000    - 
Convertible note payable (c)   110,000    - 
Debt discount – unamortized balance   (72,078)   (115,116)
Convertible notes payable, net  $202,922   $49,884 

 

(a) 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 with a fair value of $51,150 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 90th 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 Black-Scholes Merton 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.

 

The agreement also included a clause that allowed for the individual to receive additional shares if the price of the stock declined as of February 28, 2018 (the maturity date). The price of the stock on that date was $0.12 per share, causing the Company to issue the individual an additional 186,849 shares of its common stock. During the year ended September 30, 2018, the Company recorded a financing cost of $22,422 relating to the issuance of these shares.

 

 F-12 
 

 

NOTE 6 – CONVERTIBLE NOTE AGREEMENTS (CONTINUED)

 

On March 5, 2018, the Company modified the conversion price on the note payable from $0.25 per share to $0.10 per share. On that date, the reduction in the conversion price allowed for the individual to convert an additional 990,000 shares with a fair value of $0.16 per share. The total amount of expense the Company recognized relating to the modification was $158,400. Also, on March 5, 2018, the Company modified the exercise price on the attached warrants from $0.50 per share to $0.20 per share. The total amount of the cost the Company recognized relating to the modification was $5,445. The maturity date of the note was also extended until April 30, 2018.

 

During the year ended September 30, 2018, the individual converted $165,000 of the convertible note payable and $9,563 of accrued interest into 1,745,631 shares of the Company’s common stock. During the year ended September 30, 2018, the Company amortized the remaining $115,116 of debt discount, leaving no unamortized balance at September 30, 2018.

 

(b) On March 5, 2018, the Company entered into another Convertible Note Payable Agreement with the same individual under which the Company borrowed an additional $165,000. Net proceeds received by the Company under the agreement after payment of a $15,000 fee to the lender was $150,000. In connection with the agreement, the Company issued the individual 300,000 restricted shares of its common stock with a fair value of $48,000 and warrants to purchase 660,000 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 $0.20 per share. The note payable accrues interest at eight percent per annum, is unsecured and is convertible at any time after the 90th day from the issue date into the Company’s common stock at the fixed conversion price of $0.10 per share. The note matures in October 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. The note is currently past due.

 

The Company calculated the related fair value of the warrants issued to the noteholder to be $55,032 using a Black Scholes Merton option pricing model and performing a relative value calculation. The Company then made a calculation to determine if a beneficial conversion feature (BCF) existed. The beneficial conversion was based upon the effective conversion price based on the proceeds received that were allocated to the convertible instrument. Based upon the Company’s calculation, it was determined that a beneficial conversion feature existed amounting to $94,968 and was recorded as a debt discount. As such the Company recognized a debt discount at the date of issuance in the aggregate amount of $165,000 relating to the $15,000 fees paid to the lender, the relative value of the warrants and the BCF. The note discount is being amortized over the term of the note and the unamortized portion is recognized as a reduction to the carrying amount of the Convertible note (a valuation debt discount). During the year ended September 30, 2018, the Company amortized $161,163 of debt discount, leaving an unamortized balance of $3,837 at September 30, 2018.

 

The agreement also included a clause that allowed for the individual to receive additional shares if the price of the stock declined as of September 5, 2018. The price of the stock on that date was $0.13 per share, causing the Company to issue the individual an additional 60,902 shares of its common stock. The Company recorded a financing cost of $7,917 relating to the issuance of these shares.

 

In addition, the Company recorded an additional finance cost of $48,000 related to the fair value of the 300,000 shares of common stock granted at the date issuance.

 

(c) On July 11, 2018, the Company entered into another Convertible Note Payable Agreement with the same individual under which the Company borrowed an additional $110,000. Net proceeds received by the Company under the agreement after payment of a $10,000 fee to the lender was $100,000. In connection with the agreement, the Company issued the individual 200,000 restricted shares of its common stock with a fair value of $36,000 and warrants to purchase 440,000 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 $0.18 per share. The note payable accrues interest at eight percent per annum, is unsecured and is convertible at any time after the 90th day from the issue date into the Company’s common stock at the fixed conversion price of $0.15 per share. The note matures in February 2019, 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.

 

The Company calculated the related fair value of the warrants issued to the noteholder to be $66,440 using a Black Scholes Merton option pricing model and performing a relative value calculation. The Company then made a calculation to determine if a beneficial conversion feature (BCF) existed. The beneficial conversion was based upon the effective conversion price based on the proceeds received that were allocated to the convertible instrument. Based upon the Company’s calculation, it was determined that a beneficial conversion feature existed amounting to $33,560 and was recorded as a debt discount. As such the Company recognized a debt discount at the date of issuance in the aggregate amount of $110,000 relating to the $10,000 fees paid to the lender, the relative value of the warrants and the BCF. The note discount is being amortized over the term of the note and the unamortized portion is recognized as a reduction to the carrying amount of the Convertible note (a valuation debt discount). During the year ended September 30, 2018, the Company amortized $41,759 of debt discount, leaving an unamortized balance of $68,241 at September 30, 2018.

 

In addition, the Company recorded an additional finance cost of $36,000 related to the fair value of the 200,000 shares of common stock granted at the date issuance.

 

 F-13 
 

 

NOTE 7 – SHAREHOLDERS’ EQUITY

 

Authorized shares

 

During the year ended September 30, 2016, the Company was authorized by its Articles of Incorporation to issue up to 75,000,000 shares of common stock, par value $0.001 per share. Holders of shares of common stock have full voting rights, one vote for each share held of record. Shareholders are entitled to receive dividends as may be declared by the Board out of funds legally available therefore and share pro rata in any distributions to shareholders upon liquidation. Shareholders have no conversion, pre-emptive or subscription rights. All outstanding shares of common stock are fully paid and non-assessable. During the year ended September 30, 2017, the Company amended its Articles of Incorporation to authorize it to issue up to 185,000,000 shares of common stock, par value $0.001 per share, through a filing of a Certificate of Amendment on January 12, 2017. As of September 30, 2018, and 2017 there were 100,952,569 and 90,284,916 shares of common stock issued and outstanding, respectively.

 

Common shares issued for cash

 

During the year ended September 30, 2017, the Company received $884,600 from the sale of 5,837,500 shares of its common stock. In connection with the sales, the Company issued warrants to the shareholders to purchase 13,715,000 shares of the Company’s common stock. The warrants expire five years from the date of grant and have exercise prices ranging from $0.12 per share to $0.40 per share. Certain of these shares induced a “Favored Nation Clause”, which required issuance of further shares in the event that future sales of common stock went below $0.25 per share. See “Common Shares Issued in Connection with the Settlement of an Equity Agreement” below.

 

During the year ended September 30, 2018, the Company received $177,000 from the sale of 1,614,286 shares of its common stock. In connection with the sales, the Company issued warrants to the shareholders to purchase 3,228,572 shares of the Company’s common stock. The warrants expire five years from the date of grant and have exercise prices of $0.15 and $0.18 per share.

 

Common shares issued for services

 

During the year ended September 30, 2017, the Company issued 450,000 shares of its common stock for services valued at $138,500. The shares were valued at the trading price of the common stock at the date of issuance.

 

During the year ended September 30, 2018, the Company issued 770,000 shares of its common stock valued at $111,300 for services provided by WCUI and PSI consultants. The shares were valued at the trading price of the common stock at the date of issuance.

 

Retirement of common shares in legal settlement

 

During the year ended September 30, 2017, the Company reached a settlement agreement with the former shareholders of PSI. Under the settlement agreement, 250,000 shares of the Company’s common stock owned by the former owners was retired. Along with the retirement of the shares, liabilities owed to the former owners totaling to $260,027 were forgiven and were recorded as a gain on extinguishment of debt on the consolidated statement of operations for the year ended September 30, 2017 (see Note 3).

 

Common Shares Issued in Connection with the Settlement of an Equity Agreement

 

During the year ended September 30, 2017, the Company completed a sale of common stock and warrants with a subscriber whereby the Company sold to the subscriber 1,600,000 shares of common stock and warrants to acquire 1,600,000 shares of common at a price of $0.40 per share, for total purchase consideration of $400,000 ($0.25 per unit). The subscription agreement also included a Favored Nation clause that in the event a subsequent private offering occurs at a price less than $.25 per share that was paid by the subscriber, then the subscriber’s stock unit price shall be proportionately adjusted to the identical ration of 40% discount of the market price in the date of the subscription agreement. Upon issuance of the instrument, no liability for the Favored Nation clause was considered necessary as it was determined that ASC 480-10 did not apply as it is a conditional obligation embedded in a share.

 

During the year ended September 2018, the Company sold 333,333 shares of common stock at $0.15 per share and a warrant to acquire 666,667 shares of common stock at $0.18 per share to an investor that triggered the Favored Nation clause. To avoid the issuance of any future potential shares, the Company and the subscriber entered in an agreement on May 15, 2018, whereby the Company would issue an additional 1,066,667 shares common stock to the subscriber, cancel the previously issued 1,600,000 warrants, and issue a new warrant to acquire 5,334,334 shares of common stock at $.18 per share.

 

 F-14 
 

 

NOTE 7 – SHAREHOLDERS’ EQUITY (CONTINUED)

 

Common Shares Issued in Connection with the Settlement of an Equity Agreement (continued)

 

To account for the issuance, the Company determined that other than par value, no other value would be ascribed to the additional 1,066,667 shares of common stock that were issued and due under the Favored Nations clause for the reasons detailed above. The Company also determined that it should record the incremental difference of $433,000 between the fair value of the canceled warrant of $185,000 and the fair value of new warrant of $618,000 at the date of the agreement. Given that no services were provided to the Company, the difference in fair value of the warrants before and after the modification was treated as a deemed dividend.

 

Subsequent to the above issuance, the Company and the shareholder entered into a settlement agreement that will eliminate the Favored Nation clause. As such, in November 2018, the Company issued 296,534 shares and a warrant to acquire 770,987 shares of common stock at $0.18 per share. The fair value of the shares issued was $17,792 and the fair value of the warrants was $38,935. As these values were part of a settlement agreement, the total amount of $56,727 was recorded as a financing cost during the year ended September 30, 2018.

 

Stock Options

 

On December 22, 2010, effective retroactively as of June 30, 2010, the Company’s Board of Directors approved the adoption of the “2010 Non-Qualified Stock Option Plan” (“2010 Option Plan”) by unanimous consent. The 2010 Option Plan was initiated to encourage and enable officers, directors, consultants, advisors and key employees of the Company to acquire and retain a proprietary interest in the Company by ownership of its common stock. A total of 7,500,000 of the authorized shares of the Company’s common stock may be subject to, or issued pursuant to, the terms of the plan. Effective January 1, 2018, the Board of Directors approved to increase the number of authorized shares of the Company’s common stock that may be subject to, or issued pursuant to, the terms of the plan from 7,500,000 to 30,000,000.

 

The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. Additionally, the Company’s policy is to issue new shares of common stock to satisfy stock option exercises. The Company applied fair value accounting for all share based payments awards. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model.

 

Grants during Fiscal Year Ended September 30, 2017

 

During the year ended September 30, 2017, the Company issued options to purchase 1,150,000 shares of its common stock to an officer and consultants of the Company with exercise prices ranging from $0.12 to $0.40 per share. The options vested immediately and expire five years from the date of grant. During the year ended September 30, 2017, the Company valued the options using a Black-Scholes option pricing model and recorded $220,009 of stock compensation for the value of the options.

 

During the year ended September 30, 2017, the Company issued options to purchase 500,000 shares of its common stock to a Director, Dr. Jay Joshi, relating to the sale of NPC Inc. shares (see Note 3). The options had an exercise price of $0.24 per share, vested immediately and expire five years from the date of grant. During the year ended September 30, 2017, the Company valued the options using a Black-Scholes option-pricing model and recorded $106,350 for the value of the options, which was recorded as a cost to the Company in computing the total gain on the transaction (see Note 3).

 

The assumptions used for options granted during the year ended September 30, 2017 are as follows:

 

Exercise price  $0.12 - 0.40 
Expected dividends   - 
Expected volatility   138.2% - 152.3% 
Risk free interest rate   0.96% - 1.39% 
Expected life of options   2.5 

 

 F-15 
 

 

NOTE 7 – SHAREHOLDERS’ EQUITY (CONTINUED)

 

Stock Options (Continued)

 

Grants during Fiscal Year Ended September 30, 2018

 

Options Granted in Accordance with Employment Agreements

 

During the year ended September 30, 2018, the Company entered into employment agreements with four employees of SCI. Under the agreements, the Company issued options to purchase a combined total of 2,800,000 shares of its common stock with a fair value of $396,308. The options are exercisable over a term of five years, with exercise prices ranging from $0.10 to $0.19. The Company valued the options using a Black-Scholes option pricing model. A combined total of 675,000 shares vested in equal amounts over a three-month period, starting on January 1, 2018, with the remainder vesting in equal amounts over the following one year and two months.

 

Further, beginning on January 1, 2018, they will be granted additional stock options to purchase up to an aggregate total of 275,000 shares of the Company’s common stock each quarter. The options are exercisable over a five-year period, are issuable on the last day of each quarter ending and vest immediately on the date of grant. All options accelerate and become fully vested upon the sale or change of control of the Company.

 

During the year ended September 30, 2018, the Company recorded $271,804 of stock compensation for the value of the options, and as of September 30, 2018, unvested compensation of $28,063 remained that will be amortized over the remaining vesting period.

 

Other Grants

 

During the year ended September 30, 2018, the Company granted options to purchase 8,517,500 shares of its common stock to its officers, directors and employees with a fair value of $1,004,450. The options have an exercise price of $0.14 per share and expire five years from the date of grant. The shares will vest in various periods. The Company valued the options using a Black-Scholes option pricing model.

 

During the year ended September 30, 2018, the Company recorded $340,699 of stock compensation for the value of the options, and as of September 30, 2018, unvested compensation of $663,750 remained that will be amortized over the remaining vesting period.

 

The assumptions used for options granted during the year ended September 30, 2018 are as follows:

 

Exercise price  $0.10 - 0.19 
Expected dividends   - 
Expected volatility   121.1% - 130.2% 
Risk free interest rate   2.01% - 2.85% 
Expected life of options   2.5 

 

The table below summarizes the Company’s stock option activities for the years ended September 30, 2018 and 2017:

 

   Number of Option Shares   Exercise Price Range Per Share   Weighted Average Exercise Price  

Fair Value

at Date of

Grant

 
                 
Balance, September 30, 2016   5,227,500   $0.01 – 2.00     $0.60   $1,539,269 
Granted   1,650,000    0.12 – 0.40      0.21    326,359 
Cancelled   (5,000)   0.09    0.09    - 
Exercised   -    -    -    - 
Expired   (50,000)   1.00    1.00    - 
Balance, September 30, 2017   6,822,500   $0.10 - 2.00     $0.51   $1,865,628 
Granted   11,317,500    0.10 - 0.19      0.14    1,379,127 
Cancelled   (183,333)   0.14    0.14    - 
Exercised   -    -    -    - 
Expired   (10,000)   0.75    0.75    - 
Balance, September 30, 2018   17,946,667   $0.10 – 2.00     $0.28   $3,244,755 
Vested and exercisable, September 30, 2018   11,693,095   $0.10 - 2.00     $0.36   $2,149,818 
                     
Unvested, September 30, 2018   6,253,572   $0.14 – 0.19     $0.15   $1,094,937 

 

There was no aggregate intrinsic value for option shares outstanding at September 30, 2018.

 

 F-16 
 

 

NOTE 7 – SHAREHOLDERS’ EQUITY (CONTINUED)

 

Stock Options (Continued)

 

The following table summarizes information concerning outstanding and exercisable options as of September 30, 2018:

 

    Options Outstanding   Options Exercisable 
Range of Exercise Prices   Number Outstanding   Average Remaining Contractual Life (in years)  

Weighted Average

Exercise Price

   Number Exercisable  

Average Remaining Contractual

 Life (in years)

  

Weighted Average

Exercise Price

 
                          
$0.01 - 0.39    14,434,167    4.04   $0.15    8,180,595    3.71   $0.15 
 0.40 - 0.99    2,112,500    0.56    0.40    2,112,500    0.56    0.40 
 1.00 - 1.99    750,000    2.25    1.00    750,000    2.25    1.00 
 2.00    650,000    2.25    2.00    650,000    2.25    2.00 
$0.01 - 2.00    17,946,667    3.41   $0.28    11,693,095    2.97   $0.36 

 

As of September 30, 2018, there were 12,053,333 shares of stock options remaining available for issuance under the 2010 Plan.

 

Stock Warrants

 

During the year ended September 30, 2017:

 

The Company issued warrants to purchase 13,715,000 shares with exercise prices of $0.12 and $0.40 per share as part of the sale of equity units. The warrants expire five years from the date of grant.
   
The Company issued warrants to purchase 330,000 shares with an exercise price of $0.31 per share in connection with the issuance of a convertible note payable (see Note 6). The warrants expire five years from the date of grant.
   
Warrants were exercised to purchase 4,065,414 shares of the Company’s common stock for $3,000.

 

During the year ended September 30, 2018:

 

The Company issued warrants to purchase 3,228,572 shares with exercise prices of $0.15 and $0.18 per share as part of the sale of equity units. The warrants expire five years from the date of grant.
   
The Company issued warrants to purchase 1,100,000 shares with an exercise price of $0.20 per share in connection with the issuance of a convertible notes payable (see Note 6). The warrants expire five years from the date of grant.
   
The Company issued warrants to purchase 6,038,336 shares with exercise prices of $0.14 and $0.18 per share in connection with the conversion of loans payable from officers and shareholders (see Note 5).
   
The Company issued warrants to purchase 6,104,322 shares with an exercise price of $0.18 per share in connection with the initial equity agreement and the settlement of that equity agreement. Also, in connection with the agreement, a warrant to purchase 1,600,000 shares was also cancelled with an exercise price of $0.40 per share.
   
Warrants were exercised to purchase 1,407,619 shares of the Company’s common stock for $170,914.

 

 F-17 
 

 

NOTE 7 – SHAREHOLDERS’ EQUITY (CONTINUED)

 

Stock Warrants (continued)

 

The table below summarizes the Company’s warrants activities for the years ended September 30, 2018 and 2017:

 

   Number of Warrant Shares   Exercise  Price Range Per Share   Weighted Average Exercise Price   Fair Value at Date of Issuance 
                 
Balance, September 30, 2016   54,938,158    $ 0.01 - 2.31   $0.25   $2,063,637 
Granted   14,045,000    0.12 - 0.40    0.19    87,582 
Canceled   -    -    -    - 
Exercised   (4,065,414)   0.12 – 0.25    0.15    - 
Expired   (756,440)   0.45 - 2.31    0.86    - 
Balance, September 30, 2017   64,161,304    $ 0.12 - 1.00   $0.24   $2,151,219 
Granted   16,471,230    0.14 - 0.20    0.17    1,283,341 
Cancelled   (1,600,000)   0.40    0.40    - 
Exercised   (1,407,619)   0.12 - 0.15    0.12    - 
Expired   (9,717,187)   0.30 - 2.31    0.56    - 
Balance, September 30, 2018   67,907,728    $ 0.12 - 1.00   $0.17   $3,434,560 
Vested and exercisable, September 30, 2018   67,907,728    $ 0.12 - 1.00   $0.17   $3,434,560 
                     
Unvested, September 30, 2018   -   $-   $-   $- 

 

There was no aggregate intrinsic value for warrant shares outstanding at September 30, 2018.

 

The following table summarizes information concerning outstanding and exercisable warrants as of September 30, 2018:

 

    Warrants Outstanding   Warrants Exercisable 
Range of Exercise Prices   Number Outstanding   Average Remaining Contractual Life (in years)   Weighted Average Exercise Price   Number Exercisable   Average Remaining Contractual Life (in years)   Weighted Average Exercise Price 
                                 
$0.12 – 0.20    58,994,670    3.04   $0.15    58,994,670    3.04   $0.15 
 0.21 – 0.49    8,574,570    1.78    0.28    8,574,570    1.78    0.28 
 0.50 – 1.00    338,488    0.78    0.68    338,488    0.78    0.68 
                                 
                                 
$0.12 – 1.00    67,907,728    2.87   $0.17    67,907,728    2.87   $0.17 

 

NOTE 8 – SETTLEMENT OF ACCRUED LIABILITIES ACQUIRED WITH PSI ACQUISITION

 

Edwin Longo was a principal in Psoria-Shield, Inc. (PSI), a company that was purchased by Wellness Center in 2012. Prior to the acquisition of PSI, Mr. Longo made advances of $224,444 to PSI that were outstanding at the time Wellness acquired that company. Mr. Longo had filed a claim against Wellness and PSI for payment of those advances. In February 2017, through the Circuit Court of the 13th Judicial Circuit in and for Hillsborough County, Florida, a Final Settlement Agreement (“Settlement Agreement”) was executed between the Company, Longo and certain other parties. The Settlement Agreement provided for, among other matters, the transfer of all right, title and interest of 250,000 common shares of Wellness held by certain parties to the Settlement Agreement back to Wellness, and the release of Wellness from any and all claims against the Company by Longo, including but not limited to the advances owed to him of $224,444.

 

In accounting for the Settlement Agreement on the Company’s statement of operations for the year ended September 30, 2017, the balance of the amount owed to Longo of $224,444, plus another $64,333 of long outstanding or improperly recorded accounts payable, was canceled and accounted for as gain on settlement in an aggregate amount of $288,777.

 

 F-18 
 

 

NOTE 9 – 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.

 

The detailed segment information of the Company is as follows:

 

Wellness Center USA, Inc.

Assets By Segments

 

   September 30, 2018 
   Corporate   Medical Devices   Authentication and Encryption   Total 
ASSETS                    
Current Assets                    
Cash  $331   $1,452   $2,427   $4,210 
Prepaid expenses and other current assets   -    -    1,550    1,550 
Total current assets   331    1,452    3,977    5,760 
                     
Property and equipment, net   -    -    2,619    2,619 
Other assets   15,000    1,760    -    16,760 
Total other assets   15,000    1,760    2,619    19,379 
                    
TOTAL ASSETS  $15,331   $3,212   $6,596   $25,139 

 

 F-19 
 

 

Wellness Center USA, Inc.

Operations by Segments

 

   For the Year Ended 
   September 30, 2018 
   Corporate   Medical Devices   Authentication and Encryption   Total 
Sales:                
Trade  $-   $45,000   $95,023   $140,023 
Consulting services   -    -    73,700    73,700 
Total Sales   -    45,000    168,723    213,723 
                     
Cost of goods sold   -    -    79,960    79,960 
                     
Gross profit   -    45,000    88,763    133,763 
                     
Operating expenses   1,179,937    224,196    822,229    2,226,362 
                     
Loss from operations  $(1,179,937)  $(179,196)  $(733,466)  $(2,092,599)

 

Wellness Center USA, Inc.

Operations by Segments

 

   For the Year Ended 
   September 30, 2017 
   Corporate   Medical Devices   Authentication and Encryption   Total 
Sales:                    
Trade  $-   $180,999   $28,600   $209,599 
Consulting services   -    -    63,125    63,125 
Total Sales   -    180,999    91,725    272,724 
                     
Cost of goods sold   -    71,827    75,117    146,944 
                     
Gross profit   -    109,172    16,608    125,780 
                     
Operating expenses   1,066,227    436,557    626,400    2,129,184 
                     
Loss from operations  $(1,066,227)  $(327,385)  $(609,792)  $(2,003,404)

 

 F-20 
 

 

NOTE 10 – COMMITMENTS

 

Operating Leases

 

The Company leases its corporate office facilities under a non-cancellable lease agreement. The lease was initiated in July 2016 and expires February 28, 2024. The lease contains escalating rent payments and free rent periods. The Company accounts for the rent expense on a straight-line basis. At September 30, 2018 and 2017, the Company recorded a deferred rent obligation of $130,260 and $85,294, respectively, relating to the lease.

 

Commencing on October 1, 2016, the Company’s wholly-owned subsidiary, StealthCo, entered into a non-cancellable lease agreement to lease its office facilities in Oak Ridge, Tennessee. The term of the lease is five years and expires September 30, 2021.

 

Minimum annual rental commitments under non-cancelable leases at September 30, 2018 are as follows:

 

Years ending September 30,  Amount 
2019  $145,812 
2020   164,614 
2021   184,583 
2022   152,709 
2023   158,527 
Thereafter   67,871 
TOTAL  $874,116 

 

Rent expense was $188,801 and $183,685 for the years ended September 30, 2018 and 2017, respectively.

 

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.

 

F-21
 

 

NOTE 10 – COMMITMENTS

 

Legal Matters (continued)

 

In June, 2015, the Company and its then CEO, Mr. Andrew Kandelapas, received a formal order of investigation from the Chicago Regional Staff of the SEC. The Company and its then 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 then 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 said 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.

 

In periodic reports on Forms 10-K and 10-Q for the periods ending September 30, 2017 and December 31, 2017, respectively, the Company disclosed that on May 25, 2017, the SEC’s Chicago Regional Office informed it that it had made a preliminary determination to recommend filing of an enforcement action against the Company and its CEO based on possible violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act, and Section 15(a) of the Exchange Act. Subsequent discussions resulted in the submission of an Offer of Settlement (“Settlement”) through an administrative cease and desist action on November 17, 2017, which was accepted by the SEC on April 12, 2018, as disclosed on Form 8-K filed April 18, 2018. Pursuant to the Settlement, the Company neither admitted nor denied any of the allegations, but was enjoined from violating the above-referenced Sections and Rule. The Settlement imposed no financial penalties or sanctions against the Company.

 

The Form 8-K also disclosed that on April 13, 2018, the SEC filed a separate complaint against the CEO in the U.S. District Court for the Northern District of Illinois, asserting the allegations noted above, as well as allegations that he manipulated the price of company shares through undisclosed trading, realizing more than $130,000 from such trading. On the date of filing, the CEO voluntarily resigned as an officer and director of the Company. Without admitting or denying the allegations, the CEO consented to the entry of the judgment, which was entered on September 26, 2018 by the U.S. District Court for the Northern District of Illinois. The judgment permanently enjoined him from violating the anti-fraud provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and the broker registration provisions of Section 15(a) of the Exchange Act. It also bars him from serving as an officer or director of a public company and from participating in penny stock offerings, and ordered disgorgement and interest and penalties to be determined by the court.

 

Employment Contracts

 

During the year ended September 30, 2018, the Company entered into employment agreements with four employees of StealthCo (including Ricky Howard), under which their employment shall continue in effect for a period of three years. Each agreement allows for a base salary with an accumulated amount of $350,000 that can increase each year based on certain profitability goals of SCI or SCI products. Under the agreements, the Company will issue options to purchase shares of its common stock as discussed in Note 7. Subsequent to September 30, 2018, three of the four employees were no longer employed by the Company.

 

F-22
 

 

NOTE 11 – INCOME TAXES

 

At September 30, 2018, the Company had net operating loss (“NOL”) carryforwards for federal income tax purposes of approximately $16 million that may be offset against future taxable income through 2038. No tax benefit has been reported with respect to these net operating loss carryforwards because the Company believes that the realization of the Company’s net deferred tax assets of approximately $6,000,000 was not considered more likely than not and accordingly, the potential tax benefits of the net loss carryforwards are offset by a full valuation allowance.

 

Deferred tax assets consist primarily of the tax effect of NOL carryforwards. The Company has provided a full valuation allowance on the deferred tax assets because of the uncertainty regarding the probability of its realization.

 

The Company’s effective income tax rate differs from the amount computed by applying the federal statutory income tax rate to loss before income taxes as follows:

 

   September 30,
2018
   September 30,
2017
 
         
Income tax benefit at federal statutory rate   (21.0)%   (34.0)%
State income tax benefit, net of federal benefit   (4.0)%   (6.0)%
Change in valuation allowance   25.0%   40.0%
Income taxes at effective income tax rate   -%   -%

 

The components of deferred taxes consist of the following at September 30, 2018 and 2017:

 

   September 30,
2018
   September 30,
2017
 
         
Net operating loss carryforwards  $5,884,083   $5,535,673 
Less: Valuation allowance   (5,884,083)   (5,535,673)
           
Net deferred tax assets  $-   $- 

 

NOTE 12 – RELATED PARTY TRANSACTIONS

 

Compensation of Former Chairman and Chief Executive Officer

 

During the years ended September 30, 2018 and 2017, the Company's former Chairman and Chief Executive Officer, Andrew J. Kandalepas, was paid compensation of $182,375 and $250,000, respectively. During the year ended September 30, 2018, he was also granted stock options to purchase 1,300,000 shares of the Company's common stock at an exercise price of $0.14 per share. The options expire five years from the date of grant and the shares will vest in various periods. Mr. Kandalepas resigned as an officer and director in April 2018. As of September 30, 2018 and 2017, $81,965 and $13,440 of accrued compensation was owed to Mr. Kandalepas.

 

NOTE 13 – SUBSEQUENT EVENTS

 

On November 15, 2018, Wellness Center USA, Inc. (“WCUI”) and its wholly-owned subsidiary, Psoria-Shield, Inc. (“PSI”), entered into a Joint Venture Agreement with PSI Gen 2 Funding, Inc. (“GEN2”), an Illinois corporation, to further development, marketing, licensing and/or sale of PSI technology and products. The Joint Venture will be conducted through NEO PHOTOTHERAPY, LLC, a recently formed Illinois limited liability company (“NEO”), with principal offices and records to be maintained at WCUI’s offices. PSI and GEN2 will be the members of NEO, owning 58.5% and 28.0%, respectively, of the limited liability interests (“Units”) issued in connection with the organization of NEO. An additional 13.5% of such Units will be reserved for issuance as incentives for key employees and consultants retained from time to time by NEO in connection with the Venture. PSI and GEN2 will manage NEO’s day-to-day operations. PSI will contribute PSI Technology to NEO and GEN2 will contribute $700,000, through the period ending January 31, 2019. Repayment of the $700,000 investment by GEN2 will begin through and upon the date which NEO has realized and retained cumulative Net Income/Distributable Cash in the amount of $300,000. Distributions thereafter will be made to PSI, GEN2 and other members in proportion to their respective Unit ownership, at the times and in the manner determined from time to time by the managers, in their sole discretion. GEN2 consists of accredited investors, and investment participation from several WCUI officers and directors, including Calvin R. O’Harrow and Roy M. Harsch.

 

Through November 2018, PSI was 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”). In December 2018, the PDC Joint Venture Agreement was terminated. Further development, marketing, licensing and/or sales of PSI Technology and products is expected to be conducted through NEO.

 

F-23