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May. 15, 2018 4:59 PM|
About: Wellness Center USA Inc (WCUI)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number: 001-37960
WELLNESS CENTER USA, INC .
(Exact name of registrant as specified in its charter)
Nevada 27-2980395
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2500 West Higgins Road, Ste. 780, Hoffman Estates, IL 60169
(Address of principal executive offices) ( Zip Code)
(847) 925-1885
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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 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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer [ ] Accelerated Filer[ ]
Non-Accelerated Filer
(do not check if Smaller Reporting Company) [ ]
Smaller Reporting Company [X] Emerging Growth Company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of the Registrant’s common stock, $0.0001 par value, as of March 31, 2018 was 92,879,384.
FORM 10-Q
WELLNESS CENTER USA, INC.
MARCH 31, 2018
TABLE OF CONTENTS
PART I— FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
Item 3 Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Control and Procedures 23
PART II— OTHER INFORMATION
Item 1 Legal Proceedings 26
Item 1A Risk Factors 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Mine Safety Disclosures. 27
Item 5. Other Information 27
Item 6. Exhibits 27
SIGNATURE 28
2
PART I— FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Wellness Center USA, Inc.
Condensed Consolidated Balance Sheets
March 31, 2018 September 30, 2017
(Unaudited)
ASSETS
Current Assets
Cash $ 40,413 $ 29,369
Accounts receivable - 24,999
Inventories 12,057 12,335
Prepaid expenses and other current assets 2,213 1,751
Total Current Assets 54,683 68,454
Property and equipment, net 3,148 5,126
Other assets 16,760 16,760
Total Other Assets 19,908 21,886
TOTAL ASSETS $ 74,591 $ 90,340
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current Liabilities
Accounts payable and accrued expenses $ 376,641 $ 203,367
Accrued payroll - officers 51,381 13,440
Deferred revenue 49,598 55,098
Convertible notes payable 130,721 49,884
Loans payable from officers and shareholders 227,500 59,000
Total Current Liabilities 835,841 380,789
Shareholders’ Deficit
Common stock, par value $0.001, 185,000,000 shares authorized; 92,879,384 and 90,284,916 shares issued and outstanding, respectively 93,066 90,285
Additional paid-in capital 19,841,209 19,069,211
Accumulated deficit (20,310,695 ) (19,132,557 )
Total Wellness Center USA shareholders’ equity (deficit) (376,420 ) 26,939
Non-controlling interest (384,830 ) (317,388 )
Total Shareholder’s deficit (761,250 ) (290,449 )
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT $ 74,591 $ 90,340
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Wellness Center USA, Inc.
Condensed Consolidated Statements of Operations
Three Months Ended Six Months Ended
March 31, March 31,
2018 2017 2018 2017
(Unaudited) (Unaudited)
Sales:
Trade $ 20,500 $ 120,100 $ 36,000 $ 209,100
Consulting services 20,750 14,125 31,750 28,250
Total Sales 41,250 134,225 67,750 237,350
Cost of goods sold 17,666 53,407 34,658 113,907
Gross profit 23,584 80,818 33,092 123,443
Operating expenses 561,317 609,624 895,480 1,026,187
Loss from operations (537,733 ) (528,806 ) (862,388 ) (902,744 )
Other income (expenses)
Amortization of debt discount (65,790 ) - (135,837 ) -
Gain on extinguishment of debt - 288,777 - 288,777
Loss on modification of conversion price on convertible note payable (158,400 ) - (158,400 ) -
Loss on modification of exercise price on warrants in connection with convertible note payable (5,445 ) - (5,445 ) -
Financing costs (70,422 ) - (70,422 ) -
Interest expense (9,788 ) - (13,088 ) -
Total other income (expenses) (309,845 ) 288,777 (383,192 ) 288,777
LOSS FROM CONTINUING OPERATIONS (847,578 ) (240,029 ) (1,245,580 ) (613,967 )
DISCONTINUED OPERATIONS
Loss from discontinued operations - (29,361 ) - (70,923 )
NET LOSS (847,578 ) (269,390 ) (1,245,580 ) (684,890 )
Net loss (gain) attributable to non-controlling interest 21,473 (5,430 ) 67,442 1,098
NET LOSS ATTRIBUTABLE TO WELLNESS CENTER USA, INC. $ (826,105 ) $ (274,820 ) $ (1,178,138 ) $ (683,792 )
BASIC AND DILUTED LOSS PER SHARE $ (0.01 ) $ (0.00 ) $ (0.01 ) $ (0.01 )
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING BASIC AND DILUTED 91,551,485 84,644,460 91,414,889 82,814,207
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Wellness Center USA, Inc.
Condensed Consolidated Statement of Shareholders' Deficit (Unaudited)
Common Stock
Additional
Paid-in
Accumulated Total WCUI Non-controlling
Shares Amount Capital Deficit Deficit Interest Total
Balance, September 30, 2017 90,284,916 $ 90,285 $ 19,069,211 $ (19,132,557 ) $ 26,939 $ (317,388 ) $ (290,449 )
Exercise of stock warrants 1,407,619 1,407 169,507 - 170,914 - 170,914
Fair value of common stock issued for services 150,000 150 26,550 - 26,700 - 26,700
Shares issued upon conversions of note payable 550,000 737 54,263 - 55,000 - 55,000
Fair value of vested stock options - - 137,898 - 137,898 - 137,898
Fair value of common stock issued in connection with convertible note payable 486,849 487 69,935 - 70,422 - 70,422
Discount on convertible note payable due to beneficial conversion and warrants - - 150,000 - 150,000 - 150,000
Loss on modification of conversion price on convertible note payable - - 158,400 - 158,400 - 158,400
Loss on modification of exercise price on warrants in connection with convertible note payable - - 5,445 - 5,445 - 5,445
Net loss for the six months ended March 31, 2018 - - - (1,178,138 ) (1,178,138 ) (67,442 ) (1,245,580 )
Balance, March 31, 2018 (Unaudited) 92,879,384 $ 93,066 $ 19,841,209 $ (20,310,695 ) $ (376,420 ) $ (384,830 ) $ (761,250 )
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Wellness Center USA, Inc.
Condensed Consolidated Statements of Cash Flows
Six Months Ended
March 31,
2018 2017
(Unaudited)
Cash Flows from Operating Activities
Net loss $ (1,245,580 ) $ (684,890 )
Adjustments to reconcile net loss to net cash used in operating activities
Loss from discontinued operations - 70,923
Depreciation expense 1,978 5,402
Amortization of debt discount 135,837 -
Gain on extinguishment of debt - (288,777 )
Fair value of common shares issued for services 26,700 26,000
Fair value of stock options issued for services 137,898 178,068
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 70,422 -
Changes in Assets and Liabilities
(Increase) Decrease in:
Accounts receivable 24,999 (70,000 )
Inventories 278 66,787
Prepaid expenses and other current assets (462 ) 24,613
(Decrease) Increase in:
Accounts payable and accrued expenses 173,274 (25,500 )
Accrued payroll taxes - 20,506
Accrued payroll - officers 37,941 25,371
Deferred revenue (5,500 ) (24,826 )
Net cash used in operating activities from continuing operations (478,370 ) (676,323 )
Net cash used in operating activities from discontinued operations - (6,489 )
Net cash used in operating activities (478,370 ) (682,812 )
Cash Flows from Investing Activities
Purchases of property and equipment - (546 )
Net cash used in investing activities from continuing operations - (546 )
Net cash used in investing activities from discontinued operations - (1,704 )
Net cash used in investing activities - (2,250 )
Cash Flows from Financing Activities
Proceeds from loans payable from officers and shareholders 179,000 30,000
Repayment of loans payable from officers and shareholders (10,500 ) -
Proceeds from convertible note payable 150,000 -
Repayment of advances from related party - (2,000 )
Proceeds from the sale of common stock and warrants - 424,600
Exercise of stock warrants 170,914 428,015
Net cash provided by financing activities 489,414 880,615
Net increase in cash 11,044 195,553
Cash beginning of period 29,369 81,749
Cash end of period $ 40,413 $ 277,302
Supplemental cash flows disclosures:
Interest paid $ - $ -
Taxes paid $ - $ -
Supplemental non-cash financing disclosures:
Debt discount on convertible note payable $ 150,000 $ -
Conversion of convertible note payable into common shares $ 55,000 $ -
Non-controlling interest’s share in losses of a subsidiary $ 67,442 $ 1,098
The accompanying notes are an integral part of these condensed consolidated financial statements.
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WELLNESS CENTER USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED MARCH 31, 2018 and 2017
NOTE 1 – ORGANIZATION AND 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 condensed consolidated statement of operations for the three months ended March 31, 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.
Basis of Presentation of Unaudited Financial Information
The accompanying unaudited condensed consolidated financial statements of Wellness Center USA, Inc. and Subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the six months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending September 30, 2018.
Going Concern
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, the Company has not yet generated significant revenues and has incurred recurring net losses. During the six months ended March 31, 2018, the Company incurred a net loss from continuing operations of $1,245,580 and used cash in operations from continuing operations of $478,370 and had a shareholders’ deficit of $761,250 as of March 31, 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.
In addition, the Company’s independent registered public accounting firm, in its report on the Company’s September 30, 2017 financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.
At March 31, 2018, the Company had cash on hand in the amount of $40,413. 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 six months ended March 31, 2018, the Company received $489,414 through debt financing and the exercise of stock warrants.
No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case of equity financing.
7
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%
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 stockholders by the weighted average number of outstanding common shares during the period. Diluted loss per share is computed by dividing the net loss applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. For the six months ended March 31, 2018 and 2017, the basic and diluted shares outstanding were the same, as potentially dilutive shares were considered anti-dilutive. At March 31, 2018 and 2017, the dilutive impact of outstanding stock options for 8,847,500 and 6,147,500 shares, respectively, and outstanding warrants for 59,096,084 and 63,741,253 shares, respectively, have been excluded because their impact on the loss per share is anti-dilutive.
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. In addition to the aforementioned general policy, the following are the specific revenue recognition policies for each major category of revenue:
(i) Sale of products : The Company derives its revenues from sales contracts with customers with revenues being generated upon the shipment of merchandise. Persuasive evidence of an arrangement is demonstrated via sales invoice or contract; product delivery is evidenced by warehouse shipping log as well as a signed bill of lading from the vessel or rail company and title transfers upon shipment, based on free on board (“FOB”) warehouse terms; the sales price to the customer is fixed upon acceptance of the signed purchase order or contract and there is no separate sales rebate, discount, or volume incentive. When the Company recognizes revenue, no provisions are made for returns because, historically, there have been very few sales returns and adjustments that have impacted the ultimate collection of revenues.
(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 March 31, 2018 and 2017 was $49,598 and $55,098, respectively.
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.
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.
In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.
NOTE 3 – DISCONTINUED OPERATIONS
On August 11, 2017, the Company entered into an agreement with Dr. Jay Joshi to sell 100% of the issued and outstanding shares of NPC Inc. (“NPC”) to Dr. Joshi. As part of the agreement, Dr. Joshi and NPC released the Company from any and all liabilities, claims and obligations of the Company in favor of Dr. Joshi or NPC and arising from or relating to the operation of the NPC business. Also as part of the agreement, Dr. Joshi’s employment agreement with NPC was terminated and all assets and liabilities of NPC were transferred to Dr. Joshi as of the date of the agreement, including $365,459 of accrued compensation and shareholder advances owed to Dr. Joshi by NPC. The Company agreed to sell NPC to Dr. Joshi so that it could focus on its other business segments, PSI and Stealth Mark, which are technology companies, while NPC was a service business. Further, the elimination of the underlined NPC liabilities to Dr. Joshi will significantly improve Wellness Center Inc.’s financial position. As part of the agreement, the Company agreed to issue Dr. Joshi stock options to purchase 500,000 shares of its common stock with an exercise price of $0.25 per share. Dr. Joshi continued to serve on the Company’s board of directors until February 5, 2018. During the year ended September 30, 2017, the Company recorded a $252,508 gain relating to this transaction.
Components of the statement of operations relating to NPC for the three and six months ended March 31, 2017, were as follows:
Three Months Ended Six Months Ended
March 31, 2017 March 31, 2017
Total Sales $ 40,000 $ 77,402
Operating expenses 69,361 148,325
Loss from discontinued operations $ (29,361 ) $ (70,923 )
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NOTE 4 – LOANS PAYABLE FROM OFFICERS AND SHAREHOLDERS
At September 30, 2017, loans payable from officers and shareholders of $59,000 consisted of two unsecured note agreements issued in 2014 totaling to $9,000, and two short-term unsecured loans issued in fiscal 2017 totaling to $50,000. The loans issued in 2014 have no stated interest rate and are due on demand. The loans issued in 2017 have an interest rate of eight percent per annum and are due one year from the date of issuance. During the six months ended March 31, 2018, the Company borrowed $179,000 under nine 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 six months ended March 31, 2018, the Company repaid $10,500 of the loans payable. As of March 31, 2018, loans payable from officers and shareholders of $227,500 were outstanding.
NOTE 5 – CONVERTIBLE NOTES PAYABLE AGREEMENTS
March 31, 2018 September 30, 2017
Convertible note payable (a) $ 110,000 $ 165,000
Convertible note payable (b) 165,000 -
Debt discount – unamortized balance (144,279 ) (115,116 )
Convertible notes payable, net $ 130,721 $ 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 and warrants to purchase 330,000 shares of its common stock, which vested upon grant. The warrants expire five years from the date of grant and have an exercise price of $0.50 per share. The note payable accrues interest at eight percent per annum, is unsecured and is convertible at any time after the 90 th day from the issue date into the Company’s common stock at the fixed conversion price of $0.25 per share. The note matures in February 2018, but may be extended at the option of the individual. The Company may prepay the note at any time immediately following the issue date upon seven days’ prior written notice.
On the date of the agreement, the closing price of the common stock was $0.31 per share. As the conversion price embedded in the note agreement was below the trading price of the common stock on the date of issuance, a beneficial conversion feature (BCF) was recognized at the date of issuance. The Company recognized a debt discount at the date of issuance in the aggregate amount of $150,000 related to the relative fair value of the warrants and beneficial conversion features, which comprised $94,704 related to the intrinsic value of beneficial conversion features and $55,296 related to the relative fair value of the warrants. The aggregate fair value of the warrants of $87,582 was based on a probability affected 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. During the six months ended March 31, 2018, the Company amortized the remaining $115,116 of debt discount, leaving no unamortized balance at March 31, 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 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. The Company recorded an expense of $22,422 relating to the issuance of these shares.
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 expense 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 six months ended March 31, 2018, the individual converted $55,000 of the convertible note payable into 550,000 shares of the Company’s common stock.
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NOTE 5 – CONVERTIBLE NOTE AGREEMENTS (CONTINUED)
(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 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 90 th 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 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, and the aggregate amount of $150,000 relating to 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 three and six months ended March 31, 2018, the Company amortized $20,721 of debt discount, leaving an unamortized balance of $144,279 at March 31, 2018.
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.
NOTE 6 – SHAREHOLDERS’ DEFICIT
Common shares issued for Services
During the six months ended March 31, 2018, the Company issued 150,000 shares of its common stock valued at $26,700 for services provided by accounting and PSI consultants. The shares were valued at the trading price of the common stock at the date of issuance.
Common shares issued in connection with Convertible Notes Payable
During the six months ended March 31, 2018, the Company issued 486,849 shares of its common stock in connection with the issuance of convertible notes payable and also issued 550,000 shares upon the conversion of the notes payable (see Note 5).
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 (see Note 9).
On January 1, 2018, the Company entered into employment agreements with three employees of SCI. Under the agreements, the Company issued options to purchase a combined total of 1,775,000 shares of its common stock with a fair value of $289,890. The options are exercisable over a term of five years, with an exercise price of $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. During the three and six months ended March 31, 2018, the Company recorded $110,498 of stock compensation for the value of the options and as of March 31, 2018, unvested compensation of $179,392 remained that will be amortized over the remaining vesting period.
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NOTE 6 – SHAREHOLDERS’ DEFICIT (CONTINUED)
Stock Options (continued)
Further, beginning on January 1, 2018, they will be granted additional stock options to purchase up to an aggregate total of 250,000 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 six months ended March 31, 2018, the Company issued options to purchase 250,000 shares of its common stock to the employees with an exercise price of $0.13 per share. During the six months ended March 31, 2018, the Company valued the options using a Black-Scholes option pricing model and recorded $27,400 of stock compensation for the value of the options vested.
The assumptions used for options granted during the six months ended March 31, 2018 are as follows:
Exercise price $ 0.13 - 0.19
Expected dividends -
Expected volatility 123.8% - 130.2 %
Risk free interest rate 2.01% - 2.18 %
Expected life of options 2.5
The table below summarizes the Company’s stock option activities for the three months ended March 31, 2018:
Number of
Option Shares
Exercise Price Range Per Share Weighted Average Exercise Price
Fair Value
at Date of Grant
Balance, September 30, 2017 6,822,500 $ 0.10 - 2.00 $ 0.51 $ 1,865,628
Granted 2,025,000 0.13 - 0.19 0.18 317,971
Cancelled - - - -
Exercised - - - -
Expired - - - -
Balance, March 31, 2018 8,847,500 $ 0.10 – 2.00 $ 0.43 $ 2,183,599
Vested and exercisable, March 31, 2018 7,747,500 $ 0.10 – 2.00 $ 0.43 $ 2,003,527
Unvested, March 31, 2018 1,100,000 $ 0.19 $ 0.19 $ 180,072
The aggregate intrinsic value for option shares outstanding at March 31, 2018 was $13,438.
The following table summarizes information concerning outstanding and exercisable options as of March 31, 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
$ 0.10 - 0.39 5,325,000 3.72 $ 0.18 4,225,000 3.72 $ 0.18
0.40 - 0.99 2,122,500 1.05 0.40 2,122,500 1.05 0.40
1.00 - 1.99 750,000 2.75 1.00 750,000 2.75 1.00
2.00 650,000 2.75 2.00 650,000 2.75 2.00
$ 0.01 - 2.00 8,847,500 2.93 $ 0.43 7,747,500 2.93 $ 0.43
As of March 31, 2018, there were 21,152,500 shares of stock options remaining available for issuance under the 2010 Plan.
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NOTE 6 – SHAREHOLDERS’ DEFICIT (CONTINUED)
Stock Warrants
During the six months ended March, 31, 2018, the Company issued warrants to purchase 660,000 shares with an exercise price of $0.20 per share in connection with the issuance of a convertible note payable (see Note 5). The warrants expire five years from the date of grant.
During the six months ended March, 31, 2018, warrants to purchase 1,407,619 shares of the Company’s common stock were exercised for $170,914.
The table below summarizes the Company’s warrants activities for the three months ended March 31, 2018:
Number of Warrant Shares Exercise Price Range Per Share Weighted Average Exercise Price Fair Value at Date of Issuance
Balance, September 30, 2017 64,161,304 $ 0.12 - 1.00 $ 0.24 $ 2,151,219
Granted 660,000 0.20 0.20 132,000
Cancelled - - - -
Exercised (1,407,619 ) 0.12 – 0.15 0.12 -
Expired (4,317,602 ) 0.30 – 0.45 0.43 -
Balance, March 31, 2018 59,096,084 $ 0.12 - 1.00 $ 0.22 $ 2,283,219
Vested and exercisable, March 31, 2018 59,096,084 $ 0.12 - 1.00 $ 0.22 $ 2,283,219
Unvested, March 31, 2018 - $ - $ - $ -
The aggregate intrinsic value for warrant shares outstanding March 31, 2018 was $95,733.
The following table summarizes information concerning outstanding and exercisable warrants as of March 31, 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 43,183,441 2.61 $ 0.15 43,183,441 2.61 $ 0.15
0.21 – 0.49 11,412,905 2.13 0.32 11,412,905 2.13 0.32
0.50 – 1.00 4,499,738 0.38 0.75 4,499,738 0.38 0.75
$ 0.12 – 1.00 59,096,084 2.35 $ 0.22 59,096,084 2.35 $ 0.22
NOTE 7 – SEGMENT REPORTING
Reportable segments are components of an enterprise about which separate financial information is available and that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. During the year ended September 30, 2017, the Company discontinued operations of its NPC segment (see Note 3).
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NOTE 7 – SEGMENT REPORTING (CONTINUED)
The Company operates in the following business segments:
(i) Medical Devices: which it stems from PSI, its wholly-owned subsidiary it acquired on August 24, 2012, a developer, manufacturer, marketer and distributer of targeted Ultra Violet (“UV”) phototherapy devices for the treatment of skin diseases.
(ii) Authentication and Encryption Products and Services: which it stems from StealthCo, its wholly-owned subsidiary formed on March 18, 2014. StealthCo engages in the business of selling, licensing or otherwise providing certain authentication and encryption products and services upon acquisition of certain assets from SMI.
The detailed segment information of the Company is as follows:
Wellness Center USA, Inc.
Assets By Segments
March 31, 2018
Corporate Medical Devices Authentication and Encryption Total
ASSETS
Current Assets
Cash $ 24,884 $ 1,003 $ 14,526 $ 40,413
Accounts receivable - - - -
Inventories - - 12,057 12,057
Prepaid expenses and other current assets - - 2,213 2,213
Total current assets 24,884 1,003 28,796 54,683
Property and equipment, net - - 3,148 3,148
Other assets 15,000 1,760 - 16,760
Total other assets 15,000 1,760 3,148 19,908
TOTAL ASSETS $ 39,884 $ 2,763 $ 31,944 $ 74,591
Wellness Center USA, Inc.
Operations by Segments
For the Six Months Ended
March 31, 2018
Corporate Medical Devices Authentication and Encryption Total
Sales:
Trade $ - - $ 36,000 $ 36,000
Consulting services - - 31,750 31,750
Total Sales - - 67,750 67,750
Cost of goods sold - - 34,658 34,658
Gross profit - - 33,092 33,092
Operating expenses 397,108 135,934 362,438 895,480
Loss from operations $ (397,108 ) $ (135,934 ) $ (329,346 ) $ (862,388 )
Wellness Center USA, Inc.
Operations by Segments
For the Six Months Ended
March 31, 2017
Corporate Medical Devices Authentication and Encryption Total
Sales:
Trade $ - $ 196,000 $ 13,100 $ 209,100
Consulting services - - 28,250 28,250
Total Sales - 196,000 41,350 237,350
Cost of goods sold - 75,117 38,790 113,907
Gross profit - 120,883 2,560 123,443
Operating expenses 568,610 157,039 300,538 1,026,187
Loss from operations $ (568,610 ) $ (36,156 ) $ (297,978 ) $ (902,744 )
NOTE 8 – LEGAL MATTERS
The Company is periodically engaged in legal proceedings arising from and relating to its business operations. We currently are not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our Company, our common stock, any of our subsidiaries or of our Company’s or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect on our financial condition or results of operations.
In May, 2017, the Staff issued a Wells Notice stating its preliminary determination to recommend an enforcement action against the Company and our CEO, Mr. Kandalepas, based on possible violations of Section 17(a) of the Securities Act, Sections 15 (a) and 10(b) of the Exchange Act, and Rule 10b-5 thereunder. The Staff would allege, among other things, that periodic reports issued during 2013 and 2014 were misleading because they failed to disclose or mischaracterized as “salary”, “prepayments” or “loans,” several payments totaling $450,000 made to our CEO during those years without prior Board approval; that two press releases issued in 2015 touted shipments of several Psoria-Light devices that were not closed sales; and that we used an unregistered broker-dealer to identify and solicit potential investors during 2013, 2015 and 2017.
Subsequent discussions resulted in our submission of an Offer of Settlement (“Settlement”) through an administrative cease and desist action on November 17, 2017, which was accepted by the SEC on April 12, 2018. Pursuant to the Settlement, we neither admit nor deny any of the proposed allegations, but are enjoined from violating the above-referenced Sections and Rule. The Settlement imposes no financial penalties or sanctions against the Company. On April 13, 2018, the SEC filed a separate complaint against our CEO in the U.S. District Court for the Northern District of Illinois. It asserts 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. The SEC seeks a permanent injunction, disgorgement including prejudgment interest, a civil penalty, an officer-and-director bar, and a penny stock bar.
Mr. Kandalepas intends to contest the allegations against him. He has voluntarily resigned as an officer and director. He has agreed to provide transition services to Calvin R. O’Harrow and Roy M. Harsch, who have been appointed to serve as CEO and Chairman, respectively. Mr. Kandalepas will remain with the Company to serve as Executive Director of Corporate Business Development.
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NOTE 9 – SUBSEQUENT EVENTS
Subsequent to March 31, 2018, the Company borrowed $80,000 from Directors, an officer and a shareholder. Of these loans, $60,000, along with loans payable of $188,500 outstanding at March 31, 2018, were converted into 1,962,498 shares of common stock. In connection with the conversion of the loans payable, the Company issued warrants to purchase 3,925,002 shares of common stock. The warrants expire five years from the date of grant and have exercise prices of $0.14 and $0.18 per share.
An aggregate total of $70,000 of a convertible note payable was converted into 700,000 shares of the Company’s common stock.
The Company granted 500,000 shares of its common stock to consultants for services provided. The fair value of the shares on the dates of grant was $70,000.
In April 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 2010 Option Plan from 7,500,000 to 30,000,000, effective January 1, 2018 (see Note 6).
In April 2018, the Company granted options to purchase 11,980,000 shares of its common stock to its officers and directors with a fair value of approximately $1,400,000. The options have an exercise price of $0.14 per share and expire five years from the date of grant. A total of 1,230,000 shares vested upon grant and 10,750,000 shares will vest ratably on a monthly basis over 36 months.
In May 2018, the Company received $50,000 from the sale of 333,333 shares of its common stock. In connection with the sale, the Company issued warrants to the shareholders to purchase 666,667 shares of the Company’s common stock. The warrants expire five years from the date of grant and have an exercise price of $0.18 per share.
In May 2018, the Board approved the permanent appointment of Roy M. Harsch as Chairman of the Board of Directors and Calvin O’Harrow as Chief Executive Officer.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
Except for historical information, the following discussion contains forward-looking statements based upon current expectations that involve certain risks and uncertainties. Such forward-looking statements include statements regarding, among other things, (a) our projected sales and profitability, (b) our growth strategies, (c) anticipated trends in our industry, (d) our future financing plans, (e) our anticipated needs for working capital, (f) our lack of operational experience and (g) the benefits related to ownership of our common stock. Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found under “Description of Business,” and “Analysis of Financial Condition and Results of Operations”, as well as in this Report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” in our Annual Report on Form 10-K and in other Reports we have filed with the Securities and Exchange Commission, as well as matters described in this Report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Report will in fact occur as projected.
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto. This section includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. You should not place undue certainty on these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our predictions.
Description of Business
Background
Wellness Center USA, Inc. (“WCUI” or the “Company”) was incorporated in June 2010 under the laws of the State of Nevada. The Company initially engaged in online sports and nutrition supplements marketing and distribution. The Company subsequently expanded into additional businesses within the healthcare and medical sectors through acquisitions, including Psoria-Shield Inc. (“PSI”), National Pain Centers, Inc. (“NPC”) and StealthCo Inc. (“SCI”), d/b/a Stealth Mark, Inc. On August 11, 2017, the Company entered into an agreement to sell 100% of the issued and outstanding shares of NPC, which has been accounted for as a discontinued operation on the condensed consolidated financial statements for the three months ended December 31, 2016. See Note 3 for details relating to the sale.
The Company currently operates in the following business segments: (i) distribution of targeted Ultra Violet (“UV”) phototherapy devices for dermatology; and (ii) authentication and encryption products and services. The segments are operated, respectively, through PSI and SCI.
PSI
PSI was incorporated under the laws of the state of Florida on June 17, 2009. On August 24, 2012, we acquired all of the issued and outstanding shares of stock in PSI. PSI is a wholly-owned subsidiary of the Company and operated by Psoria Development Company LLC, an Illinois limited liability company (“PDC”), a joint venture between WCUI/PSI and The Medical Alliance, Inc., a Florida corporation (“TMA”).
PSI designs, develops and markets a targeted ultraviolet (“UV”) phototherapy device called the 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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SCI
SCI was incorporated under the laws of the state of Illinois on March 18, 2014. SCI acquired certain Stealth Mark assets on April 4, 2014 and operates as a wholly-owned subsidiary of the Company. It is a Tennessee-based provider of: a) Stealth Mark encryption and authentication solutions offering advanced technologies within the security and supply chain management vertical sectors (Microparticles) , and b) advanced data intelligence services offering proprietary, unprecedented, and actionable technology for industries, companies, and agencies on a global scale ( ActiveDuty TM ).
Intelligent Microparticles
SCI provides clients premiere authentication technology for the protection of a variety of products and brands from illicit counterfeiting and diversion activities. Its technology is applicable to a wide range of industries affected by counterfeiting, diversion and theft including, but not limited to, pharmaceuticals, defense/aerospace, automotive, electronics, technology, consumer and personal care goods, designer products, beverage/spirits, and many others.
SCI delivers the client a complete, simple to use, easy to implement, and cost effective turnkey system that is extremely difficult to compromise. SCI’s technology includes a combination of proprietary software and intelligent microparticle marks that are unduplicatable and undetectable to the human eye. These taggants are created with proprietary materials that create unique numerical codes that are assigned meaning by the client and are machine readable without the use of rare earth or chemical tracers. They have been used in covert and overt operations with easy to implement technology and do-it-yourself in-the-field forensic caliber verification.
In April 2018, the Company’s subsidiary, SCI, concluded licensing of a patent for technology that is the next generation of Stealth Mark. Working with researchers at the Oak Ridge National Labs, the patent signifies development of a new technology that will generate an invisible marking system with attributes currently unavailable in the anti-counterfeit marketplace today. The formula and techniques have been shown through extensive testing to be resilient to manufacturing processes and can be used on a wide range of materials from woven and non-woven fabrics, cardboard, metal, concrete, plastics, leather, wood, and paper. In addition, the complexity of the information that can be encoded with the system makes counterfeiting difficult.
ActiveDuty TM
SCI’s ActiveDuty TM 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 TM 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 TM creates the first systemic reporting mechanism to deliver strategic and tactical results supported by an intense worldwide analysis of patterns of human behavior. The ActiveDuty TM global framework is heuristic in nature, capable of comprehending big data across the digital spectrum and speaks all the major languages. Up until now, there has not existed a unified system that could actively measure this lifecycle that is a collection of discreet and seemingly random behaviors of criminals anywhere within the digital domain. Criminals change their identities but not their basic behaviors.
SCI is managed by its CEO, Ricky Howard. Mr. Howard has over thirty years of experience in operations management and executive positions in a variety of industries ranging from entrepreneurial startups to Fortune 500 companies. He joined Stealth Mark as V.P. of Operations at the early stage of development in 2006 and played an integral role in bringing the company’s capabilities to its present status including design and creation of its manufacturing capabilities, implementation of its ERP inventory controls system, software and hardware development, marketing and sales materials processes and day-to-day operational procedures and processes.
Analysis of Financial Condition and Results of Operations
Results of Operations for the three months ended March 31, 2018 compared to the three months ended March 31, 2017.
Revenue and Cost of Goods Sold
Revenue for the three months ended March 31, 2018 and 2017 was $41,250 and $134,225, respectively. The decrease of $92,795 was due to the decrease in revenues at PSI, as they had no revenue during the three months ended March 31, 2018, but had $112,000 of revenue during the three months ended March 31, 2017. Cost of sales for the three months ended March 31, 2018 and 2017, was $17,666 and $53,407, respectively. Gross profit for the three months ended March 31, 2018 and 2017, was $23,584 and $80,818, respectively. The gross profit decrease of $57,234 was due to the decrease in revenues of PSI during the three months ended March 31, 2018.
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In June 2017, PSI entered into a pilot program agreement with a Chicago government healthcare organization under which the customer purchased one Psoria Light (PL 1000) to conduct therapy and evaluate the device’s efficacy and functionality for a period of 60 days. Under the agreement, at the end of the pilot program, if the customer was satisfied with the first unit, PSI would receive a purchase order for an additional 15 units. PSI shipped the first unit to the customer in early August 2017, it passed their electrical safety inspection and they were ready to commence training. The pilot study lasted longer than expected but in favor of expand?in?g the utilization of the PL 1000 to additional facilities affiliated with the hospital system. Units will be supplied to individual clinics on a scheduled basis predicated upon in-service and educational program coordination. The objective is to have all selected hospital system clinics equipped with the PL 1000 as medical staff become properly trained to treat ??previously identified skin conditions. The first shipment for the expanded program was completed in April 2018.?
Operating Expenses
Operating expenses for the three months ended March 31, 2018 and 2017 were $561,317 and $609,624, respectively. The decrease in operating expenses of $48,307 was due primarily to the reduction of consulting and professional fees during the three months ended March 31, 2018.
Other Income (Expenses)
Other expenses during the three months ended March 31, 2018 consisted of $65,790 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, $70,422 relating to financing costs and $9,788 of interest expense. There was no other income during the three months ended March 31, 2018. Other income during the three months ended March 31, 2017 consisted of $288,777 relating to a gain on the extinguishment of debt. There was no other expenses during the three months ended March 31, 2017.
Net Loss from Continuing Operations
Our net loss from continuing operations for the three months ended March 31, 2018 was $847,578, compared to a net loss from continuing operations of $240,029 for the three months ended March 31, 2017. The increase in the net loss of $607,549 was primarily due to the total of other expenses of $309,845 incurred in fiscal 2018, as compared to the total of other income of $288,777 in fiscal 2017, a total loss difference of $598,622. The increase in the net loss was also due to the decrease in revenues and gross profit in 2018, offset by the decrease in operating expenses in 2018.
Results of Operations for the six months ended March 31, 2018 compared to the six months ended March 31, 2017.
Revenue and Cost of Goods Sold
Revenue for the six months ended March 31, 2018 and 2017 was $67,750 and $237,350, respectively. The decrease of $103,125 was due to the decrease in revenues at PSI, as they had no revenue during the six months ended March 31, 2018, but had $196,000 of revenue during the six months ended March 31, 2017. Cost of sales for the six months ended March 31, 2018 and 2017, was $34,658 and $113,907, respectively. Gross profit for the six months ended March 31, 2018 and 2017, was $33,902 and $123,443, respectively. The gross profit decrease of $90,351 was primarily due to the decrease in revenues of PSI during the six months ended March 31, 2018.
In June 2017, PSI entered into a pilot program agreement with a Chicago government healthcare organization under which the customer purchased one Psoria Light (PL 1000) to conduct therapy and evaluate the device’s efficacy and functionality for a period of 60 days. Under the agreement, at the end of the pilot program, if the customer was satisfied with the first unit, PSI would receive a purchase order for an additional 15 units. PSI shipped the first unit to the customer in early August 2017, it passed their electrical safety inspection and they were ready to commence training. The pilot study lasted longer than expected but in favor of expand?in?g the utilization of the PL 1000 to additional facilities affiliated with the hospital system. Units will be supplied to individual clinics on a scheduled basis predicated upon in-service and educational program coordination. The objective is to have all selected hospital system clinics equipped with the PL 1000 as medical staff become properly trained to treat ??previously identified skin conditions. The first shipment for the expanded program was completed in April 2018.?
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Operating Expenses
Operating expenses for the six months ended March 31, 2018 and 2017 were $895,480 and $1,026,187, respectively. The decrease in operating expenses of $130,707 was due primarily to the reduction of consulting and professional fees, and the reduction of costs relating to the development of the ActiveDuty TM product, during the six months ended March 31, 2018.
Other Income (Expenses)
Other expenses during the six months ended March 31, 2018 consisted of $135,837 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, $70,422 relating to financing costs and $13,088 of interest expense. There was no other income during the six months ended March 31, 2018. Other income during the six months ended March 31, 2017 consisted of $288,777 relating to a gain on the extinguishment of debt. There was no other expenses during the six months ended March 31, 2017.
Net Loss from Continuing Operations
Our net loss from continuing operations for the six months ended March 31, 2018 was $1,245,580, compared to a net loss from continuing operations of $613,967 for the six months ended March 31, 2017. The increase in the net loss of $631,613 in 2018 was primarily due to the total of other expenses of $383,192 incurred in 2018, as compared to the total of other income of $288,777 in 2017, a total loss difference of $671,969. The increase in the net loss was also due to the decrease in revenues and gross profit in 2018, offset by the decrease in operating expenses in 2018.
Results of Operations by Segment
The Company currently maintains two business segments:
(i) Medical Devices: which it provided through PSI, its wholly-owned subsidiary acquired on August 24, 2012, a developer, manufacturer, marketer and distributer of targeted Ultra Violet (“UV”) phototherapy devices for the treatment of skin diseases; and
(ii) Authentication and Encryption Products and Services: which it provided through SCI, its wholly-owned subsidiary that on April 4, 2014 acquired certain assets of SMI Holdings, Inc. d/b/a Stealth Mark, Inc., including Stealth Mark tradenames and marks, and related encryption and authentication solutions offering advanced product security technologies within the security and supply chain management vertical sectors.
The detailed segment information of the Company is as follows:
Wellness Center USA, Inc.
Operations by Segments
For the Six Months Ended
March 31, 2018
Corporate Medical Devices Authentication and Encryption Total
Sales:
Trade $ - - $ 36,000 $ 36,000
Consulting services - - 31,750 31,750
Total Sales - - 67,750 67,750
Cost of goods sold - - 34,658 34,658
Gross profit - - 33,092 33,092
Operating expenses 397,108 135,934 362,438 895,480
Loss from operations $ (397,108 ) $ (135,934 ) $ (329,346 ) $ (862,388 )
Revenue for the Medical Devices segment for the six months ended March 31, 2017 was $196,000. The Medical Devices segment had no revenue, cost of sales or gross profit for the six months ended March 31, 2018. Cost of goods sold for the six months ended March 31, 2017 was $75,117. Gross profit for the six months ended March 31, 2017 was $120,883. Operating expenses for the six months ended March 31, 2018 and 2017 was $135,934 and $157,039, respectively. The decrease in operating expenses of $21,105 in 2017 was due primarily to the decrease in consulting fees. The loss from operations for the six months ended March 31, 2018 and 2017 was $135,934 and $36,156, respectively.
Revenue for the Authentication and Encryption segment for the six months ended March 31, 2018 and 2017 was $67,750 and $41,350, respectively. The increase of $26,400 was primarily due to the increase in trade sales during fiscal 2018. Cost of goods sold for the six months ended March 31, 2018 and 2017 was $34,658 and $38,790, respectively, and the gross profit was $33,092 and $2,560, respectively. The gross profit increase in fiscal 2018 was primarily due to the increase in sales in fiscal 2018. Operating expenses for the six months ended March 31, 2018 and 2017 was $362,438 and $300,538, respectively. The increase in operating expenses of $61,900 in fiscal 2018 was due primarily to the increase in consulting costs. The loss from operations for the six months ended March 31, 2018 and 2017 was $329,346 and $297,978, respectively.
The Corporate segment primarily provides executive management services for the Company. Operating expenses for the six months ended March 31, 2018 and 2017 was $397,108 and $568,610, respectively. The decrease in operating expenses of $171,502 in fiscal 2018 was due primarily to the decrease in professional and consulting fees. The loss from operations for the six months ended March 31, 2018 and 2017 was $397,108 and $568,610, respectively.
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Liquidity and Capital Resources
Liquidity is the ability of a company to generate adequate amounts of cash to meet its cash needs.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, the Company has not yet generated significant revenues and has incurred recurring net losses. During the six months ended March 31, 2018, the Company incurred a net loss of $1,245,580 and used cash in operations of $478,370, and had a shareholders’ deficit of $761,250 as of March 31, 2018. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. 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.
As of March 31, 2018, our cash balance was $40,413. Our current cash on hand is not sufficient to maintain our daily operations for the next 12 months unless the Company is able to generate positive cash flows from operating activities. If needed, management intends to raise additional capital through debt and equity financing to fund our daily operations through next 12 months. During the six months ended March 31, 2018, the Company received $489,414 through debt financing and the exercise of stock warrants. However no assurance can be given that we will be successful in raising sufficient capital through debt or equity financing, or that we will be able to raise the required working capital on terms favorable, or that such working capital will be available on any terms when needed during next 12 months. Any failure to secure sufficient debt or equity financing may force the Company to modify its business plan. In addition, we have incurred recurring losses from inception and such losses are expected to continue for the foreseeable future and until such time, if ever, as the Company is able to attain sales levels sufficient to support its operations.
No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case of equity financing.
The Company’s independent registered public accounting firm, in their report on the Company’s consolidated financial statements for the year ended September 30, 2017, has expressed substantial doubt about the Company’s ability to continue as a going concern.
Comparison of six months for the years ended March 31, 2018 and 2017
As of March 31, 2018, we had $40,413 in cash, negative working capital of $781,158 and an accumulated deficit of $20,310,695.
As of March 31, 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 six months ended March 31, 2018, the Company used cash flows in operating activities of $478,370 compared to $682,812 used in the six months ended March 31, 2017. During the six months ended March 31, 2018, the Company incurred a net loss of $1,245,580 with $536,680 of non-cash expenses compared to a net loss of $684,890 and $79,307 of negative non-cash expenses during the six months ended March 31, 2017.
C ash flows used in investing activities
During the six months ended March 31, 2017, we had purchases of property and equipment of $2,250. During the six months ended March 31, 2018, we had no cash flows from investing activities.
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Cash flows provided by financing activities
During the six months ended March 31, 2018, we had proceeds from loans payable from officers and shareholders of $179,000, from a convertible note payable of $150,000 and from the exercise of stock warrants of $170,914. We used cash to repay loans payable from officers and shareholders of $10,500. During the six months ended March 31, 2017, we had proceeds loans payable from officers and shareholders of $30,000, from the sale of common stock and warrants of $424,600 and from the exercise of stock warrants of $428,015. We used cash to repay advances from a related party of $2,000.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Summary of Critical Accounting Policies .
The Company has identified critical accounting policies that, as a result of the judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operations involved could result in material changes to its financial condition or results of operations under different conditions or using different assumptions. The Company’s most critical accounting policies include, but are not limited to, those related to fair value of financial instruments, revenue recognition, stock based compensation for obtaining employee services, and equity instruments issued to parties other than employees for acquiring goods or services. Details regarding the Company’s use of these policies and the related estimates are described in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017, filed with the Securities and Exchange Commission on February 20, 2018. There have been no material changes to the Company’s critical accounting policies that impact the Company’s financial condition, results of operations or cash flows for the six months ended March 31, 2018.
Recently Issued Accounting Pronouncements
See Management’s discussion of recent accounting policies included in footnote 2 to the condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting Companies.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Regulations under the Securities Exchange Act of 1934 (the “Exchange Act”) require public companies to maintain “disclosure controls and procedures,” which are defined as controls and other procedures that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
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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 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.
3 . The Company does not have sufficient segregation of duties so that one person can initiate, authorize and execute transactions.
4 . Lack of Board of Director approval of debt and equity instruments before issuance.
5 . Weaknesses in the controls over press releases before being disseminated.
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
The Company remediated certain of the material weaknesses in our disclosure controls and procedures identified above by adding independent directors and by hiring a CFO with SEC reporting experience. Effective November 17, 2017, the Board of Directors filled then existing vacancies in the Board by appointing each of the following persons as a member of the Board: William E. Kingsford; Thomas E. Scott, CPA; Paul D. Jones; and Roy M. Harsch, each to serve until the next annual meeting of the shareholders, or until his successor has been duly qualified and appointed. On December 1, 2017, the Board of Directors consisting of Andrew J. Kandalepas, Jay Joshi, M.D., Messrs. Kingsford, Scott, Jones, and Harsch, accepted the voluntary resignation of Mr. Kandalepas, as President, and appointed Mr. Jones as President. Mr. Kandalepas’ resignation and Mr. Jones’ appointment were effective immediately. On February 5, 2018, the Board of Directors appointed Calvin R. O’Harrow as Chief Operating Officer and a member of the Board. It accepted the resignation of Andrew J. Kandalepas as Chief Financial Officer (CFO) and Principal Accounting Officer (PAO) and appointed Douglas W. Samuelson, CPA, as CFO and PAO. It also removed Jay Joshi, M.D., as a Director. The Board of Directors also appointed a Compensation Committee consisting of Messrs. Jones, Scott and Kingsford. On April 17, 2018, Mr. Kandalepas voluntarily resigned as an officer and Director and agreed to provide transition services to Calvin R. O’Harrow and Roy M. Harsch, who have been appointed to serve as CEO and Chairman, respectively, from the date of Mr. Kandalepas’ resignation and until appointment of permanent successors.
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The company has implemented the following corporate policies to remediate the noted material weaknesses:
? All Debt agreements must be approved by the Board
? All Equity grants must be approved by the Board
? All Officers must have an agreement approved by the Board
? All employees must have a written agreement
? Consultant agreements with payments totaling over $20,000 must be approved by the Board
? Create a Board compensation plan
? Create an Audit Committee with an Audit Committee Charter
? Create a policy for Board approval on cash disbursements over $20,000
? Create a policy to ensure no one at any entity can initiate a payment to themselves
? Create controls over all Press Releases
? Ensure the Company will only work with licensed dealer/brokers relating to the sale of equity instruments
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.
As of the end of our most recent fiscal year, management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and SEC guidance on conducting such assessments. Based on that evaluation, they concluded that, as of September 30, 2017, such internal control over financial reporting was not effective. This was due to deficiencies that existed in the design or operation of our internal control over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.
The matters involving internal control over financial reporting that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; (2) inadequate segregation of duties consistent with control objectives of having segregation of the initiation of transactions, the recording of transactions and the custody of assets; and (3) ineffective controls over period end financial disclosure and reporting processes. The aforementioned material weaknesses were identified by our Chief Executive Officer in connection with the review of our financial statements as of September 30, 2017.
25
To address the material weaknesses set forth in items (2) and (3) discussed above, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.
This Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to the rules of the SEC that permit the Company to provide only the management’s report in this Report.
Management’s Remediation Initiatives
In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated, or plan to initiate, all of the series of measures noted above in Remediation of Material Weaknesses.
Changes in internal control over financial reporting.
There have been no changes in our internal control over financial reporting that occurred during the quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is periodically engaged in legal proceedings arising from and relating to its business operations. We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
In May, 2017, the Staff issued a Wells Notice stating its preliminary determination to recommend an enforcement action against the Company and our CEO, Mr. Kandalepas, based on possible violations of Section 17(a) of the Securities Act, Sections 15 (a) and 10(b) of the Exchange Act, and Rule 10b-5 thereunder. The Staff would allege, among other things, that periodic reports issued during 2013 and 2014 were misleading because they failed to disclose or mischaracterized as “salary”, “prepayments” or “loans,” several payments totaling $450,000 made to our CEO during those years without prior Board approval; that two press releases issued in 2015 touted shipments of several Psoria-Light devices that were not closed sales; and that we used an unregistered broker-dealer to identify and solicit potential investors during 2013, 2015 and 2017.
Subsequent discussions resulted in our submission of an Offer of Settlement (“Settlement”) through an administrative cease and desist action on November 17, 2017, which was accepted by the SEC on April 12, 2018. Pursuant to the Settlement, we neither admit nor deny any of the proposed allegations, but are enjoined from violating the above-referenced Sections and Rule. The Settlement imposes no financial penalties or sanctions against the Company. On April 13, 2018, the SEC filed a separate complaint against our CEO in the U.S. District Court for the Northern District of Illinois. It asserts 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. The SEC seeks a permanent injunction, disgorgement including prejudgment interest, a civil penalty, an officer-and-director bar, and a penny stock bar.
Mr. Kandalepas intends to contest the allegations against him. He has voluntarily resigned as an officer and director. He has agreed to provide transition services to Calvin R. O’Harrow and Roy M. Harsch, who have been appointed to serve as CEO and Chairman, respectively. Mr. Kandalepas will remain with the Company to serve as Executive Director of Corporate Business Development.
26
Item 1A. Risk Factors
Not required for smaller reporting companies.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None
Item 6. Exhibits
Exhibit No. Description
31.1 Certification of Principal Executive Officer Pursuant to Rule 13a-14*
32.1 CEO and CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act*
101.INS XBRL Instance Document**
101.SCH XBRL Taxonomy Extension Schema**
101.CAL XBRL Taxonomy Extension Calculation Linkbase**
101.DEF XBRL Taxonomy Extension Definition Linkbase**
101.LAB XBRL Taxonomy Extension Label Linkbase**
101.PRE XBRL Taxonomy Extension Presentation Linkbase**
* 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.
27
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: May 15, 2018 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: May 15, 2018 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 May 15, 2018
/s/ Douglas W. Samuelson Chief Financial Officer, Chief Accounting Officer May 15, 2018
Douglas W. Samuelson
/s/ Roy M. Harsch Chairman May 15, 2018
Roy M. Harsch
/s/ Paul D. Jones Director, President May 15, 2018
Paul D. Jones
/s/ Thomas E. Scott Director, Secretary May 15, 2018
Thomas E. Scott
/s/ William E. Kingsford Director May 15, 2018
William E. Kingsford
28
Exhibit 31.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Calvin R. O’Harrow, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Wellness Center USA, Inc. for the quarterly period ended March 31, 2018;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such internal control over financial reporting to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, if any, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period cover by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting;
Date: May 15, 2018
/s/ Calvin R. O’Harrow
Name: Calvin R. O’Harrow
Title: Chief Executive Officer, Chief Operating Officer and Director
Exhibit 31.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Douglas W. Samuelson, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Wellness Center USA, Inc. for the quarterly period ended March 31, 2018;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such internal control over financial reporting to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, if any, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period cover by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting;
Date: May 15, 2018
/s/ Douglas W. Samuelson
Name: Douglas W. Samuelson
Title: Chief Financial Officer and Chief Accounting Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018 of Wellness Center USA, Inc., a Nevada corporation (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Calvin R. O’Harrow, Chief Executive Officer, Chief Operating Officer and Director of the Company certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or15(d) of the Securities and Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
Date: May 15, 2018
/s/ Calvin R. O’Harrow
Name: Calvin R. O’Harrow
Title: Chief Executive Officer, Chief Operating Officer and Director
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018 of Wellness Center USA, Inc., a Nevada corporation (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Douglas W. Samuelson, Chief Financial Officer and Chief Accounting Officer of the Company certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or15(d) of the Securities and Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
Date: May 15, 2018
/s/ Douglas W. Samuelson
Name: Douglas W. Samuelson
Title: Chief Financial Officer and Chief Accounting Officer
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by Taboola
May. 15, 2018 4:59 PM|
About: Wellness Center USA Inc (WCUI)
View as PDF
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number: 001-37960
WELLNESS CENTER USA, INC .
(Exact name of registrant as specified in its charter)
Nevada 27-2980395
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2500 West Higgins Road, Ste. 780, Hoffman Estates, IL 60169
(Address of principal executive offices) ( Zip Code)
(847) 925-1885
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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 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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer [ ] Accelerated Filer[ ]
Non-Accelerated Filer
(do not check if Smaller Reporting Company) [ ]
Smaller Reporting Company [X] Emerging Growth Company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of the Registrant’s common stock, $0.0001 par value, as of March 31, 2018 was 92,879,384.
FORM 10-Q
WELLNESS CENTER USA, INC.
MARCH 31, 2018
TABLE OF CONTENTS
PART I— FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
Item 3 Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Control and Procedures 23
PART II— OTHER INFORMATION
Item 1 Legal Proceedings 26
Item 1A Risk Factors 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Mine Safety Disclosures. 27
Item 5. Other Information 27
Item 6. Exhibits 27
SIGNATURE 28
2
PART I— FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Wellness Center USA, Inc.
Condensed Consolidated Balance Sheets
March 31, 2018 September 30, 2017
(Unaudited)
ASSETS
Current Assets
Cash $ 40,413 $ 29,369
Accounts receivable - 24,999
Inventories 12,057 12,335
Prepaid expenses and other current assets 2,213 1,751
Total Current Assets 54,683 68,454
Property and equipment, net 3,148 5,126
Other assets 16,760 16,760
Total Other Assets 19,908 21,886
TOTAL ASSETS $ 74,591 $ 90,340
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current Liabilities
Accounts payable and accrued expenses $ 376,641 $ 203,367
Accrued payroll - officers 51,381 13,440
Deferred revenue 49,598 55,098
Convertible notes payable 130,721 49,884
Loans payable from officers and shareholders 227,500 59,000
Total Current Liabilities 835,841 380,789
Shareholders’ Deficit
Common stock, par value $0.001, 185,000,000 shares authorized; 92,879,384 and 90,284,916 shares issued and outstanding, respectively 93,066 90,285
Additional paid-in capital 19,841,209 19,069,211
Accumulated deficit (20,310,695 ) (19,132,557 )
Total Wellness Center USA shareholders’ equity (deficit) (376,420 ) 26,939
Non-controlling interest (384,830 ) (317,388 )
Total Shareholder’s deficit (761,250 ) (290,449 )
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT $ 74,591 $ 90,340
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Wellness Center USA, Inc.
Condensed Consolidated Statements of Operations
Three Months Ended Six Months Ended
March 31, March 31,
2018 2017 2018 2017
(Unaudited) (Unaudited)
Sales:
Trade $ 20,500 $ 120,100 $ 36,000 $ 209,100
Consulting services 20,750 14,125 31,750 28,250
Total Sales 41,250 134,225 67,750 237,350
Cost of goods sold 17,666 53,407 34,658 113,907
Gross profit 23,584 80,818 33,092 123,443
Operating expenses 561,317 609,624 895,480 1,026,187
Loss from operations (537,733 ) (528,806 ) (862,388 ) (902,744 )
Other income (expenses)
Amortization of debt discount (65,790 ) - (135,837 ) -
Gain on extinguishment of debt - 288,777 - 288,777
Loss on modification of conversion price on convertible note payable (158,400 ) - (158,400 ) -
Loss on modification of exercise price on warrants in connection with convertible note payable (5,445 ) - (5,445 ) -
Financing costs (70,422 ) - (70,422 ) -
Interest expense (9,788 ) - (13,088 ) -
Total other income (expenses) (309,845 ) 288,777 (383,192 ) 288,777
LOSS FROM CONTINUING OPERATIONS (847,578 ) (240,029 ) (1,245,580 ) (613,967 )
DISCONTINUED OPERATIONS
Loss from discontinued operations - (29,361 ) - (70,923 )
NET LOSS (847,578 ) (269,390 ) (1,245,580 ) (684,890 )
Net loss (gain) attributable to non-controlling interest 21,473 (5,430 ) 67,442 1,098
NET LOSS ATTRIBUTABLE TO WELLNESS CENTER USA, INC. $ (826,105 ) $ (274,820 ) $ (1,178,138 ) $ (683,792 )
BASIC AND DILUTED LOSS PER SHARE $ (0.01 ) $ (0.00 ) $ (0.01 ) $ (0.01 )
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING BASIC AND DILUTED 91,551,485 84,644,460 91,414,889 82,814,207
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Wellness Center USA, Inc.
Condensed Consolidated Statement of Shareholders' Deficit (Unaudited)
Common Stock
Additional
Paid-in
Accumulated Total WCUI Non-controlling
Shares Amount Capital Deficit Deficit Interest Total
Balance, September 30, 2017 90,284,916 $ 90,285 $ 19,069,211 $ (19,132,557 ) $ 26,939 $ (317,388 ) $ (290,449 )
Exercise of stock warrants 1,407,619 1,407 169,507 - 170,914 - 170,914
Fair value of common stock issued for services 150,000 150 26,550 - 26,700 - 26,700
Shares issued upon conversions of note payable 550,000 737 54,263 - 55,000 - 55,000
Fair value of vested stock options - - 137,898 - 137,898 - 137,898
Fair value of common stock issued in connection with convertible note payable 486,849 487 69,935 - 70,422 - 70,422
Discount on convertible note payable due to beneficial conversion and warrants - - 150,000 - 150,000 - 150,000
Loss on modification of conversion price on convertible note payable - - 158,400 - 158,400 - 158,400
Loss on modification of exercise price on warrants in connection with convertible note payable - - 5,445 - 5,445 - 5,445
Net loss for the six months ended March 31, 2018 - - - (1,178,138 ) (1,178,138 ) (67,442 ) (1,245,580 )
Balance, March 31, 2018 (Unaudited) 92,879,384 $ 93,066 $ 19,841,209 $ (20,310,695 ) $ (376,420 ) $ (384,830 ) $ (761,250 )
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Wellness Center USA, Inc.
Condensed Consolidated Statements of Cash Flows
Six Months Ended
March 31,
2018 2017
(Unaudited)
Cash Flows from Operating Activities
Net loss $ (1,245,580 ) $ (684,890 )
Adjustments to reconcile net loss to net cash used in operating activities
Loss from discontinued operations - 70,923
Depreciation expense 1,978 5,402
Amortization of debt discount 135,837 -
Gain on extinguishment of debt - (288,777 )
Fair value of common shares issued for services 26,700 26,000
Fair value of stock options issued for services 137,898 178,068
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 70,422 -
Changes in Assets and Liabilities
(Increase) Decrease in:
Accounts receivable 24,999 (70,000 )
Inventories 278 66,787
Prepaid expenses and other current assets (462 ) 24,613
(Decrease) Increase in:
Accounts payable and accrued expenses 173,274 (25,500 )
Accrued payroll taxes - 20,506
Accrued payroll - officers 37,941 25,371
Deferred revenue (5,500 ) (24,826 )
Net cash used in operating activities from continuing operations (478,370 ) (676,323 )
Net cash used in operating activities from discontinued operations - (6,489 )
Net cash used in operating activities (478,370 ) (682,812 )
Cash Flows from Investing Activities
Purchases of property and equipment - (546 )
Net cash used in investing activities from continuing operations - (546 )
Net cash used in investing activities from discontinued operations - (1,704 )
Net cash used in investing activities - (2,250 )
Cash Flows from Financing Activities
Proceeds from loans payable from officers and shareholders 179,000 30,000
Repayment of loans payable from officers and shareholders (10,500 ) -
Proceeds from convertible note payable 150,000 -
Repayment of advances from related party - (2,000 )
Proceeds from the sale of common stock and warrants - 424,600
Exercise of stock warrants 170,914 428,015
Net cash provided by financing activities 489,414 880,615
Net increase in cash 11,044 195,553
Cash beginning of period 29,369 81,749
Cash end of period $ 40,413 $ 277,302
Supplemental cash flows disclosures:
Interest paid $ - $ -
Taxes paid $ - $ -
Supplemental non-cash financing disclosures:
Debt discount on convertible note payable $ 150,000 $ -
Conversion of convertible note payable into common shares $ 55,000 $ -
Non-controlling interest’s share in losses of a subsidiary $ 67,442 $ 1,098
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
WELLNESS CENTER USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED MARCH 31, 2018 and 2017
NOTE 1 – ORGANIZATION AND 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 condensed consolidated statement of operations for the three months ended March 31, 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.
Basis of Presentation of Unaudited Financial Information
The accompanying unaudited condensed consolidated financial statements of Wellness Center USA, Inc. and Subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the six months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending September 30, 2018.
Going Concern
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, the Company has not yet generated significant revenues and has incurred recurring net losses. During the six months ended March 31, 2018, the Company incurred a net loss from continuing operations of $1,245,580 and used cash in operations from continuing operations of $478,370 and had a shareholders’ deficit of $761,250 as of March 31, 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.
In addition, the Company’s independent registered public accounting firm, in its report on the Company’s September 30, 2017 financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.
At March 31, 2018, the Company had cash on hand in the amount of $40,413. 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 six months ended March 31, 2018, the Company received $489,414 through debt financing and the exercise of stock warrants.
No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case of equity financing.
7
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%
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 stockholders by the weighted average number of outstanding common shares during the period. Diluted loss per share is computed by dividing the net loss applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. For the six months ended March 31, 2018 and 2017, the basic and diluted shares outstanding were the same, as potentially dilutive shares were considered anti-dilutive. At March 31, 2018 and 2017, the dilutive impact of outstanding stock options for 8,847,500 and 6,147,500 shares, respectively, and outstanding warrants for 59,096,084 and 63,741,253 shares, respectively, have been excluded because their impact on the loss per share is anti-dilutive.
8
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. In addition to the aforementioned general policy, the following are the specific revenue recognition policies for each major category of revenue:
(i) Sale of products : The Company derives its revenues from sales contracts with customers with revenues being generated upon the shipment of merchandise. Persuasive evidence of an arrangement is demonstrated via sales invoice or contract; product delivery is evidenced by warehouse shipping log as well as a signed bill of lading from the vessel or rail company and title transfers upon shipment, based on free on board (“FOB”) warehouse terms; the sales price to the customer is fixed upon acceptance of the signed purchase order or contract and there is no separate sales rebate, discount, or volume incentive. When the Company recognizes revenue, no provisions are made for returns because, historically, there have been very few sales returns and adjustments that have impacted the ultimate collection of revenues.
(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 March 31, 2018 and 2017 was $49,598 and $55,098, respectively.
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.
9
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.
In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.
NOTE 3 – DISCONTINUED OPERATIONS
On August 11, 2017, the Company entered into an agreement with Dr. Jay Joshi to sell 100% of the issued and outstanding shares of NPC Inc. (“NPC”) to Dr. Joshi. As part of the agreement, Dr. Joshi and NPC released the Company from any and all liabilities, claims and obligations of the Company in favor of Dr. Joshi or NPC and arising from or relating to the operation of the NPC business. Also as part of the agreement, Dr. Joshi’s employment agreement with NPC was terminated and all assets and liabilities of NPC were transferred to Dr. Joshi as of the date of the agreement, including $365,459 of accrued compensation and shareholder advances owed to Dr. Joshi by NPC. The Company agreed to sell NPC to Dr. Joshi so that it could focus on its other business segments, PSI and Stealth Mark, which are technology companies, while NPC was a service business. Further, the elimination of the underlined NPC liabilities to Dr. Joshi will significantly improve Wellness Center Inc.’s financial position. As part of the agreement, the Company agreed to issue Dr. Joshi stock options to purchase 500,000 shares of its common stock with an exercise price of $0.25 per share. Dr. Joshi continued to serve on the Company’s board of directors until February 5, 2018. During the year ended September 30, 2017, the Company recorded a $252,508 gain relating to this transaction.
Components of the statement of operations relating to NPC for the three and six months ended March 31, 2017, were as follows:
Three Months Ended Six Months Ended
March 31, 2017 March 31, 2017
Total Sales $ 40,000 $ 77,402
Operating expenses 69,361 148,325
Loss from discontinued operations $ (29,361 ) $ (70,923 )
10
NOTE 4 – LOANS PAYABLE FROM OFFICERS AND SHAREHOLDERS
At September 30, 2017, loans payable from officers and shareholders of $59,000 consisted of two unsecured note agreements issued in 2014 totaling to $9,000, and two short-term unsecured loans issued in fiscal 2017 totaling to $50,000. The loans issued in 2014 have no stated interest rate and are due on demand. The loans issued in 2017 have an interest rate of eight percent per annum and are due one year from the date of issuance. During the six months ended March 31, 2018, the Company borrowed $179,000 under nine 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 six months ended March 31, 2018, the Company repaid $10,500 of the loans payable. As of March 31, 2018, loans payable from officers and shareholders of $227,500 were outstanding.
NOTE 5 – CONVERTIBLE NOTES PAYABLE AGREEMENTS
March 31, 2018 September 30, 2017
Convertible note payable (a) $ 110,000 $ 165,000
Convertible note payable (b) 165,000 -
Debt discount – unamortized balance (144,279 ) (115,116 )
Convertible notes payable, net $ 130,721 $ 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 and warrants to purchase 330,000 shares of its common stock, which vested upon grant. The warrants expire five years from the date of grant and have an exercise price of $0.50 per share. The note payable accrues interest at eight percent per annum, is unsecured and is convertible at any time after the 90 th day from the issue date into the Company’s common stock at the fixed conversion price of $0.25 per share. The note matures in February 2018, but may be extended at the option of the individual. The Company may prepay the note at any time immediately following the issue date upon seven days’ prior written notice.
On the date of the agreement, the closing price of the common stock was $0.31 per share. As the conversion price embedded in the note agreement was below the trading price of the common stock on the date of issuance, a beneficial conversion feature (BCF) was recognized at the date of issuance. The Company recognized a debt discount at the date of issuance in the aggregate amount of $150,000 related to the relative fair value of the warrants and beneficial conversion features, which comprised $94,704 related to the intrinsic value of beneficial conversion features and $55,296 related to the relative fair value of the warrants. The aggregate fair value of the warrants of $87,582 was based on a probability affected 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. During the six months ended March 31, 2018, the Company amortized the remaining $115,116 of debt discount, leaving no unamortized balance at March 31, 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 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. The Company recorded an expense of $22,422 relating to the issuance of these shares.
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 expense 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 six months ended March 31, 2018, the individual converted $55,000 of the convertible note payable into 550,000 shares of the Company’s common stock.
11
NOTE 5 – CONVERTIBLE NOTE AGREEMENTS (CONTINUED)
(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 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 90 th 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 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, and the aggregate amount of $150,000 relating to 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 three and six months ended March 31, 2018, the Company amortized $20,721 of debt discount, leaving an unamortized balance of $144,279 at March 31, 2018.
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.
NOTE 6 – SHAREHOLDERS’ DEFICIT
Common shares issued for Services
During the six months ended March 31, 2018, the Company issued 150,000 shares of its common stock valued at $26,700 for services provided by accounting and PSI consultants. The shares were valued at the trading price of the common stock at the date of issuance.
Common shares issued in connection with Convertible Notes Payable
During the six months ended March 31, 2018, the Company issued 486,849 shares of its common stock in connection with the issuance of convertible notes payable and also issued 550,000 shares upon the conversion of the notes payable (see Note 5).
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 (see Note 9).
On January 1, 2018, the Company entered into employment agreements with three employees of SCI. Under the agreements, the Company issued options to purchase a combined total of 1,775,000 shares of its common stock with a fair value of $289,890. The options are exercisable over a term of five years, with an exercise price of $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. During the three and six months ended March 31, 2018, the Company recorded $110,498 of stock compensation for the value of the options and as of March 31, 2018, unvested compensation of $179,392 remained that will be amortized over the remaining vesting period.
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NOTE 6 – SHAREHOLDERS’ DEFICIT (CONTINUED)
Stock Options (continued)
Further, beginning on January 1, 2018, they will be granted additional stock options to purchase up to an aggregate total of 250,000 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 six months ended March 31, 2018, the Company issued options to purchase 250,000 shares of its common stock to the employees with an exercise price of $0.13 per share. During the six months ended March 31, 2018, the Company valued the options using a Black-Scholes option pricing model and recorded $27,400 of stock compensation for the value of the options vested.
The assumptions used for options granted during the six months ended March 31, 2018 are as follows:
Exercise price $ 0.13 - 0.19
Expected dividends -
Expected volatility 123.8% - 130.2 %
Risk free interest rate 2.01% - 2.18 %
Expected life of options 2.5
The table below summarizes the Company’s stock option activities for the three months ended March 31, 2018:
Number of
Option Shares
Exercise Price Range Per Share Weighted Average Exercise Price
Fair Value
at Date of Grant
Balance, September 30, 2017 6,822,500 $ 0.10 - 2.00 $ 0.51 $ 1,865,628
Granted 2,025,000 0.13 - 0.19 0.18 317,971
Cancelled - - - -
Exercised - - - -
Expired - - - -
Balance, March 31, 2018 8,847,500 $ 0.10 – 2.00 $ 0.43 $ 2,183,599
Vested and exercisable, March 31, 2018 7,747,500 $ 0.10 – 2.00 $ 0.43 $ 2,003,527
Unvested, March 31, 2018 1,100,000 $ 0.19 $ 0.19 $ 180,072
The aggregate intrinsic value for option shares outstanding at March 31, 2018 was $13,438.
The following table summarizes information concerning outstanding and exercisable options as of March 31, 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
$ 0.10 - 0.39 5,325,000 3.72 $ 0.18 4,225,000 3.72 $ 0.18
0.40 - 0.99 2,122,500 1.05 0.40 2,122,500 1.05 0.40
1.00 - 1.99 750,000 2.75 1.00 750,000 2.75 1.00
2.00 650,000 2.75 2.00 650,000 2.75 2.00
$ 0.01 - 2.00 8,847,500 2.93 $ 0.43 7,747,500 2.93 $ 0.43
As of March 31, 2018, there were 21,152,500 shares of stock options remaining available for issuance under the 2010 Plan.
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NOTE 6 – SHAREHOLDERS’ DEFICIT (CONTINUED)
Stock Warrants
During the six months ended March, 31, 2018, the Company issued warrants to purchase 660,000 shares with an exercise price of $0.20 per share in connection with the issuance of a convertible note payable (see Note 5). The warrants expire five years from the date of grant.
During the six months ended March, 31, 2018, warrants to purchase 1,407,619 shares of the Company’s common stock were exercised for $170,914.
The table below summarizes the Company’s warrants activities for the three months ended March 31, 2018:
Number of Warrant Shares Exercise Price Range Per Share Weighted Average Exercise Price Fair Value at Date of Issuance
Balance, September 30, 2017 64,161,304 $ 0.12 - 1.00 $ 0.24 $ 2,151,219
Granted 660,000 0.20 0.20 132,000
Cancelled - - - -
Exercised (1,407,619 ) 0.12 – 0.15 0.12 -
Expired (4,317,602 ) 0.30 – 0.45 0.43 -
Balance, March 31, 2018 59,096,084 $ 0.12 - 1.00 $ 0.22 $ 2,283,219
Vested and exercisable, March 31, 2018 59,096,084 $ 0.12 - 1.00 $ 0.22 $ 2,283,219
Unvested, March 31, 2018 - $ - $ - $ -
The aggregate intrinsic value for warrant shares outstanding March 31, 2018 was $95,733.
The following table summarizes information concerning outstanding and exercisable warrants as of March 31, 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 43,183,441 2.61 $ 0.15 43,183,441 2.61 $ 0.15
0.21 – 0.49 11,412,905 2.13 0.32 11,412,905 2.13 0.32
0.50 – 1.00 4,499,738 0.38 0.75 4,499,738 0.38 0.75
$ 0.12 – 1.00 59,096,084 2.35 $ 0.22 59,096,084 2.35 $ 0.22
NOTE 7 – SEGMENT REPORTING
Reportable segments are components of an enterprise about which separate financial information is available and that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. During the year ended September 30, 2017, the Company discontinued operations of its NPC segment (see Note 3).
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NOTE 7 – SEGMENT REPORTING (CONTINUED)
The Company operates in the following business segments:
(i) Medical Devices: which it stems from PSI, its wholly-owned subsidiary it acquired on August 24, 2012, a developer, manufacturer, marketer and distributer of targeted Ultra Violet (“UV”) phototherapy devices for the treatment of skin diseases.
(ii) Authentication and Encryption Products and Services: which it stems from StealthCo, its wholly-owned subsidiary formed on March 18, 2014. StealthCo engages in the business of selling, licensing or otherwise providing certain authentication and encryption products and services upon acquisition of certain assets from SMI.
The detailed segment information of the Company is as follows:
Wellness Center USA, Inc.
Assets By Segments
March 31, 2018
Corporate Medical Devices Authentication and Encryption Total
ASSETS
Current Assets
Cash $ 24,884 $ 1,003 $ 14,526 $ 40,413
Accounts receivable - - - -
Inventories - - 12,057 12,057
Prepaid expenses and other current assets - - 2,213 2,213
Total current assets 24,884 1,003 28,796 54,683
Property and equipment, net - - 3,148 3,148
Other assets 15,000 1,760 - 16,760
Total other assets 15,000 1,760 3,148 19,908
TOTAL ASSETS $ 39,884 $ 2,763 $ 31,944 $ 74,591
Wellness Center USA, Inc.
Operations by Segments
For the Six Months Ended
March 31, 2018
Corporate Medical Devices Authentication and Encryption Total
Sales:
Trade $ - - $ 36,000 $ 36,000
Consulting services - - 31,750 31,750
Total Sales - - 67,750 67,750
Cost of goods sold - - 34,658 34,658
Gross profit - - 33,092 33,092
Operating expenses 397,108 135,934 362,438 895,480
Loss from operations $ (397,108 ) $ (135,934 ) $ (329,346 ) $ (862,388 )
Wellness Center USA, Inc.
Operations by Segments
For the Six Months Ended
March 31, 2017
Corporate Medical Devices Authentication and Encryption Total
Sales:
Trade $ - $ 196,000 $ 13,100 $ 209,100
Consulting services - - 28,250 28,250
Total Sales - 196,000 41,350 237,350
Cost of goods sold - 75,117 38,790 113,907
Gross profit - 120,883 2,560 123,443
Operating expenses 568,610 157,039 300,538 1,026,187
Loss from operations $ (568,610 ) $ (36,156 ) $ (297,978 ) $ (902,744 )
NOTE 8 – LEGAL MATTERS
The Company is periodically engaged in legal proceedings arising from and relating to its business operations. We currently are not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our Company, our common stock, any of our subsidiaries or of our Company’s or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect on our financial condition or results of operations.
In May, 2017, the Staff issued a Wells Notice stating its preliminary determination to recommend an enforcement action against the Company and our CEO, Mr. Kandalepas, based on possible violations of Section 17(a) of the Securities Act, Sections 15 (a) and 10(b) of the Exchange Act, and Rule 10b-5 thereunder. The Staff would allege, among other things, that periodic reports issued during 2013 and 2014 were misleading because they failed to disclose or mischaracterized as “salary”, “prepayments” or “loans,” several payments totaling $450,000 made to our CEO during those years without prior Board approval; that two press releases issued in 2015 touted shipments of several Psoria-Light devices that were not closed sales; and that we used an unregistered broker-dealer to identify and solicit potential investors during 2013, 2015 and 2017.
Subsequent discussions resulted in our submission of an Offer of Settlement (“Settlement”) through an administrative cease and desist action on November 17, 2017, which was accepted by the SEC on April 12, 2018. Pursuant to the Settlement, we neither admit nor deny any of the proposed allegations, but are enjoined from violating the above-referenced Sections and Rule. The Settlement imposes no financial penalties or sanctions against the Company. On April 13, 2018, the SEC filed a separate complaint against our CEO in the U.S. District Court for the Northern District of Illinois. It asserts 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. The SEC seeks a permanent injunction, disgorgement including prejudgment interest, a civil penalty, an officer-and-director bar, and a penny stock bar.
Mr. Kandalepas intends to contest the allegations against him. He has voluntarily resigned as an officer and director. He has agreed to provide transition services to Calvin R. O’Harrow and Roy M. Harsch, who have been appointed to serve as CEO and Chairman, respectively. Mr. Kandalepas will remain with the Company to serve as Executive Director of Corporate Business Development.
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NOTE 9 – SUBSEQUENT EVENTS
Subsequent to March 31, 2018, the Company borrowed $80,000 from Directors, an officer and a shareholder. Of these loans, $60,000, along with loans payable of $188,500 outstanding at March 31, 2018, were converted into 1,962,498 shares of common stock. In connection with the conversion of the loans payable, the Company issued warrants to purchase 3,925,002 shares of common stock. The warrants expire five years from the date of grant and have exercise prices of $0.14 and $0.18 per share.
An aggregate total of $70,000 of a convertible note payable was converted into 700,000 shares of the Company’s common stock.
The Company granted 500,000 shares of its common stock to consultants for services provided. The fair value of the shares on the dates of grant was $70,000.
In April 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 2010 Option Plan from 7,500,000 to 30,000,000, effective January 1, 2018 (see Note 6).
In April 2018, the Company granted options to purchase 11,980,000 shares of its common stock to its officers and directors with a fair value of approximately $1,400,000. The options have an exercise price of $0.14 per share and expire five years from the date of grant. A total of 1,230,000 shares vested upon grant and 10,750,000 shares will vest ratably on a monthly basis over 36 months.
In May 2018, the Company received $50,000 from the sale of 333,333 shares of its common stock. In connection with the sale, the Company issued warrants to the shareholders to purchase 666,667 shares of the Company’s common stock. The warrants expire five years from the date of grant and have an exercise price of $0.18 per share.
In May 2018, the Board approved the permanent appointment of Roy M. Harsch as Chairman of the Board of Directors and Calvin O’Harrow as Chief Executive Officer.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
Except for historical information, the following discussion contains forward-looking statements based upon current expectations that involve certain risks and uncertainties. Such forward-looking statements include statements regarding, among other things, (a) our projected sales and profitability, (b) our growth strategies, (c) anticipated trends in our industry, (d) our future financing plans, (e) our anticipated needs for working capital, (f) our lack of operational experience and (g) the benefits related to ownership of our common stock. Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found under “Description of Business,” and “Analysis of Financial Condition and Results of Operations”, as well as in this Report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” in our Annual Report on Form 10-K and in other Reports we have filed with the Securities and Exchange Commission, as well as matters described in this Report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Report will in fact occur as projected.
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto. This section includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. You should not place undue certainty on these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our predictions.
Description of Business
Background
Wellness Center USA, Inc. (“WCUI” or the “Company”) was incorporated in June 2010 under the laws of the State of Nevada. The Company initially engaged in online sports and nutrition supplements marketing and distribution. The Company subsequently expanded into additional businesses within the healthcare and medical sectors through acquisitions, including Psoria-Shield Inc. (“PSI”), National Pain Centers, Inc. (“NPC”) and StealthCo Inc. (“SCI”), d/b/a Stealth Mark, Inc. On August 11, 2017, the Company entered into an agreement to sell 100% of the issued and outstanding shares of NPC, which has been accounted for as a discontinued operation on the condensed consolidated financial statements for the three months ended December 31, 2016. See Note 3 for details relating to the sale.
The Company currently operates in the following business segments: (i) distribution of targeted Ultra Violet (“UV”) phototherapy devices for dermatology; and (ii) authentication and encryption products and services. The segments are operated, respectively, through PSI and SCI.
PSI
PSI was incorporated under the laws of the state of Florida on June 17, 2009. On August 24, 2012, we acquired all of the issued and outstanding shares of stock in PSI. PSI is a wholly-owned subsidiary of the Company and operated by Psoria Development Company LLC, an Illinois limited liability company (“PDC”), a joint venture between WCUI/PSI and The Medical Alliance, Inc., a Florida corporation (“TMA”).
PSI designs, develops and markets a targeted ultraviolet (“UV”) phototherapy device called the 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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SCI
SCI was incorporated under the laws of the state of Illinois on March 18, 2014. SCI acquired certain Stealth Mark assets on April 4, 2014 and operates as a wholly-owned subsidiary of the Company. It is a Tennessee-based provider of: a) Stealth Mark encryption and authentication solutions offering advanced technologies within the security and supply chain management vertical sectors (Microparticles) , and b) advanced data intelligence services offering proprietary, unprecedented, and actionable technology for industries, companies, and agencies on a global scale ( ActiveDuty TM ).
Intelligent Microparticles
SCI provides clients premiere authentication technology for the protection of a variety of products and brands from illicit counterfeiting and diversion activities. Its technology is applicable to a wide range of industries affected by counterfeiting, diversion and theft including, but not limited to, pharmaceuticals, defense/aerospace, automotive, electronics, technology, consumer and personal care goods, designer products, beverage/spirits, and many others.
SCI delivers the client a complete, simple to use, easy to implement, and cost effective turnkey system that is extremely difficult to compromise. SCI’s technology includes a combination of proprietary software and intelligent microparticle marks that are unduplicatable and undetectable to the human eye. These taggants are created with proprietary materials that create unique numerical codes that are assigned meaning by the client and are machine readable without the use of rare earth or chemical tracers. They have been used in covert and overt operations with easy to implement technology and do-it-yourself in-the-field forensic caliber verification.
In April 2018, the Company’s subsidiary, SCI, concluded licensing of a patent for technology that is the next generation of Stealth Mark. Working with researchers at the Oak Ridge National Labs, the patent signifies development of a new technology that will generate an invisible marking system with attributes currently unavailable in the anti-counterfeit marketplace today. The formula and techniques have been shown through extensive testing to be resilient to manufacturing processes and can be used on a wide range of materials from woven and non-woven fabrics, cardboard, metal, concrete, plastics, leather, wood, and paper. In addition, the complexity of the information that can be encoded with the system makes counterfeiting difficult.
ActiveDuty TM
SCI’s ActiveDuty TM 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 TM 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 TM creates the first systemic reporting mechanism to deliver strategic and tactical results supported by an intense worldwide analysis of patterns of human behavior. The ActiveDuty TM global framework is heuristic in nature, capable of comprehending big data across the digital spectrum and speaks all the major languages. Up until now, there has not existed a unified system that could actively measure this lifecycle that is a collection of discreet and seemingly random behaviors of criminals anywhere within the digital domain. Criminals change their identities but not their basic behaviors.
SCI is managed by its CEO, Ricky Howard. Mr. Howard has over thirty years of experience in operations management and executive positions in a variety of industries ranging from entrepreneurial startups to Fortune 500 companies. He joined Stealth Mark as V.P. of Operations at the early stage of development in 2006 and played an integral role in bringing the company’s capabilities to its present status including design and creation of its manufacturing capabilities, implementation of its ERP inventory controls system, software and hardware development, marketing and sales materials processes and day-to-day operational procedures and processes.
Analysis of Financial Condition and Results of Operations
Results of Operations for the three months ended March 31, 2018 compared to the three months ended March 31, 2017.
Revenue and Cost of Goods Sold
Revenue for the three months ended March 31, 2018 and 2017 was $41,250 and $134,225, respectively. The decrease of $92,795 was due to the decrease in revenues at PSI, as they had no revenue during the three months ended March 31, 2018, but had $112,000 of revenue during the three months ended March 31, 2017. Cost of sales for the three months ended March 31, 2018 and 2017, was $17,666 and $53,407, respectively. Gross profit for the three months ended March 31, 2018 and 2017, was $23,584 and $80,818, respectively. The gross profit decrease of $57,234 was due to the decrease in revenues of PSI during the three months ended March 31, 2018.
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In June 2017, PSI entered into a pilot program agreement with a Chicago government healthcare organization under which the customer purchased one Psoria Light (PL 1000) to conduct therapy and evaluate the device’s efficacy and functionality for a period of 60 days. Under the agreement, at the end of the pilot program, if the customer was satisfied with the first unit, PSI would receive a purchase order for an additional 15 units. PSI shipped the first unit to the customer in early August 2017, it passed their electrical safety inspection and they were ready to commence training. The pilot study lasted longer than expected but in favor of expand?in?g the utilization of the PL 1000 to additional facilities affiliated with the hospital system. Units will be supplied to individual clinics on a scheduled basis predicated upon in-service and educational program coordination. The objective is to have all selected hospital system clinics equipped with the PL 1000 as medical staff become properly trained to treat ??previously identified skin conditions. The first shipment for the expanded program was completed in April 2018.?
Operating Expenses
Operating expenses for the three months ended March 31, 2018 and 2017 were $561,317 and $609,624, respectively. The decrease in operating expenses of $48,307 was due primarily to the reduction of consulting and professional fees during the three months ended March 31, 2018.
Other Income (Expenses)
Other expenses during the three months ended March 31, 2018 consisted of $65,790 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, $70,422 relating to financing costs and $9,788 of interest expense. There was no other income during the three months ended March 31, 2018. Other income during the three months ended March 31, 2017 consisted of $288,777 relating to a gain on the extinguishment of debt. There was no other expenses during the three months ended March 31, 2017.
Net Loss from Continuing Operations
Our net loss from continuing operations for the three months ended March 31, 2018 was $847,578, compared to a net loss from continuing operations of $240,029 for the three months ended March 31, 2017. The increase in the net loss of $607,549 was primarily due to the total of other expenses of $309,845 incurred in fiscal 2018, as compared to the total of other income of $288,777 in fiscal 2017, a total loss difference of $598,622. The increase in the net loss was also due to the decrease in revenues and gross profit in 2018, offset by the decrease in operating expenses in 2018.
Results of Operations for the six months ended March 31, 2018 compared to the six months ended March 31, 2017.
Revenue and Cost of Goods Sold
Revenue for the six months ended March 31, 2018 and 2017 was $67,750 and $237,350, respectively. The decrease of $103,125 was due to the decrease in revenues at PSI, as they had no revenue during the six months ended March 31, 2018, but had $196,000 of revenue during the six months ended March 31, 2017. Cost of sales for the six months ended March 31, 2018 and 2017, was $34,658 and $113,907, respectively. Gross profit for the six months ended March 31, 2018 and 2017, was $33,902 and $123,443, respectively. The gross profit decrease of $90,351 was primarily due to the decrease in revenues of PSI during the six months ended March 31, 2018.
In June 2017, PSI entered into a pilot program agreement with a Chicago government healthcare organization under which the customer purchased one Psoria Light (PL 1000) to conduct therapy and evaluate the device’s efficacy and functionality for a period of 60 days. Under the agreement, at the end of the pilot program, if the customer was satisfied with the first unit, PSI would receive a purchase order for an additional 15 units. PSI shipped the first unit to the customer in early August 2017, it passed their electrical safety inspection and they were ready to commence training. The pilot study lasted longer than expected but in favor of expand?in?g the utilization of the PL 1000 to additional facilities affiliated with the hospital system. Units will be supplied to individual clinics on a scheduled basis predicated upon in-service and educational program coordination. The objective is to have all selected hospital system clinics equipped with the PL 1000 as medical staff become properly trained to treat ??previously identified skin conditions. The first shipment for the expanded program was completed in April 2018.?
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Operating Expenses
Operating expenses for the six months ended March 31, 2018 and 2017 were $895,480 and $1,026,187, respectively. The decrease in operating expenses of $130,707 was due primarily to the reduction of consulting and professional fees, and the reduction of costs relating to the development of the ActiveDuty TM product, during the six months ended March 31, 2018.
Other Income (Expenses)
Other expenses during the six months ended March 31, 2018 consisted of $135,837 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, $70,422 relating to financing costs and $13,088 of interest expense. There was no other income during the six months ended March 31, 2018. Other income during the six months ended March 31, 2017 consisted of $288,777 relating to a gain on the extinguishment of debt. There was no other expenses during the six months ended March 31, 2017.
Net Loss from Continuing Operations
Our net loss from continuing operations for the six months ended March 31, 2018 was $1,245,580, compared to a net loss from continuing operations of $613,967 for the six months ended March 31, 2017. The increase in the net loss of $631,613 in 2018 was primarily due to the total of other expenses of $383,192 incurred in 2018, as compared to the total of other income of $288,777 in 2017, a total loss difference of $671,969. The increase in the net loss was also due to the decrease in revenues and gross profit in 2018, offset by the decrease in operating expenses in 2018.
Results of Operations by Segment
The Company currently maintains two business segments:
(i) Medical Devices: which it provided through PSI, its wholly-owned subsidiary acquired on August 24, 2012, a developer, manufacturer, marketer and distributer of targeted Ultra Violet (“UV”) phototherapy devices for the treatment of skin diseases; and
(ii) Authentication and Encryption Products and Services: which it provided through SCI, its wholly-owned subsidiary that on April 4, 2014 acquired certain assets of SMI Holdings, Inc. d/b/a Stealth Mark, Inc., including Stealth Mark tradenames and marks, and related encryption and authentication solutions offering advanced product security technologies within the security and supply chain management vertical sectors.
The detailed segment information of the Company is as follows:
Wellness Center USA, Inc.
Operations by Segments
For the Six Months Ended
March 31, 2018
Corporate Medical Devices Authentication and Encryption Total
Sales:
Trade $ - - $ 36,000 $ 36,000
Consulting services - - 31,750 31,750
Total Sales - - 67,750 67,750
Cost of goods sold - - 34,658 34,658
Gross profit - - 33,092 33,092
Operating expenses 397,108 135,934 362,438 895,480
Loss from operations $ (397,108 ) $ (135,934 ) $ (329,346 ) $ (862,388 )
Revenue for the Medical Devices segment for the six months ended March 31, 2017 was $196,000. The Medical Devices segment had no revenue, cost of sales or gross profit for the six months ended March 31, 2018. Cost of goods sold for the six months ended March 31, 2017 was $75,117. Gross profit for the six months ended March 31, 2017 was $120,883. Operating expenses for the six months ended March 31, 2018 and 2017 was $135,934 and $157,039, respectively. The decrease in operating expenses of $21,105 in 2017 was due primarily to the decrease in consulting fees. The loss from operations for the six months ended March 31, 2018 and 2017 was $135,934 and $36,156, respectively.
Revenue for the Authentication and Encryption segment for the six months ended March 31, 2018 and 2017 was $67,750 and $41,350, respectively. The increase of $26,400 was primarily due to the increase in trade sales during fiscal 2018. Cost of goods sold for the six months ended March 31, 2018 and 2017 was $34,658 and $38,790, respectively, and the gross profit was $33,092 and $2,560, respectively. The gross profit increase in fiscal 2018 was primarily due to the increase in sales in fiscal 2018. Operating expenses for the six months ended March 31, 2018 and 2017 was $362,438 and $300,538, respectively. The increase in operating expenses of $61,900 in fiscal 2018 was due primarily to the increase in consulting costs. The loss from operations for the six months ended March 31, 2018 and 2017 was $329,346 and $297,978, respectively.
The Corporate segment primarily provides executive management services for the Company. Operating expenses for the six months ended March 31, 2018 and 2017 was $397,108 and $568,610, respectively. The decrease in operating expenses of $171,502 in fiscal 2018 was due primarily to the decrease in professional and consulting fees. The loss from operations for the six months ended March 31, 2018 and 2017 was $397,108 and $568,610, respectively.
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Liquidity and Capital Resources
Liquidity is the ability of a company to generate adequate amounts of cash to meet its cash needs.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, the Company has not yet generated significant revenues and has incurred recurring net losses. During the six months ended March 31, 2018, the Company incurred a net loss of $1,245,580 and used cash in operations of $478,370, and had a shareholders’ deficit of $761,250 as of March 31, 2018. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. 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.
As of March 31, 2018, our cash balance was $40,413. Our current cash on hand is not sufficient to maintain our daily operations for the next 12 months unless the Company is able to generate positive cash flows from operating activities. If needed, management intends to raise additional capital through debt and equity financing to fund our daily operations through next 12 months. During the six months ended March 31, 2018, the Company received $489,414 through debt financing and the exercise of stock warrants. However no assurance can be given that we will be successful in raising sufficient capital through debt or equity financing, or that we will be able to raise the required working capital on terms favorable, or that such working capital will be available on any terms when needed during next 12 months. Any failure to secure sufficient debt or equity financing may force the Company to modify its business plan. In addition, we have incurred recurring losses from inception and such losses are expected to continue for the foreseeable future and until such time, if ever, as the Company is able to attain sales levels sufficient to support its operations.
No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case of equity financing.
The Company’s independent registered public accounting firm, in their report on the Company’s consolidated financial statements for the year ended September 30, 2017, has expressed substantial doubt about the Company’s ability to continue as a going concern.
Comparison of six months for the years ended March 31, 2018 and 2017
As of March 31, 2018, we had $40,413 in cash, negative working capital of $781,158 and an accumulated deficit of $20,310,695.
As of March 31, 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 six months ended March 31, 2018, the Company used cash flows in operating activities of $478,370 compared to $682,812 used in the six months ended March 31, 2017. During the six months ended March 31, 2018, the Company incurred a net loss of $1,245,580 with $536,680 of non-cash expenses compared to a net loss of $684,890 and $79,307 of negative non-cash expenses during the six months ended March 31, 2017.
C ash flows used in investing activities
During the six months ended March 31, 2017, we had purchases of property and equipment of $2,250. During the six months ended March 31, 2018, we had no cash flows from investing activities.
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Cash flows provided by financing activities
During the six months ended March 31, 2018, we had proceeds from loans payable from officers and shareholders of $179,000, from a convertible note payable of $150,000 and from the exercise of stock warrants of $170,914. We used cash to repay loans payable from officers and shareholders of $10,500. During the six months ended March 31, 2017, we had proceeds loans payable from officers and shareholders of $30,000, from the sale of common stock and warrants of $424,600 and from the exercise of stock warrants of $428,015. We used cash to repay advances from a related party of $2,000.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Summary of Critical Accounting Policies .
The Company has identified critical accounting policies that, as a result of the judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operations involved could result in material changes to its financial condition or results of operations under different conditions or using different assumptions. The Company’s most critical accounting policies include, but are not limited to, those related to fair value of financial instruments, revenue recognition, stock based compensation for obtaining employee services, and equity instruments issued to parties other than employees for acquiring goods or services. Details regarding the Company’s use of these policies and the related estimates are described in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017, filed with the Securities and Exchange Commission on February 20, 2018. There have been no material changes to the Company’s critical accounting policies that impact the Company’s financial condition, results of operations or cash flows for the six months ended March 31, 2018.
Recently Issued Accounting Pronouncements
See Management’s discussion of recent accounting policies included in footnote 2 to the condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting Companies.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Regulations under the Securities Exchange Act of 1934 (the “Exchange Act”) require public companies to maintain “disclosure controls and procedures,” which are defined as controls and other procedures that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
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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 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.
3 . The Company does not have sufficient segregation of duties so that one person can initiate, authorize and execute transactions.
4 . Lack of Board of Director approval of debt and equity instruments before issuance.
5 . Weaknesses in the controls over press releases before being disseminated.
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
The Company remediated certain of the material weaknesses in our disclosure controls and procedures identified above by adding independent directors and by hiring a CFO with SEC reporting experience. Effective November 17, 2017, the Board of Directors filled then existing vacancies in the Board by appointing each of the following persons as a member of the Board: William E. Kingsford; Thomas E. Scott, CPA; Paul D. Jones; and Roy M. Harsch, each to serve until the next annual meeting of the shareholders, or until his successor has been duly qualified and appointed. On December 1, 2017, the Board of Directors consisting of Andrew J. Kandalepas, Jay Joshi, M.D., Messrs. Kingsford, Scott, Jones, and Harsch, accepted the voluntary resignation of Mr. Kandalepas, as President, and appointed Mr. Jones as President. Mr. Kandalepas’ resignation and Mr. Jones’ appointment were effective immediately. On February 5, 2018, the Board of Directors appointed Calvin R. O’Harrow as Chief Operating Officer and a member of the Board. It accepted the resignation of Andrew J. Kandalepas as Chief Financial Officer (CFO) and Principal Accounting Officer (PAO) and appointed Douglas W. Samuelson, CPA, as CFO and PAO. It also removed Jay Joshi, M.D., as a Director. The Board of Directors also appointed a Compensation Committee consisting of Messrs. Jones, Scott and Kingsford. On April 17, 2018, Mr. Kandalepas voluntarily resigned as an officer and Director and agreed to provide transition services to Calvin R. O’Harrow and Roy M. Harsch, who have been appointed to serve as CEO and Chairman, respectively, from the date of Mr. Kandalepas’ resignation and until appointment of permanent successors.
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The company has implemented the following corporate policies to remediate the noted material weaknesses:
? All Debt agreements must be approved by the Board
? All Equity grants must be approved by the Board
? All Officers must have an agreement approved by the Board
? All employees must have a written agreement
? Consultant agreements with payments totaling over $20,000 must be approved by the Board
? Create a Board compensation plan
? Create an Audit Committee with an Audit Committee Charter
? Create a policy for Board approval on cash disbursements over $20,000
? Create a policy to ensure no one at any entity can initiate a payment to themselves
? Create controls over all Press Releases
? Ensure the Company will only work with licensed dealer/brokers relating to the sale of equity instruments
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.
As of the end of our most recent fiscal year, management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and SEC guidance on conducting such assessments. Based on that evaluation, they concluded that, as of September 30, 2017, such internal control over financial reporting was not effective. This was due to deficiencies that existed in the design or operation of our internal control over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.
The matters involving internal control over financial reporting that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; (2) inadequate segregation of duties consistent with control objectives of having segregation of the initiation of transactions, the recording of transactions and the custody of assets; and (3) ineffective controls over period end financial disclosure and reporting processes. The aforementioned material weaknesses were identified by our Chief Executive Officer in connection with the review of our financial statements as of September 30, 2017.
25
To address the material weaknesses set forth in items (2) and (3) discussed above, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.
This Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to the rules of the SEC that permit the Company to provide only the management’s report in this Report.
Management’s Remediation Initiatives
In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated, or plan to initiate, all of the series of measures noted above in Remediation of Material Weaknesses.
Changes in internal control over financial reporting.
There have been no changes in our internal control over financial reporting that occurred during the quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is periodically engaged in legal proceedings arising from and relating to its business operations. We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
In May, 2017, the Staff issued a Wells Notice stating its preliminary determination to recommend an enforcement action against the Company and our CEO, Mr. Kandalepas, based on possible violations of Section 17(a) of the Securities Act, Sections 15 (a) and 10(b) of the Exchange Act, and Rule 10b-5 thereunder. The Staff would allege, among other things, that periodic reports issued during 2013 and 2014 were misleading because they failed to disclose or mischaracterized as “salary”, “prepayments” or “loans,” several payments totaling $450,000 made to our CEO during those years without prior Board approval; that two press releases issued in 2015 touted shipments of several Psoria-Light devices that were not closed sales; and that we used an unregistered broker-dealer to identify and solicit potential investors during 2013, 2015 and 2017.
Subsequent discussions resulted in our submission of an Offer of Settlement (“Settlement”) through an administrative cease and desist action on November 17, 2017, which was accepted by the SEC on April 12, 2018. Pursuant to the Settlement, we neither admit nor deny any of the proposed allegations, but are enjoined from violating the above-referenced Sections and Rule. The Settlement imposes no financial penalties or sanctions against the Company. On April 13, 2018, the SEC filed a separate complaint against our CEO in the U.S. District Court for the Northern District of Illinois. It asserts 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. The SEC seeks a permanent injunction, disgorgement including prejudgment interest, a civil penalty, an officer-and-director bar, and a penny stock bar.
Mr. Kandalepas intends to contest the allegations against him. He has voluntarily resigned as an officer and director. He has agreed to provide transition services to Calvin R. O’Harrow and Roy M. Harsch, who have been appointed to serve as CEO and Chairman, respectively. Mr. Kandalepas will remain with the Company to serve as Executive Director of Corporate Business Development.
26
Item 1A. Risk Factors
Not required for smaller reporting companies.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None
Item 6. Exhibits
Exhibit No. Description
31.1 Certification of Principal Executive Officer Pursuant to Rule 13a-14*
32.1 CEO and CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act*
101.INS XBRL Instance Document**
101.SCH XBRL Taxonomy Extension Schema**
101.CAL XBRL Taxonomy Extension Calculation Linkbase**
101.DEF XBRL Taxonomy Extension Definition Linkbase**
101.LAB XBRL Taxonomy Extension Label Linkbase**
101.PRE XBRL Taxonomy Extension Presentation Linkbase**
* 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.
27
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: May 15, 2018 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: May 15, 2018 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 May 15, 2018
/s/ Douglas W. Samuelson Chief Financial Officer, Chief Accounting Officer May 15, 2018
Douglas W. Samuelson
/s/ Roy M. Harsch Chairman May 15, 2018
Roy M. Harsch
/s/ Paul D. Jones Director, President May 15, 2018
Paul D. Jones
/s/ Thomas E. Scott Director, Secretary May 15, 2018
Thomas E. Scott
/s/ William E. Kingsford Director May 15, 2018
William E. Kingsford
28
Exhibit 31.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Calvin R. O’Harrow, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Wellness Center USA, Inc. for the quarterly period ended March 31, 2018;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such internal control over financial reporting to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, if any, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period cover by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting;
Date: May 15, 2018
/s/ Calvin R. O’Harrow
Name: Calvin R. O’Harrow
Title: Chief Executive Officer, Chief Operating Officer and Director
Exhibit 31.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Douglas W. Samuelson, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Wellness Center USA, Inc. for the quarterly period ended March 31, 2018;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such internal control over financial reporting to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, if any, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period cover by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting;
Date: May 15, 2018
/s/ Douglas W. Samuelson
Name: Douglas W. Samuelson
Title: Chief Financial Officer and Chief Accounting Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018 of Wellness Center USA, Inc., a Nevada corporation (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Calvin R. O’Harrow, Chief Executive Officer, Chief Operating Officer and Director of the Company certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or15(d) of the Securities and Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
Date: May 15, 2018
/s/ Calvin R. O’Harrow
Name: Calvin R. O’Harrow
Title: Chief Executive Officer, Chief Operating Officer and Director
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018 of Wellness Center USA, Inc., a Nevada corporation (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Douglas W. Samuelson, Chief Financial Officer and Chief Accounting Officer of the Company certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or15(d) of the Securities and Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
Date: May 15, 2018
/s/ Douglas W. Samuelson
Name: Douglas W. Samuelson
Title: Chief Financial Officer and Chief Accounting Officer
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