NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR
THE SIX MONTHS ENDED MARCH 31, 2019 AND 2018
NOTE
1 – BASIS OF PRESENTATION
Organization
and Operations
Wellness
Center USA, Inc. (“WCUI” or the “Company”) was incorporated in June 2010 under the laws of the State of
Nevada. The Company initially engaged in online sports and nutrition supplements marketing and distribution. The Company subsequently
expanded into additional businesses within the healthcare and medical sectors through acquisitions, including Psoria-Shield Inc.
(“PSI”) and StealthCo Inc. (“SCI”), d/b/a Stealth Mark, Inc.
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, 2019 are not necessarily indicative of the results that may be expected for the year ending
September 30, 2019.
Going
Concern
The
accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying
condensed consolidated financial statements, the Company has not yet generated significant revenues and has incurred recurring
net losses. During the six months ended March 31, 2019, the Company incurred a net loss of $1,158,398 and used cash in operations
of $685,290, and had a shareholders’ deficit of $1,078,563 as of March 31, 2019. 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,
2018 financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.
At
March 31, 2019, the Company had cash on hand in the amount of $62,170. 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, 2019, the Company received $743,250 through short-term loans, contributions of capital by a joint
venture partner and the sale of common stock.
No
assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory
to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations,
in the case of debt financing or cause substantial dilution for our stock holders, in case of equity financing.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Consolidation
The
Company’s consolidated subsidiaries and/or entities are as follows:
|
Name
of consolidated subsidiary or entity
|
|
State
or other jurisdiction of incorporation or organization
|
|
Date
of incorporation or formation (date of acquisition/disposition, if applicable)
|
|
Attributable
interest
|
|
|
|
|
|
|
|
|
|
|
|
Psoria-Shield
Inc. (“PSI”)
|
|
The
State of Florida
|
|
June
17, 2009
(August 24, 2012)
|
|
|
100
|
%
|
|
StealthCo,
Inc. (“StealthCo”)
|
|
The
State of Illinois
|
|
March
18, 2014
|
|
|
100
|
%
|
|
Psoria
Development Company LLC. (“PDC”)
|
|
The
State of Illinois
|
|
January
15, 2015/November 15, 2018
|
|
|
50
|
%
|
|
NEO
Phototherapy LLC (“NEO”)
|
|
The
State of Illinois
|
|
December
2018
|
|
|
50.5
|
%
|
Through
October 2018, PSI was operated by PDC, a joint venture between PSI and the Medical Alliance, Inc (“TMA”). On November
15, 2018, the Company and TMA entered into a Withdraw and Mutual Release Agreement to terminate their joint venture agreement.
In December 2018, the Company and its wholly-owned subsidiary, Psoria-Shield, Inc. (“PSI”), entered into a Joint Venture
Agreement with PSI Gen 2 Funding, Inc. (“GEN2”), an Illinois corporation, to further development, marketing, licensing
and/or sale of PSI technology and products. The joint venture will be conducted through NEO Phototherapy, LLC, a recently formed
Illinois limited liability company (“NEO”), with principal offices and records to be maintained at WCUI’s offices.
See Non-Controlling Interests in Note 2 for more details.
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, 2019 and 2018, the basic and diluted
shares outstanding were the same, as potentially dilutive shares were considered anti-dilutive. At March 31, 2019 and 2018, the
dilutive impact of outstanding stock options of 15,625,238 and 8,847,500 shares, respectively, and outstanding warrants for 67,020,537
and 59,096,084 shares, respectively, have been excluded because their impact on the loss per share is anti-dilutive.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue
Recognition
In
May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers (Topic
606).
This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the
transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for
those goods or services. The Company adopted this ASU on October 1, 2018 retrospectively, the cumulative effect of the initial
application on our accumulated deficit on that date was immaterial.
For
trade sales, the Company generates its revenue from sales contracts with customers with revenues being generated upon the shipment
of merchandise, or for
c
onsulting services, revenue is recognized in the period services are rendered and earned under
service arrangements with clients.
We
sell our products through two main sales channels: 1) directly to customers who use our products (the “Direct Channel”)
and 2) to distribution partners who resell our products (the “Indirect Channel”).
Under
the Direct Channel, we sell our products to and we receive payment directly from customers who purchase our products. Under our
Indirect Channel, we have entered into distribution agreements that allow the distributors to sell our products and fulfill performance
obligations under the agreements.
We
determine revenue recognition through the following steps:
|
|
●
|
Identification
of the contract, or contracts, with a customer
|
|
|
|
|
|
|
●
|
Identification
of the performance obligations in the contract
|
|
|
|
|
|
|
●
|
Determination
of the transaction price
|
|
|
|
|
|
|
●
|
Allocation
of the transaction price to the performance obligations in the contract
|
|
|
|
|
|
|
●
|
Recognition
of revenue when, or as, we satisfy a performance obligation.
|
Revenue
is generally recognized upon shipment or when a service has been completed, unless we have significant performance obligations
for services still to be completed. We recognize revenue when a material reversal is no longer probable. Payments received before
the relevant criteria for revenue recognition are satisfied are recorded as deferred revenue. Deferred revenue at March 31, 2019
and 2018 was $7,625 and $8,624, respectively.
Non-controlling
Interests
Through
November 2018, non-controlling interest represented 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.
On
November 15, 2018, PSI and TMA entered into a Withdraw and Mutual Release Agreement to terminate their joint venture agreement.
On the date of termination, the non-controlling interest’s share of the accumulated losses of the joint venture totaled
to $405,383. Upon termination, during the three months ended December 31, 2018, the Company wrote-off the non-controlling interest’s
share of the accumulated losses and recorded a loss from the deconsolidation of a non-controlling interest of $405,383.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Non-controlling
Interests (continued)
In
December 2018, PSI entered into a Joint Venture Agreement with GEN2 to further development, marketing, licensing and/or sale of
PSI technology and products. The joint venture will be conducted through NEO. PSI and GEN2 will be the members of NEO, owning
50.5% and 36.0%, respectively, of the Units issued in connection with the organization of NEO. An additional 13.5% of such Units
will be reserved for issuance as incentives for key employees and consultants. Until such shares are distributed, the Company
controls 68% of the joint venture and GEN2 the remaining 32%. PSI and GEN2 will manage NEO’s day-to-day operations. PSI
will contribute PSI technology to NEO and GEN2 will contribute $700,000. Repayment of the $700,000 investment by GEN2 will begin
through and upon the date which NEO has realized and retained cumulative net income/distributable cash in the amount of $300,000.
Distributions thereafter will be made to PSI, GEN2 and other members in proportion to their respective Unit ownership, at the
times and in the manner determined from time to time by the managers, in their sole discretion. GEN2 consists of accredited investors,
and investment participation from several WCUI officers and directors, including Calvin R. O’Harrow and Roy M. Harsch.
As
of March 31, 2019, GEN2 had received $475,000 of investments to contribute to NEO and the Company recorded its proportionate share
of $323,000 to additional paid-in-capital and $152,000 to non-controlling interest. During the three and six months ended March
31, 2019, NEO recorded a loss of $2,006 relating to its operations.
Stock-Based
Compensation
The
Company periodically grants stock options and warrants to employees and non-employees in non-capital raising transactions as compensation
for services rendered. The Company accounts for stock option and stock warrant grants to employees based on the authoritative
guidance provided by the Financial Accounting Standards Board where the value of the award is measured on the date of grant and
recognized over the vesting period. The Company accounts for stock option and stock warrant grants to non-employees in accordance
with the authoritative guidance of the Financial Accounting Standards Board where the value of the stock compensation is determined
based upon the measurement date at either a) the date at which a performance commitment is reached, or b) at the date at which
the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally
are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance
requirements by the non-employee, option or warrant grants are immediately vested and the total stock-based compensation charge
is recorded in the period of the measurement date.
The
fair value of the Company’s common stock option and warrant grants are estimated using a Black-Scholes Merton option pricing
model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the common stock
options, estimated forfeitures and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes
option pricing model, and based on actual experience. The assumptions used in the Black-Scholes Merton option pricing model could
materially affect compensation expense recorded in future periods.
Recently
Issued Accounting Pronouncements
In
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 – LOANS PAYABLE FROM OFFICERS AND SHAREHOLDERS
As
of September 30, 2018, loans payable from officers and shareholders of $66,000 were outstanding. During the six months ended March
31, 2019, the Company borrowed $258,250 from its officers and shareholders. All of the loans are unsecured, have an interest rate
of eight percent and are due one year from the date of issuance. As of March 31, 2019, loans payable to officers and shareholders
of $324,250 were outstanding.
NOTE
4 – CONVERTIBLE NOTE AGREEMENTS
|
|
|
March
31, 2018
|
|
|
September
30, 2018
|
|
|
|
|
|
|
|
|
|
|
Convertible
note payable (a)
|
|
$
|
-
|
|
|
$
|
165,000
|
|
|
Convertible
note payable (b)
|
|
|
110,000
|
|
|
|
110,000
|
|
|
Debt
discount – unamortized balance
|
|
|
-
|
|
|
|
(72,078
|
)
|
|
Convertible
note payable, net
|
|
$
|
110,000
|
|
|
$
|
202,922
|
|
(a)
On March 5, 2018, 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 after payment of a $15,000 fee to the lender was $150,000.
In connection with the agreement, the Company issued the individual 300,000 restricted shares of its common stock with a fair
value of $48,000 and warrants to purchase 660,000 shares of its common stock, which vested upon grant. The warrants expire five
years from the date of grant and have an exercise price of $0.20 per share. The note payable accrues interest at eight percent
per annum, is unsecured and is convertible at any time after the 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 matured in October 2018.
The
Company calculated the related fair value of the warrants issued to the noteholder to be $55,032 using a Black Scholes Merton
option pricing model and performing a relative value calculation. The Company then made a calculation to determine if a beneficial
conversion feature (BCF) existed. The beneficial conversion was based upon the effective conversion price based on the proceeds
received that were allocated to the convertible instrument. Based upon the Company’s calculation, it was determined that
a beneficial conversion feature existed amounting to $94,968 and was recorded as a debt discount. As such the Company recognized
a debt discount at the date of issuance in the aggregate amount of $165,000 relating to the $15,000 fees paid to the lender, the
relative value of the warrants and the BCF. The note discount is being amortized over the term of the note and the unamortized
portion is recognized as a reduction to the carrying amount of the Convertible note (a valuation debt discount). The balance of
the unamortized discount at September 30, 2018 was $3,837.
During
the six months ended March 31, 2019, the Company amended the terms of the agreement by extending the maturity date to January
2019 and reducing the conversion price from $0.10 per share to $0.07 per share. The reduction of the conversion price caused the
Company to issue an additional 744,732 shares, which on the conversion dates had a combined total fair value of $51,434, which
was recorded a financing cost during the six months ended March 31, 2019.
During
the six months ended March 31, 2019, the individual converted $165,000 of the convertible note payable and $8,783 of accrued interest
into 2,482,441 shares of the Company’s common stock. During the six months ended March 31, 2019, the Company amortized the
remaining $3,837 of debt discount, leaving no unamortized balance at March 31, 2019. No amounts were outstanding under the agreement
as of March 31, 2019.
NOTE
4 – CONVERTIBLE NOTE AGREEMENTS (CONTINUED)
(b)
On July 11, 2018, the Company entered into another Convertible Note Payable Agreement with the same individual under which the
Company borrowed an additional $110,000. Net proceeds received by the Company under the agreement after payment of a $10,000 fee
to the lender was $100,000. In connection with the agreement, the Company issued the individual 200,000 restricted shares of its
common stock with a fair value of $36,000 and warrants to purchase 440,000 shares of its common stock, which vested upon grant.
The warrants expire five years from the date of grant and have an exercise price of $0.18 per share. The note payable accrues
interest at eight percent per annum, is unsecured and is convertible at any time after the 90
th
day from the issue
date into the Company’s common stock at the fixed conversion price of $0.15 per share. The note matures in February 2019,
but may be extended at the option of the individual. The Company may prepay the note at any time immediately following the issue
date upon seven days’ prior written notice. The note was past due as of March 31, 2019, but on April 2, 2019, was converted
into shares of the Company’s common stock (see below).
The
Company calculated the related fair value of the warrants issued to the noteholder to be $66,440 using a Black Scholes Merton
option pricing model and performing a relative value calculation. The Company then made a calculation to determine if a beneficial
conversion feature (BCF) existed. The beneficial conversion was based upon the effective conversion price based on the proceeds
received that were allocated to the convertible instrument. Based upon the Company’s calculation, it was determined that
a beneficial conversion feature existed amounting to $33,560 and was recorded as a debt discount. As such the Company recognized
a debt discount at the date of issuance in the aggregate amount of $110,000 relating to the $10,000 fees paid to the lender, the
relative value of the warrants and the BCF. The note discount is being amortized over the term of the note and the unamortized
portion is recognized as a reduction to the carrying amount of the Convertible note (a valuation debt discount). As of September
30, 2018, the Company had amortized $41,759 of debt discount, leaving an unamortized balance of $68,241 at September 30, 2018.
During
the three and six months ended March 31, 2019, the Company amortized $21,389 and $68,241 of debt discount, respectively, leaving
no unamortized balance at March 31, 2019. A total of $110,000 was owed under the agreement as of March 31, 2019. On April 2, 2019,
the individual converted the note payable of $110,000 and $6,389 of accrued interest into 2,327,781 shares of the Company’s
common stock (see Note 9).
NOTE
5 – SHAREHOLDERS’ EQUITY
Common
shares issued for cash
During
the six months ended March 31, 2019, the Company received $10,000 from the sale of 142,857 shares of its common stock. In connection
with the sale, the Company issued a warrant to the shareholder to purchase 284,714 shares of the Company’s common stock.
The warrant expires five years from the date of grant and has an exercise price of $0.15 per share.
Common
shares issued for Services
During
the six months ended March 31, 2019, the Company issued 120,000 shares of its common stock valued at $9,600 for services provided
by consultants. The shares were valued at the trading price of the common stock at the date of issuance.
Stock
Options
On
December 22, 2010, effective retroactively as of June 30, 2010, the Company’s Board of Directors approved the adoption of
the “2010 Non-Qualified Stock Option Plan” (“2010 Option Plan”) by unanimous consent. The 2010 Option
Plan was initiated to encourage and enable officers, directors, consultants, advisors and key employees of the Company to acquire
and retain a proprietary interest in the Company by ownership of its common stock. A total of 7,500,000 of the authorized shares
of the Company’s common stock may be subject to, or issued pursuant to, the terms of the plan. 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.
NOTE
5 – SHAREHOLDERS’ EQUITY (CONTINUED)
Stock
Options (continued)
The
Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule
on a straight-line basis over the requisite service period for the entire award. Additionally, the Company’s policy is to
issue new shares of common stock to satisfy stock option exercises. The Company applied fair value accounting for all share based
payments awards. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing
model.
During
the six months ended March 31, 2019, the Company granted options to an employee to purchase an aggregate total of 125,000 shares
of its common stock with an aggregate fair value of $6,485. The options have an exercise price of $0.06 per share and expire five
years from the date of grant. The shares vested equally on December 31, 2018 and March 31, 2019. The Company valued the option
using a Black-Scholes option pricing model.
The
assumptions used for the option granted during the six months ended March 31, 2019 are as follows:
|
Exercise
price
|
|
$
|
0.06
|
|
|
Expected
dividends
|
|
|
-
|
|
|
Expected
volatility
|
|
|
126.8
– 133.7
|
%
|
|
Risk
free interest rate
|
|
|
2.24
- 2.47
|
%
|
|
Expected
life of options
|
|
|
2.5
|
|
During
the six months ended March 31, 2019, the Company recorded $163,178 of stock compensation for the value of all outstanding options,
and as of March 31, 2019, unvested compensation of $514,416 remained that will be amortized over the remaining vesting period.
The
table below summarizes the Company’s stock option activities for the six months ended March 31, 2019:
|
|
|
Number
of Option Shares
|
|
|
Exercise
Price Range Per Share
|
|
|
Weighted
Average Exercise Price
|
|
|
Fair
Value at Date of Grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2018
|
|
|
17,946,667
|
|
|
$
|
0.10
- 2.00
|
|
|
$
|
0.28
|
|
|
$
|
3,244,755
|
|
|
Granted
|
|
|
125,000
|
|
|
|
0.06
|
|
|
|
0.06
|
|
|
|
6,485
|
|
|
Cancelled
|
|
|
(646,429
|
)
|
|
|
0.14
– 0.19
|
|
|
|
0.17
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Expired
|
|
|
(1,800,000
|
)
|
|
|
0.40
|
|
|
|
0.40
|
|
|
|
-
|
|
|
Balance,
March 31, 2019
|
|
|
15,625,238
|
|
|
$
|
0.06
– 2.00
|
|
|
$
|
0.27
|
|
|
$
|
3,251,240
|
|
|
Vested
and exercisable, March 31, 2019
|
|
|
11,282,381
|
|
|
$
|
0.06
– 2.00
|
|
|
$
|
0.32
|
|
|
$
|
2,182,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested,
March 31, 2019
|
|
|
4,342,857
|
|
|
$
|
0.14
– 0.19
|
|
|
$
|
0.14
|
|
|
$
|
1,068,387
|
|
There
was no aggregate intrinsic value for option shares outstanding at March 31, 2019. As of March 31, 2019, there were 14,374,762
shares of stock options remaining available for issuance under the 2010 Plan.
The
following table summarizes information concerning outstanding and exercisable options as of March 31, 2019:
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.06
- 0.39
|
|
|
|
13,912,738
|
|
|
|
3.54
|
|
|
$
|
0.15
|
|
|
|
9,569,881
|
|
|
|
3.33
|
|
|
$
|
0.15
|
|
|
|
0.40
- 0.99
|
|
|
|
312,500
|
|
|
|
0.87
|
|
|
|
0.40
|
|
|
|
312,500
|
|
|
|
0.87
|
|
|
|
0.40
|
|
|
|
1.00
- 1.99
|
|
|
|
750,000
|
|
|
|
1.75
|
|
|
|
1.00
|
|
|
|
750,000
|
|
|
|
1.75
|
|
|
|
1.00
|
|
|
|
2.00
|
|
|
|
650,000
|
|
|
|
1.75
|
|
|
|
2.00
|
|
|
|
650,000
|
|
|
|
1.75
|
|
|
|
2.00
|
|
|
$
|
0.06
- 2.00
|
|
|
|
15,625,238
|
|
|
|
3.23
|
|
|
$
|
0.27
|
|
|
|
11,282,381
|
|
|
|
3.07
|
|
|
$
|
0.32
|
|
NOTE
5 – SHAREHOLDERS’ EQUITY (CONTINUED)
Stock
Warrants
During
the six months ended March 31, 2019, the Company issued a warrant to purchase 284,714 shares with an exercise price of $0.15 per
share as part of the sale of equity units. The warrant expires five years from the date of grant.
The
table below summarizes the Company’s warrants activities for the six months ended March 31, 2019:
|
|
|
Number
of Warrant Shares
|
|
|
Exercise
Price Range Per Share
|
|
|
Weighted
Average Exercise Price
|
|
|
Fair
Value at Date of Issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2018
|
|
|
67,907,728
|
|
|
$
|
0.12
- 0.67
|
|
|
$
|
0.17
|
|
|
$
|
3,434,560
|
|
|
Granted
|
|
|
284,714
|
|
|
|
0.15
|
|
|
|
0.15
|
|
|
|
17,803
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Expired
|
|
|
(1,171,905
|
)
|
|
|
0.40
– 0.65
|
|
|
|
0.44
|
|
|
|
-
|
|
|
Balance,
March 31, 2019
|
|
|
67,020,537
|
|
|
$
|
0.12
- 0.67
|
|
|
$
|
0.17
|
|
|
$
|
3,452,363
|
|
|
Vested
and exercisable, March 31, 2019
|
|
|
67,020,537
|
|
|
$
|
0.12
- 0.67
|
|
|
$
|
0.17
|
|
|
$
|
3,452,363
|
|
There
was no aggregate intrinsic value for warrant shares outstanding at March 31, 2019.
The
following table summarizes information concerning outstanding and exercisable warrants as of March 31, 2019:
|
|
|
|
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
|
|
|
|
59,279,384
|
|
|
|
2.61
|
|
|
$
|
0.15
|
|
|
|
59,279,384
|
|
|
|
2.61
|
|
|
$
|
0.15
|
|
|
|
0.21
– 0.49
|
|
|
|
7,552,665
|
|
|
|
1.53
|
|
|
|
0.26
|
|
|
|
7,552,665
|
|
|
|
1.53
|
|
|
|
0.26
|
|
|
|
0.50
– 0.67
|
|
|
|
188,488
|
|
|
|
0.33
|
|
|
|
0.66
|
|
|
|
188,488
|
|
|
|
0.33
|
|
|
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.12
– 0.67
|
|
|
|
67,020,537
|
|
|
|
2.49
|
|
|
$
|
0.17
|
|
|
|
67,020,537
|
|
|
|
2.49
|
|
|
$
|
0.17
|
|
NOTE
6 – 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.
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.
NOTE
6 – SEGMENT REPORTING (CONTINUED)
The
detailed segment information of the Company is as follows:
Wellness
Center USA, Inc.
Assets
By Segment
|
|
|
March
31, 2019
|
|
|
|
|
Corporate
|
|
|
Medical
Devices
|
|
|
Authentication
and Encryption
|
|
|
Total
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
29,939
|
|
|
$
|
26,035
|
|
|
$
|
6,196
|
|
|
$
|
62,170
|
|
|
Total
current assets
|
|
|
29,939
|
|
|
|
26,035
|
|
|
|
6,196
|
|
|
|
62,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
-
|
|
|
|
-
|
|
|
|
2,091
|
|
|
|
2,091
|
|
|
Other
assets
|
|
|
-
|
|
|
|
1,760
|
|
|
|
-
|
|
|
|
1,760
|
|
|
Total
other assets
|
|
|
-
|
|
|
|
1,760
|
|
|
|
2,091
|
|
|
|
3,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
29,939
|
|
|
$
|
27,795
|
|
|
$
|
8,287
|
|
|
$
|
66,021
|
|
Wellness
Center USA, Inc.
Operations
by Segment
|
|
|
For
the Six Months Ended
|
|
|
|
|
March
31, 2019
|
|
|
|
|
Corporate
|
|
|
Medical
Devices
|
|
|
Authentication
and Encryption
|
|
|
Total
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16,400
|
|
|
$
|
16,400
|
|
|
Consulting
services
|
|
|
-
|
|
|
|
-
|
|
|
|
9,350
|
|
|
|
9,350
|
|
|
Total
Sales
|
|
|
-
|
|
|
|
-
|
|
|
|
25,750
|
|
|
|
25,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
-
|
|
|
|
-
|
|
|
|
15,450
|
|
|
|
15,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
-
|
|
|
|
-
|
|
|
|
10,300
|
|
|
|
10,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
541,116
|
|
|
|
265,991
|
|
|
|
204,350
|
|
|
|
1,011,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
$
|
(541,116
|
)
|
|
$
|
(265,991
|
)
|
|
$
|
(194,050
|
)
|
|
$
|
(1,001,157
|
)
|
Wellness
Center USA, Inc.
Operations
by Segment
|
|
|
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
|
)
|
NOTE
7 – 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. However, we recently decided to attempt to preserve revenue and reduce operating expenses
through actions including, but not limited to, facilities consolidation and staff reductions, which we hope to implement through
negotiated transactions with lessors, employees and other third parties. Such actions may result in disputes with and claims by
such parties which, if not resolved through negotiations, may impact negatively the Company’s ability to continue as a going
concern.
In
periodic reports on Forms 10K and 10Q for the periods ending September 30, 2017 and December 31, 2017, respectively, the Company
disclosed that on May 25, 2017, the SEC’s Chicago Regional Office informed it that it had made a preliminary determination
to recommend filing of an enforcement action against the Company and its CEO based on possible violations of Section 10(b) of
the Exchange Act and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act, and Section 15(a) of the Exchange Act. Subsequent
discussions resulted in the submission of an Offer of Settlement (“Settlement”) through an administrative cease and
desist action on November 17, 2017, which was accepted by the SEC on April 12, 2018, as disclosed on Form 8K filed April 18, 2018.
Pursuant to the Settlement, the Company neither admitted nor denied any of the allegations, but was enjoined from violating the
above-referenced Sections and Rule. The Settlement imposed no financial penalties or sanctions against the Company.
The
Form 8K also disclosed that on April 13, 2018, the SEC filed a separate complaint against the CEO in the U.S. District Court for
the Northern District of Illinois, asserting the allegations noted above, as well as allegations that he manipulated the price
of company shares through undisclosed trading, realizing more than $130,000 from such trading. On the date of filing, the CEO
voluntarily resigned as an officer and director of the Company. Without admitting or denying the allegations, the CEO consented
to the entry of the judgment, which was entered on September 26, 2018 by the U.S. District Court for the Northern District of
Illinois. The judgment permanently enjoined him from violating the anti-fraud provisions of Section 17(a) of the Securities Act
of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and the broker registration provisions
of Section 15(a) of the Exchange Act. It also bars him from serving as an officer or director of a public company and from participating
in penny stock offerings, and ordered disgorgement and interest and penalties to be determined by the court.
On
January 31, 2019, the employment agreement between the Company and its ex-CEO dated April 1, 2018 was terminated and his service
thereunder as Director of Business Development ceased as of that date.
NOTE
8 – COMMITMENTS
The
Company leases its corporate office facilities under a non-cancellable lease agreement. The lease was initiated in July 2016 and
expires February 28, 2024. The Company abandoned the facility in April 2019 and is in negotiations with the owners regarding the
settlement of its lease obligations. During the three months ended March 31, 2019, the Company recorded an accrual for the potential
settlement and wrote-off its $15,000 security deposit relating to the lease.
NOTE
9 – SUBSEQUENT EVENTS
Subsequent
to March 31, 2019, the Company borrowed $50,000 from one of its officers and shareholders. The loan is unsecured, has an interest
rate of eight percent and is due one year from the date of issuance. Also, an officer invested $25,000 in GEN2 and a third party
invested $50,000 in GEN2.
On
April 2, 2019, an individual converted his convertible note payable of $110,000 and $6,389 of accrued interest into 2,327,781
shares of the Company’s common stock (see Note 4).
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 six months ended
December 31, 2016.
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”).
On
November 15, 2018, PSI and TMA entered into a Withdraw and Mutual Release Agreement to terminate their joint venture agreement.
On the date of termination, the non-controlling interest’s share of the accumulated losses of the joint venture totaled
to $405,383. Upon termination, during the six months ended March 31, 2019, the Company wrote-off the non-controlling interest’s
share of the accumulated losses and recorded a loss from deconsolidation of non-controlling interest of $405,383.
In
December 2018, PSI entered into a Joint Venture Agreement with GEN2 to further development, marketing, licensing and/or sale of
PSI technology and products. The joint venture will be conducted through NEO. PSI and GEN2 will be the members of NEO, owning
50.5% and 36.0%, respectively, of the Units issued in connection with the organization of NEO. An additional 13.5% of such Units
will be reserved for issuance as incentives for key employees and consultants. Until such shares are distributed, the Company
controls 68% of the joint venture and GEN2 the remaining 32%. PSI and GEN2 will manage NEO’s day-to-day operations. PSI
will contribute PSI technology to NEO and GEN2 will contribute $700,000. Repayment of the $700,000 investment by GEN2 will begin
through and upon the date which NEO has realized and retained cumulative net income/distributable cash in the amount of $300,000.
Distributions thereafter will be made to PSI, GEN2 and other members in proportion to their respective Unit ownership, at the
times and in the manner determined from time to time by the managers, in their sole discretion. GEN2 consists of accredited investors,
and investment participation from several WCUI officers and directors, including Calvin R. O’Harrow and Roy M. Harsch.
As
of March 31, 2019, GEN2 had received $475,000 of investments to contribute to NEO and the Company recorded its proportionate share
of $323,000 to additional paid-in-capital and $152,000 to non-controlling interest. During the six months ended March 31, 2019,
NEO recorded a net loss of $2,006 relating to its operations.
PSI
designs, develops and markets a targeted ultraviolet (“UV”) phototherapy device called the Psoria-Light. The Psoria-Light
is designated for use in targeted PUVA photochemistry and UVB phototherapy and is designed to treat certain skin conditions including
psoriasis, vitiligo, atopic dermatitis (eczema), seborrheic dermatitis, and leukoderma.
Psoriasis,
eczema, and vitiligo, are common skin conditions that can be challenging to treat, and often cause the client significant psychosocial
stress. Clients may undergo a variety of treatments to address these skin conditions, including routine consumption of systemic
and biologic drug therapies which are highly toxic, reduce systemic immune system function, and come with a host of chemotherapy-like
side effects. Ultraviolet (UV) phototherapy is a clinically validated alternate treatment modality for these disorders.
Traditionally,
“non-targeted” UV phototherapy was administered by lamps that emitted either UVA or UVB light to both diseased and
healthy skin. While sunblocks or other UV barriers may be used to protect healthy skin, the UV administered in this manner must
be low dosage to avoid excessive exposure of healthy tissue. Today, “targeted” UV phototherapy devices administer
much higher dosages of light only to affected tissue, resulting in “clearance” in the case of psoriasis and eczema,
and “repigmentation” in the case of vitiligo, at much faster rates than non-targeted (low dosage) UV treatments.
Targeted
UV treatments are typically administered to smaller total body surface areas, and are therefore used to treat the most intense
parts of a client’s disease. Non-targeted UV treatment is typically used as a follow-up and for maintenance, capable of
treating large surfaces of the body. Excimer laser devices (UVB at 308nm) are expensive and consume dangerous chemicals (Xenon
and Chlorine). Mercury lamp devices (UVB and/or UVA) require expensive lamp replacements regularly and require special disposal
(due to mercury content). Additionally, mercury lamp devices typically deliver wavelengths of light below 300nm. While within
the UVB spectrum, it has been shown that wavelengths below 300nm produce significantly more “sunburn” type side effects
than do wavelengths between 300 and 320nm without improvement in therapeutic benefit.
The
Psoria-Light is a targeted UV phototherapy device that produces UVB light between 300 and 320 nm as well as UVA light between
350 and 395nm. It does not require consumption of dangerous chemicals or require special environmental disposal, and is cost effective
for clinicians, which should result in increased patient access to this type of treatment. It has several unique and advanced
features that we believe will distinguish it from the non-targeted and targeted UV phototherapy devices that are currently being
used by dermatologists and other healthcare providers. These features include the following: the utilization of deep narrow-band
UVB (“NB-UVB”) LEDs as light sources; the ability to produce both UVA or NB-UVB therapeutic wavelengths; an integrated
high resolution digital camera and client record integration capabilities; the ability to export to an external USB memory device
a PDF file of treatment information including a patent pending graph that includes digital images plotted against user tracked
metrics which can be submitted to improve medical reimbursements; an accessory port and ability to update software; ease of placement
and portability; advanced treatment site detection safety sensor; international language support; a warranty which includes the
UV lamp(s); and a non-changeable treatment log (that does not include HIPPA information).
The
Psoria-Light consists of three components: a base console, a color display with touchscreen control, and a hand-held delivery
device with a conduit (or tether) between the handheld device and the base console. PSI requires clearance by the United States
Food and Drug Administration (“FDA”) to market and sell the device in the United States as well as permission from
TUV SUD America Inc., PSI’s Notified Body, to affix the CE mark to the Psoria-Light in order to market and sell the device
in countries of the European Union.
To
obtain FDA clearance and permission to affix the CE mark, PSI was required to conduct EMC and electrical safety testing, which
it completed in the second quarter of 2011. PSI received FDA clearance on February 11, 2011 (no. K103540) and was granted permission
to affix the CE mark on November 10, 2011. In its 510(k) application with the FDA (application number K103540), PSI asserted that
the Psoria-Light was “substantially equivalent” in intended use and technology to two predicate devices, the X -Trac
Excimer Laser, which has wide acceptance in the medical billing literature and has a large installed base in the U.S., and the
Dualight, another competing targeted UV phototherapy device.
PSI
has established an ISO 13485 compliant quality system for the Psoria-Light, which was first audited in the third quarter of 2011.
This system is intended to ensure PSI devices will be manufactured in a controlled and reliable environment and that its resources
follow similar practices and is required for sales in countries requiring a CE mark. PSI has also received Certified Space Technology
designation from the Space Foundation, based on PSI’s incorporation of established NASA-funded LED technology.
PSI
began Psoria-Light Beta deployment in January 2012. It is currently operating at a loss, and there is no assurance that its business
development plans and strategies will ever be successful. PSI’s success depends upon the acceptance by healthcare providers
and clients of Psoria-Light treatment as a preferred method of treatment for psoriasis and other UV-treatable skin conditions.
Psoria-Light treatment appears to have been beneficial to clients, without demonstrable harmful side effects or safety issues,
as evidenced by more than 10,000 treatments completed on more than 1,000 clients, domestically and Mexico, since 2012. In order
for the Company to continue PSI operations, it will need additional capital and it will have to successfully coordinate integration
of PSI operations without materially and adversely affecting continuation and development of other Company operations.
SCI
SCI
was incorporated under the laws of the state of Illinois on March 18, 2014. SCI acquired certain Stealth Mark assets on April
4, 2014 and operates as a wholly-owned subsidiary of the Company. It is a Tennessee-based provider of: a) Stealth Mark encryption
and authentication solutions offering advanced technologies within the security and supply chain management vertical sectors
(Microparticles)
,
and b) advanced data intelligence services offering proprietary, unprecedented, and actionable technology for industries, companies,
and agencies on a global scale (
ActiveDutyTM).
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.
ActiveDutyTM
SCI’s
ActiveDutyTM 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. ActiveDutyTM 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 ActiveDutyTM creates the first systemic reporting mechanism to deliver strategic and tactical
results supported by an intense worldwide analysis of patterns of human behavior. The ActiveDutyTM global framework is heuristic
in nature, capable of comprehending big data across the digital spectrum and speaks all the major languages. Up until now, there
has not existed a unified system that could actively measure this lifecycle that is a collection of discreet and seemingly random
behaviors of criminals anywhere within the digital domain. Criminals change their identities but not their basic behaviors.
During
the period covered by this Report, SCI was managed by its CEO, Ricky Howard. Mr. Howard brought to SCI over thirty years of experience
in operations management and executive positions in a variety of industries ranging from entrepreneurial startups to Fortune 500
companies. He joined Stealth Mark as V.P. of Operations at the early stage of development in 2006 and played an integral role
in bringing the company’s capabilities to its present status including design and creation of its manufacturing capabilities,
implementation of its ERP inventory controls system, software and hardware development, marketing and sales materials processes
and day-to-day operational procedures and processes. In November 2018, Mr. Howard passed away suddenly and Mr. O’Harrow
took over operations of SCI’s business on an interim basis.
Analysis
of Financial Condition and Results of Operations
Results
of Operations for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.
Revenue
and Cost of Goods Sold
Revenue
for the three months ended March 31, 2019 and 2018 was $12,875 and $41,250, respectively. The decrease of $28,375 was due to the
decrease in revenues at SCI. Cost of sales for the three months ended March 31, 2019 and 2018, was $7,725 and $17,666, respectively.
Gross profit for the three months ended March 31, 2019 and 2018 was $5,150 and $23,584, respectively. The gross profit decrease
of $18,434 was primarily due to the decrease in revenues at SCI during the three months ended March 31, 2019.
Operating
Expenses
Operating
expenses for the three months ended March 31, 2019 and 2018 were $535,593 and $561,317, respectively. The decrease in operating
expenses of $25,724 was due primarily to the decrease in consulting and salaries and wages during the three months ended March
31, 2019.
Other
Expenses
Other
expenses during the three months ended March 31, 2019 consisted of $21,389 of amortization of debt discount, $22,000 of financing
costs and $6,878 of interest expense, totaling to $50,267. Other expenses during the three months ended March 31, 2018 consisted
of $65,790 of amortization of debt discount, $70,422 of financing costs, a loss on the modification of the conversion price on
a convertible note payable of $158,400, a loss on the modification of the exercise price on warrants in connection with a convertible
note payable of $5,445, and $9,788 of interest expense, totaling to $309,845.
Net
Loss
Our
net loss for the three months ended March 31, 2019 was $580,710, compared to a net loss of $847,578 for the three months ended
March 31, 2018. The decrease in the net loss of $266,868 was primarily due to the decrease in operating and other expenses.
Results
of Operations for the six months ended March 31, 2019 compared to the six months ended March 31, 2018.
Revenue
and Cost of Goods Sold
Revenue
for the six months ended March 31, 2019 and 2018 was $25,750 and $67,750, respectively. The decrease of $42,000 was due to the
decrease in revenues at SCI. Cost of sales for the six months ended March 31, 2019 and 2018 was $15,450 and $34,658, respectively.
Gross profit for the six months ended March 31, 2019 and 2018 was $10,300 and $33,092, respectively. The gross profit decrease
of $22,792 was primarily due to the decrease in revenues at SCI during the six months ended March 31, 2019.
Operating
Expenses
Operating
expenses for the six months ended March 31, 2019 and 2018 were $1,011,457 and $895,480, respectively. The increase in operating
expenses of $115,977 was due primarily to the increase in consulting and professional fees during the three months ended March
31, 2019.
Other
Expenses
Other
expenses during the six months ended March 31, 2019 consisted of $72,078 of amortization of debt discount, $73,434 of financing
costs and $11,729 of interest expense, totaling to $157,241. Other expenses during the six months ended March 31, 2018 consisted
of $135,837 of amortization of debt discount, $70,422 of financing costs, a loss on the modification of the conversion price on
a convertible note payable of $158,400, a loss on the modification of the exercise price on warrants in connection with a convertible
note payable of $5,445, and $13,088 of interest expense, totaling to $383,192.
Net
Loss
Our
net loss for the six months ended March 31, 2019 was $1,158,398, compared to a net loss of $1,245,580 for the six months ended
March 31, 2018. The decrease in the net loss of $87,182 was primarily due to the decrease in other expenses, offset by the increase
in operating expenses.
Results
of Operations by Segment
The
Company currently maintains two business segments:
|
|
(i)
|
Medical
Devices:
which it provided through PSI, its wholly-owned subsidiary acquired on August
24, 2012, a developer, manufacturer, marketer and distributer of targeted Ultra Violet
(“UV”) phototherapy devices for the treatment of skin diseases; and
|
|
|
(ii)
|
Authentication
and Encryption Products and Services:
which it provided through SCI, its wholly-owned
subsidiary that on April 4, 2014 acquired certain assets of SMI Holdings, Inc. d/b/a
Stealth Mark, Inc., including Stealth Mark tradenames and marks, and related encryption
and authentication solutions offering advanced product security technologies within the
security and supply chain management vertical sectors.
|
The
detailed segment information of the Company is as follows:
Wellness
Center USA, Inc.
Operations
by Segment
|
|
|
For
the Six Months Ended
|
|
|
|
|
March
31, 2019
|
|
|
|
|
Corporate
|
|
|
Medical
Devices
|
|
|
Authentication
and Encryption
|
|
|
Total
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16,400
|
|
|
$
|
16,400
|
|
|
Consulting
services
|
|
|
-
|
|
|
|
-
|
|
|
|
9,350
|
|
|
|
9,350
|
|
|
Total
Sales
|
|
|
-
|
|
|
|
-
|
|
|
|
25,750
|
|
|
|
25,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
-
|
|
|
|
-
|
|
|
|
15,450
|
|
|
|
15,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
-
|
|
|
|
-
|
|
|
|
10,300
|
|
|
|
10,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
541,116
|
|
|
|
265,991
|
|
|
|
204,350
|
|
|
|
1,011,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
$
|
(541,116
|
)
|
|
$
|
(265,991
|
)
|
|
$
|
(194,050
|
)
|
|
$
|
(1,001,157
|
)
|
Wellness
Center USA, Inc.
Operations
by Segment
|
|
|
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
|
)
|
There
was no revenue or cost of goods sold for the Medical Devices segment for the six months ended March 31, 2019 and 2018. Operating
expenses for the six months ended March 31, 2019 and 2018 was $265,991 and $135,934, respectively. The increase in operating expenses
of $130,057 in 2019 was due primarily to the increase in contract labor. The loss from operations for the six months ended March
31, 2019 and 2018 was $265,991 and $135,934, respectively.
Revenue
for the Authentication and Encryption segment for the six months ended March 31, 2019 and 2018 was $25,750 and $67,750, respectively.
The decrease of $42,000 was due to the decrease in trade sales and consulting services in 2019. Cost of goods sold for the six
months ended March 31, 2019 and 2018 was $15,450 and $34,658, respectively, and the gross profit was $10,300 and $33,092, respectively.
The gross profit decrease in in 2019 of $22,792 was primarily due to the decrease in sales in 2019. Operating expenses for the
six months ended March 31, 2019 and 2018 was $204,350 and $362,438, respectively. The decrease in operating expenses of $158,088
in 2019 was due primarily to the decrease in stock compensation costs and salaries and wages. The loss from operations for the
six months ended March 31, 2019 and 2018 was $194,050 and $329,346, respectively.
The
Corporate segment primarily provides executive management services for the Company. Operating expenses for the six months ended
March 31, 2019 and 2018 was $541,116 and $397,108, respectively. The increase in operating expenses of $144,008 in 2019 was due
primarily to the increase in professional fees. The loss from operations for the six months ended March 31, 2019 and 2018 was
$541,116 and $397,108, respectively.
Liquidity
and Capital Resources
The
accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying
condensed consolidated financial statements, the Company has not yet generated significant revenues and has incurred recurring
net losses. During the six months ended March 31, 2019, the Company incurred a net loss of $1,158,398 and used cash in operations
of $685,290, and had a shareholders’ deficit of $1,078,563 as of March 31, 2019. 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,
2018 financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.
At
March 31, 2019, the Company had cash on hand in the amount of $62,170. 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, 2019, the Company received $743,250 through short-term loans, contributions of capital by a joint
venture partner and the sale of common stock. As of March 31, 2019, loans payable to officers and shareholders of $324,250 were
outstanding. All of the loans are unsecured, have an interest rate of eight percent and are due one year from the date of issuance.
At March 31, 2019, the Company had outstanding convertible note of $110,000 that was past due, but on April 2, 2019, was converted
into shares of the Company’s common stock.
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.
Comparison
of six months ended March 31, 2019 and 2018
As
of March 31, 2019, we had $62,170 in cash, negative working capital of $1,082,414 and an accumulated deficit of $24,534,119.
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.
Cash
flows used in operating activities
During
the six months ended March 31, 2019, the Company used cash flows in operating activities of $685,290, compared to $478,370 used
in the six months ended March 31, 2018. During the six months ended March 31, 2019, the Company incurred a net loss of $1,158,398
and $383,818 of non-cash expenses compared to a net loss of $1,245,580 and $536,680 of non-cash expenses during the six months
ended March 31, 2018.
Cash
flows used in investing activities
During
the six months ended March 31, 2019 and 2018, the Company had no cash flows from investing activities.
Cash
flows provided by financing activities
During
the six months ended March 31, 2019, the Company had proceeds from loans payable from officers and shareholders of $258,250, proceeds
from common stock issued for cash of $10,000 and proceeds of $475,000 from contributions of capital by its joint venture partner.
During the six months ended March 31, 2018, the Company had proceeds from loans payable from officers and shareholders of $179,000,
proceeds from a convertible note payable of $150,000, and proceeds from the exercise of stock warrants of $170,914, and used cash
to repay loans payable from officers and shareholders of $10,500.
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, 2018, filed with the Securities and Exchange Commission on
January 15, 2019. There have been no material changes to the Company’s critical accounting policies that impact the Company’s
financial condition, results of operations or cash flows for the three months ended March 31, 2019.
Recently
Issued Accounting Pronouncements
See
Management’s discussion of recent accounting policies included in footnote 2 to the condensed consolidated financial statements.
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.
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, 2018, 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.
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.
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
|
|
|
|
|
|
|
●
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Consultant
agreements with payments totaling over $20,000 must be approved by the Board
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Creation
of a Board compensation plan
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Creation
of an Audit Committee with an Audit Committee Charter
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Creation
of a policy for Board approval on cash disbursements over $20,000
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Creation
of a policy to ensure no one at any entity can initiate a payment to them selves
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Creation
of controls over all Press Releases
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Ensure
the Company will only work with licensed dealer/brokers relating to the sale of equity instruments.
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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:
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Pertain
to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of
the assets of the issuer;
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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;
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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.
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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, 2018, such internal control
over financial reporting was not effective. This was due to deficiencies that existed in the design or operation of our internal
control over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.
The
matters involving internal control over financial reporting that our management considered to be material weaknesses under the
standards of the Public Company Accounting Oversight Board were: (1) lack of a functioning audit committee due to a lack of a
majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective
oversight in the establishment and monitoring of required internal controls and procedures; and (2) inadequate segregation of
duties consistent with control objectives of having segregation of the initiation of transactions, the recording of transactions
and the custody of assets. The aforementioned material weaknesses were identified by our Chief Executive Officer in connection
with the review of our financial statements as of March 31, 2019.
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.