Wellness Center USA, Inc. - Quarter Report: 2016 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_______________

 

FORM 10-Q

_______________

 

  X . QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2016

 

      . TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ___________

 

WELLNESS CENTER USA, INC.

(Name of small business issuer in its charter)

 

NEVADA		333-173216		27-2980395
(State or other jurisdiction of incorporation or organization)		Commission File Number		(IRS Employee Identification No.)

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

(Address of Principal Executive Offices)

_______________

 

(847) 925-1885

(Issuer Telephone number)

Not Applicable

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

_______________

 

Copies of communication to:

Ronald P. Duplack, Esq.

Rieck and Crotty, P.C.

55 West Monroe Street, Suite 3625, Chicago, IL 60603

Telephone (312) 726-4646 Fax (312) 726-0647

Securities registered under Section 12(b) of the Exchange Act:
Title of each class registered:	Name of each exchange on which registered:
None	None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.001 (Title of class)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  X .No      .

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

Large Accelerated Filer	.	Non-Accelerated Filer	.
.Accelerated Filer	.	Smaller Reporting Company	X .

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 issued and outstanding of each of the issuer’s classes of common equity as of December 31, 2016 was 74,968,352.

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FORM 10-Q

WELLNESS CENTER USA, INC.

DECEMBER 31, 2016

TABLE OF CONTENTS

 

 

PART I-- FINANCIAL INFORMATION

 

Item 1.	Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Control and Procedures	27

 

PART II-- OTHER INFORMATION

 

Item 1	Legal Proceedings	27
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	28

 

SIGNATURE

 

3

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Wellness Center USA, Inc.
Condensed Consolidated Balance Sheets
		December 31,		September 30,
		2016		2016
		(Unaudited)
ASSETS
Current Assets
Cash	$	154,724	$	89,249
Accounts receivable		14,000		-
Inventories		39,175		79,169
Prepaid expenses and other current assets		4,855		29,334
Total Current Assets		212,754		197,752
Property and equipment, net		15,370		15,821
Other assets		16,760		16,760
Total Other Assets		32,130		32,581
TOTAL ASSETS	$	244,884	$	230,333
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued expenses	$	642,103	$	610,581
Accrued payroll taxes		49,640		37,436
Accrued payroll - officers		244,972		200,096
Deferred revenue		71,674		77,375
Advances from related parties		50,545		50,545
Notes payable		9,000		9,000
Total Current Liabilities		1,067,934		985,033
Shareholders' Deficit
Common stock, par value $0.001, 185,000,000 shares authorized;   74,968,352 shares issued and outstanding		74,969		74,969
Additional paid-in capital		16,503,046		16,464,896
Common stock issuable, 8,138,650 and 5,048,650 shares, respectively		751,400		442,400
Accumulated deficit		(17,950,799)		(17,541,827)
Total Wellness Center USA shareholders' deficit		(621,384)		(559,562)
Non-controlling interest		(201,666)		(195,138)
Total Shareholder's deficit		(823,050)		(754,700)
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT	$	244,884	$	230,333
The accompanying notes are an integral part of these condensed consolidated financial statements.

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Wellness Center USA, Inc.
Condensed Consolidated Statements of Operations
		Three Months Ended
		December 31,
		2016		2015
		(Unaudited)
Sales:
Trade	$	89,000	$	7,224
Consulting services		14,125		7,500
Management services to related party		37,402		61,702
Total Sales		140,527		76,426
Cost of goods sold		60,500		27,561
Gross profit		80,027		48,865
Operating expenses		495,527		625,972
Loss from operations		(415,500)		(577,107)
Other income
Interest income -  related party		-		2,913
NET LOSS		(415,500)		(574,194)
Net loss attributable to non-controlling interest		6,528		32,638
NET LOSS ATTRIBUTABLE TO
WELLNESS CENTER USA, INC.	$	(408,972)	$	(541,556)
BASIC AND DILUTED LOSS PER SHARE	$	(0.01)	$	(0.01)
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC AND DILUTED		80,998,306		66,898,921
The accompanying notes are an integral part of these condensed consolidated financial statements.

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Wellness Center USA, Inc.
Condensed Consolidated Statements of Cash Flows
		Three Months Ended
		December 31,
		2016		2015
		(Unaudited)
Cash Flows from Operating Activities
Net loss	$	(415,500)	$	(574,194)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation expense		2,701		2,290
Amortization expense		-		22,154
Fair value of common shares issued for services		-		118,000
Fair value of stock options issued for services		38,150		5,806
Loss on shares issued for repayment of accounts payable		-		40,000
Changes in Assets and Liabilities
(Increase) Decrease in:
Accounts receivable		(14,000)		-
Inventories		39,994		32
Note receivable - Chairman and CEO		-		11,636
Prepaid expenses and other current assets		24,479		6,295
(Decrease) Increase in:
Accounts payable and accrued expenses		31,522		(38,800)
Accrued payroll taxes		12,204		37,436
Accrued payroll - officers		44,876		-
Deferred revenue		(5,701)		(12,500)
Net cash used in operating activities		(241,275)		(381,845)
Cash Flows from Investing Activities
Purchases of property and equipment		(2,250)		-
Net cash used in investing activities		(2,250)		-
Cash Flows from Financing Activities
Proceeds from notes payable		-		82,300
Repayment of advances from related party		-		(13,083)
Common stock issued for cash		-		409,000
Exercise of stock warrants		-		5,000
Proceeds from common stock issuable		309,000		-
Net cash provided by financing activities		309,000		483,217
Net increase in cash		65,475		101,372
Cash beginning of period		89,249		34,227
Cash end of period	$	154,724	$	135,599
Supplemental cash flows disclosures:
Interest paid	$	-	$	-
Taxes paid	$	-	$	-
Supplemental non-cash financing disclosures:
Issuance of common stock for repayment of accounts payable of $60,000	$	-	$	100,000
Non-controlling interest's share in losses of a subsidiary	$	6,528	$	32,638
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 THREE MONTHS ENDED DECEMBER 31, 2016 AND 2015

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Wellness Center USA, Inc. and Subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the three months ended December 31, 2016 are not necessarily indicative of the results that may be expected for the year ending September 30, 2017.

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. Later, the Company expanded into additional businesses within the healthcare and medical sectors through acquisitions, including Psoria­Shield Inc. (“PSI”), National Pain Centers, Inc. (“NPC”), 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; (ii) management of top­tier medical practices in the interventional and multi­modal pain management sector; and (iii) authentication and encryption products and services. The segments are operated, respectively, through PSI, NPC and SCI.

Going Concern

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, the Company has not yet generated significant revenues and has incurred recurring losses from operations. As of December 31, 2016, the Company has a shareholders’ deficit of $823,050, and during the three months ended December 31, 2016, the Company incurred a net loss of $415,500 and used cash in operations of $241,275. 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, 2016 financial statements, has raised substantial doubt about the Company's ability to continue as a going concern.

At December 31, 2016, the Company had cash on hand in the amount of $154,724. The ability to continue as a going concern is dependent on the Company attaining and maintaining profitable operations in the future and raising additional capital soon to meet its obligations and repay its liabilities arising from normal business operations when they come due. Since inception, we have funded our operations primarily through equity and debt financings, and we expect to continue to rely on these sources of capital in the future. During the three months ended December 31, 2016, the Company raised $309,000 through the sale of its 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.

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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation

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

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%
National Pain Centers, Inc. (“NPC”)	The State of Nevada	January 24, 2014 (February 28, 2014)	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%

Intercompany balances and transactions have been eliminated in consolidation. The Company has determined that its existing management services agreement with National Pain Center, LLC (“NPC LLC”) does not meet the requirements for consolidation under U.S. generally accepted accounting principles. Specifically, the Company does not have an equity ownership interest in NPC LLC. Furthermore, the Company's service agreement specifically does not give the Company "control" of NPC LLC as the Company does not have exclusive authority over decision making and the Company does not have a financial interest in NPC LLC (See Note 6).

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

Income (Loss) Per Share

Basic loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of outstanding common shares during the period. Diluted loss per share is computed by dividing the net loss applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. For the three months ended December 31, 2016 and 2015, the basic and diluted shares outstanding were the same, as potentially dilutive shares were considered anti-dilutive. At December 31, 2016 and September 30, 2016, the dilutive impact of outstanding stock options for 5,785,000 and 5,227,500 shares, respectively, and outstanding warrants for 64,208,158 and 54,938,158 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)

Management fees of medical practice: The Company receives management fees from the management services it provides to a medical practice owned by a related entity. The Company earns and records 50% of the fees the medical practice collects as management fees when collected per management service agreement. Revenue is recorded net of $50,000 of salary earned by the director during the three months ended December 31, 2016 and 2015.

(iii)

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 December 31, 2016 and September 30, 2016 was $71,674 and $77,375, respectively.

Fair Value measurements

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

·

Level 1 — Quoted prices in active markets for identical assets or liabilities.

·

Level 2 — Inputs, other than Level 1, that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

·

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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

Non-controlling Interest

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

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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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, 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.

Reclassifications

 

Certain salary amounts paid to a related party during the three months ended December 31, 2015 have been reclassified from operating costs as an offset to revenue to conform to current period presentation.

Recently Issued Accounting Pronouncements

In July 2015, the FASB issued Accounting Standards Update 2015-11, Simplifying the Measurement of Inventory, which requires that inventory within the scope of ASU 2015-11 be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out (LIFO) and the retail inventory method are not impacted by the new guidance. ASU 2015-11 applies to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of ASU 2015-11 at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for public business entities in fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2015-11 on the Company’s financial statements and disclosures.

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.

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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recently Issued Accounting Pronouncements (Continued)

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

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

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31, 2016 and September 30, 2016:

		December 31, 2016				September 30, 2016
Vehicles		$	15,000			$	15,000
Computer equipment			9,058				9,058
Furniture and fixtures			27,216				24,966
Medical equipment			18,889				18,889
Software			23,207				23,207
Leasehold improvements			15,170				15,170
			108,540				106,290
Less: accumulated depreciation and amortization			(93,170)				(90,469)
Property and equipment, net		$	15,370			$	15,821

Depreciation expense for the three months ended December 31, 2016 and 2015 was $2,701 and $2,290, respectively.

NOTE 4 – LOANS PAYABLE

Loans payable of $9,000 at December 31, 2016 and September 30, 2016 consist of two unsecured note agreements issued on May 14, 2014 and August 21, 2014. The loans have no stated interest rate and are due on demand.

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NOTE 5 – SHAREHOLDERS’ EQUITY

Authorized shares

As of December 31, 2016, we were authorized by our Articles of Incorporation to issue up to 75,000,000 shares of common stock, par value $0.001 per share. As of December 31, 2016 there were 74,968,352 shares of common stock issued and outstanding. Subsequent to December 31, 2016, the Company amended its Articles of Incorporation to increase its authorized shares to 185,000,000 shares of common stock, par value $0.001 per share, through a Certificate of Amendment dated January 12, 2017.

Common shares issued for cash

During the three months ended December 31, 2016, the Company received $309,000 from several investors to purchase 3,090,000 shares of the Company’s common stock. In connection with the sale, the Company issued warrants to the shareholders to purchase 9,270,000 shares of the Company’s common stock. The warrants expire five years from the date of grant and have exercise prices ranging from $0.12 to $0.18 per share. As of December 31, 2016, the shares had not been issued to the investors.

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.

During the three months ended December 31, 2016, the Company issued options to purchase 62,500 shares of its common stock to an officer of the Company with an exercise price of $0.19 per share. The options vested immediately and expire five years from the date of grant. The Company valued the options using a Black-Scholes option-pricing model and recorded $10,850 of stock compensation for the value of the options during the three months ended December 31, 2016.

During the three months ended December 31, 2016, the Company issued options to purchase 500,000 shares of its common stock to a consulting firm with an exercise price of $0.12 per share. All of the options vest on January 30, 2017, provided the agreement has not been terminated prior to that date. The Company valued the options using a Black-Scholes option-pricing model and recorded $27,300 of stock compensation for the value of the options during the three months ended December 31, 2016.

 

The assumptions used for options granted during the three months ended December 31, 2016 are as follows:

Exercise price		$	0.12 - 0.19
Expected dividends			-
Expected volatility			150.8% - 152.3%
Risk free interest rate			0.96% - 1.03%
Expected life of options			2.5

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NOTE 5 – SHAREHOLDERS’ EQUITY (CONTINUED)

Stock Options (continued)

The table below summarizes the Company’s stock option activities for the three months ended December 31, 2016:

	Number of Option Shares			Exercise Price Range Per Share			Weighted Average Exercise Price			Fair Value at Date of Grant
Balance, September 30, 2016		5,227,500		$	0.01 - 2.00		$	0.60		$	1,539,269
Granted		562,500			0.12 - 0.19			0.13			65,450
Cancelled		(5,000)			0.09			0.09			-
Exercised		-			-			-			-
Expired		-			-			-			-
Balance, December 31, 2016		5,785,000		$	0.01 – 2.00		$	0.55		$	1,604,719
Vested and exercisable, December 31, 2016		5,285,000		$	0.01 – 2.00		$	0.59		$	1,550,119
Unvested, December 31, 2016		500,000		$	0.12		$	0.12		$	54,600

The aggregate intrinsic value for option shares outstanding at December 31, 2016 was $127,688.

The following table summarizes information concerning outstanding and exercisable options as of December 31, 2016:

		Options Outstanding						Options Exercisable
Range of Exercise Prices		Number Outstanding		Average Remaining Contractual Life (in years)		Weighted Average Exercise Price		Number Exercisable		Average Remaining Contractual Life (in years)		Weighted Average Exercise Price
$0.01 - 0.39		2,325,000		3.71	$	0.14		1,825,000		3.71	$	0.14
0.40 - 0.99		2,060,000		2.22		0.40		2,060,000		2.22		0.40
1.00 - 1.99		750,000		4.00		1.00		750,000		4.00		1.00
2.00		650,000		4.00		2.00		650,000		4.00		2.00
$0.01 - 2.00		5,785,000		3.25	$	0.55		5,285,000		3.25	$	0.59

As of December 31, 2016, there were 1,715,000 shares of stock options remaining available for issuance under the 2010 Plan.

Stock Warrants

During the three months ended December 31, 2016, the Company issued warrants to purchase 9,270,000 shares with exercise prices of $0.12 and $0.18 per share as part of the sale of equity units (see Note 5). The warrants expire five years from the date of grant.

 

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NOTE 5 – SHAREHOLDERS’ EQUITY (CONTINUED)

Stock Warrants (continued)

The table below summarizes the Company’s warrants activities for the three months ended December 31, 2016:

	Number of Warrant  Shares			Exercise Price Range Per Share			Weighted  Average Exercise  Price			Fair Value at Date of Issuance
Balance, September 30, 2016		54,938,158		$	0.01-2.31		$	0.28		$	2,119,957
Granted		9,270,000			0.12-0.18			0.15			-
Canceled		-			-			-			-
Exercised		-			-			-			-
Expired		-			-			-			-
Balance, December 31, 2016		64,208,158		$	0.01 - 2.31		$	0.24		$	2,119,957
Vested and exercisable, December 31, 2016		64,208,158		$	0.01 - 2.31		$	0.24		$	2,119,957
Unvested, December 31, 2016		-		$	-		$	-		$	-

The aggregate intrinsic value for warrant shares outstanding at December 31, 2016 was $2,006,978.

The following table summarizes information concerning outstanding and exercisable warrants as of December 31, 2016:

		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
$0.01 – 0.20			45,504,807			3.62		$	0.15			45,504,807			3.62		$	0.15
0.21 – 0.49			13,783,840			2.33			0.34			13,783,840			2.33			0.34
0.50 – 1.00			4,764,738			1.55			0.74			4,764,738			1.55			0.74
1.01 – 2.31			154,773			0.39			2.23			154,773			0.39			2.23
$0.01 – 2.31			64,208,158			3.12		$	0.24			64,208,158			3.12		$	0.24

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NOTE 6 – RELATED PARTY TRANSACTIONS

Advances from Shareholders

From time to time, shareholders of the Company advance funds to the Company for working capital purpose. Those advances are unsecured, non-interest bearing and due on demand. At December 31, 2016 and September 30, 2016, advances from shareholders were $50,545.

Management service agreement between NPC and National Pain Centers, LLC

NPC was incorporated under the laws of the state of Nevada on January 24, 2014. It is an Illinois-based management services provider. It was acquired by the Company on February 28, 2014 and is operated as a wholly-owned subsidiary of the Company. NPC manages non-medical services in three clinics and two surgical centers in the Chicago-land area that provide diagnostic, surgical, treatment, research, advocacy, education, and setting standards and protocols within the interventional and multi-modal pain management, pursuant to a management service agreement dated as of February 28, 2014, by and between NPC and National Pain Centers, LLC ("NPC LLC"), which is owned by Dr. Jay Joshi, the president and CEO of NPC. Under the management agreement, NPC LLC engages NPC to provide management services for a term period of five years commencing on the effective date. During the term of this agreement, NPC LLC shall pay NPC the equivalent of 50% of all monies collected and as billed monthly to NPC LLC on net-30 term.

NPC is managed by its founder and CEO Dr. Jay Joshi, MD, DABA, DABAPM, FABAPM. Dr. Joshi also serves as the Company’s Chief Medical Officer (“CMO”) and as a member of its Board of Directors.

Management service revenue related to the collections was $37,402 and $61,702 for the three months ended December 31, 2016 and 2015, respectively. These amounts are net of salaries of $50,000 earned by Dr. Joshi during the three months ended December 31, 2016 and 2015, which have been offset to revenue earned from NPC LLC for financial statement purposes.

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.

The Company operates in 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)

Management of Client Services: which it stems from NPC, its wholly-owned subsidiary it acquired on February 28, 2014. NPC engages in management of top-tier medical practices in the interventional and multi-modal pain management sector.

(iii)

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

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The detailed segment information of the Company is as follows:

Wellness Center USA, Inc.
Assets By Segments
			December 31, 2016
			Corporate		Medical Devices		Mgmt of Medical Practice		Authentication and Encryption		Total
ASSETS
Current Assets
Cash		$	109,608	$	27,477	$	9,504	$	8,135	$	154,724
Accounts receivable			-		14,000		-		-		14,000
Inventories			-		26,689		-		12,486		39,175
Prepaid expenses and other current assets			-		-		2,700		2,155		4,855
Total current assets			109,608		68,166		12,204		22,776		212,754
Property and equipment, net			4,021		5,061		3,218		3,070		15,370
Other assets			15,000		1,760		-		-		16,760
Total other assets			19,021		6,821		3,218		3,070		32,130
TOTAL ASSETS		$	128,629	$	74,987	$	15,422	$	25,846	$	244,884

Wellness Center USA, Inc.
Operations by Segments
				For the Three Months Ended
				December 31, 2016
				Corporate		Medical Devices		Mgmt of Medical Practice		Authentication and Encryption			Total
Sales:
	Trade		$	-	$	84,000	$	-	$	5,000		$	89,000
	Consulting services			-		-		-		14,125			14,125
	Management services to related party			-		-		37,402		-			37,402
Total Sales				-		84,000		37,402		19,125			140,527
Cost of goods sold				-		40,033		-		20,467			60,500
Gross profit (loss)				-		43,967		37,402		(1,342)			80,027
Operating expenses				236,905		65,656		78,964		114,002			495,527
Loss from operations			$	(236,905)	$	(21,689)	$	(41,562)	$	(115,344)		$	(415,500)

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Wellness Center USA, Inc.
Operations by Segments
				For the Three Months Ended
				December 31, 2015
				Corporate		Medical Devices		Mgmt of Medical Practice		Authentication and Encryption			Total
Sales:
	Trade		$	-	$	2,224	$	-	$	5,000		$	7,224
	Consulting services			-		-		-		7,500			7,500
	Management services to related party			-		-		61,702		-			61,702
Total Sales				-		2,224		61,702		12,500			76,426
Cost of goods sold				-		6,152		-		21,409			27,561
Gross profit (loss)				-		(3,928)		61,702		(8,909)			48,865
Operating expenses				363,160		106,371		49,812		67,247			586,590
Income (loss) from operations			$	(363,160)	$	(110,299)	$	11,890	$	(76,156)		$	(537,725)

NOTE 8 – SUBSEQUENT EVENTS

Subsequent to December 31, 2016, the Company raised $97,600 from the sale of 835,000 shares of its common stock. In connection with the sale, the Company issued warrants to the shareholders to purchase 2,395,000 shares of the Company’s common stock. The warrants expire five years from the date of grant and have exercise prices ranging from of $0.16 per share to $0.25 per share.

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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. Later, the Company expanded into additional businesses within the healthcare and medical sectors through acquisitions, including Psoria­Shield Inc. (“PSI”), National Pain Centers, Inc. (“NPC”), 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; (ii) management of top­tier medical practices in the interventional and multi­modal pain management sector; and (iii) authentication and encryption products and services. The segments are operated, respectively, through PSI, NPC and SCI.

PSI

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

PSI designs, develops and markets a targeted ultraviolet (“UV”) phototherapy device called the Psoria­Light. The Psoria­Light is designated for use in targeted PUVA photochemistry and UVB phototherapy and is designed to treat certain skin conditions including psoriasis, vitiligo, atopic dermatitis (eczema), seborrheic dermatitis, and leukoderma.

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

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.

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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.

NPC

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

NPC manages non-medical services in three clinics and two surgical centers in the Chicago-land area that provide diagnostic, surgical, treatment, research, advocacy, education, and setting standards and protocols within the interventional and multi-modal pain management, pursuant to a management service agreement dated as of February 28, 2014, by and between NPC and National Pain Centers, LLC ("NPC LLC"), which is owned by Dr. Jay Joshi, the president and CEO of NPC. Under the management agreement, NPC LLC engages NPC to provide management services for a term period of five (5) years commencing on the effective date. During the term of this agreement, NPCLLC shall pay NPC the equivalent of 50% of all monies collected and as billed monthly to NPCLLC on net-30 term.

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NPC is managed by its founder and CEO Dr. Jay Joshi, MD, DABA, DABAPM, FABAPM. Dr. Joshi also serves as the Company’s Chief Medical Officer (“CMO”) and as a member of its Board of Directors. Dr. Joshi is a nationally recognized double board certified Anesthesiologist and fellowship trained Interventional Spine and Pain Management physician whose capabilities combine clinical medicine, research, creativity, marketing, inventions, and business development. He is considered a National Key Opinion Leader in pain management. He has presented to a variety of audiences over 500 times, and has worked internationally at the World Health Organization (WHO).

SCI

SCI was incorporated under the laws of the state of Illinois on March 18, 2014. It is a Tennessee-based provider of Stealth Mark encryption and authentication solutions offering advanced product security technologies within the security and supply chain management vertical sectors. SCI acquired certain Stealth Mark assets on April 4, 2014 and operates as a wholly-owned subsidiary of the Company.

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 enables 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 use of intelligent micro particles that are unduplicatable and undetectable to the human eye. These taggants are created with a proprietary material that creates a unique numerical code that is assigned meaning by the client and is 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.

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.

Management

Presently, all business functions of the Company are managed by our CEO/director and founder, Andrew J. Kandalepas. He is responsible for developing and planning our business units, including product development, organizational structure, financing and administrational functions. His services shall be utilized until the Company is financially capable to engage additional staffing.

On January 12, 2015, the Company entered into the PDC Joint Venture Agreement with TMA to further develop, market, license and/or sell PSI technology and products. Mr. Kandalepas manages PSI activities with John Yorke of TMA. Mr. Yorke started his career with Abbott Labs as an FDA specialist and then joined Kendall as a product manager for OR and CV products. He formed and operated Cardiomax, a $45M medical products distributorship. In 1991, he formed TFGI to assist start-up and small-cap companies to develop business plans, source funding and secure strategic partners. TFGI clients included PMG (Pennsylvania Merchant Group), J&J Development Company, Zures Medical Group, SCA Capital Partners, Forest Health Group and Hillman Medical. In 2013, TFGI merged with The ComedIT Group and Ocean Medical to form TMA.

Jay Joshi, M.D., DABA, DABAPM, FABAPM manages NPC’s business. Dr. Joshi is a nationally recognized double board certified Anesthesiologist and fellowship trained Interventional Spine and Pain Management physician whose capabilities combine clinical medicine, research, creativity, marketing, inventions, and business development. He is considered a National Key Opinion Leader in pain management. He has presented to a variety of audiences over 500 times, and has worked internationally at the World Health Organization (WHO). Although we have an Employment Agreement with Dr. Joshi, we cannot guarantee that he will remain affiliated with us.

Mr. Ricky Howard manages SCI’s business. 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. Although we have an Employment Agreement with Mr. Howard, we cannot guarantee that he will remain affiliated with us.

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Analysis of Financial Condition and Results of Operations

Results of Operations for the three months ended December 31, 2016 compared to the three months ended December 31, 2015.

Revenue and Cost of Goods Sold

Revenue for the three months ended December 31, 2016 and 2015 was $140,527 and $76,426, respectively. The increase of $64,101 was due to the sales of three PSI phototherapy devices during the first quarter of fiscal 2017, as compared to the first quarter of the prior year.

Cost of sales for the three months ended December 31, 2016 and 2015, was $60,500 and $27,561, respectively. Gross profit for the three months ended December 31, 2016 and 2015, was $80,027 and $48,865, respectively. The gross profit increase of $31,162 was primarily due to the increase in trade sales during the first quarter of fiscal 2017.

Operating Expenses

Operating expenses for the three months ended December 31, 2016 and 2015 was $495,527 and $625,972, respectively. The decrease in operating expenses of $130,445 was due primarily to the reduction of consulting and professional fees during the first quarter of fiscal 2017.

Other Income

There was no other income or expense during the three months ended December 31, 2016. Other income during the three months ended December 31, 2015 was $2,913 and related to interest income from a related party.

Net Loss

 

Our net loss for the three months ended December 31, 2016 was $415,500, compared to a net loss of $574,194 for the three months ended December 31, 2015. The decrease in the net loss of $158,694 was due to the decrease in operating expenses of $130,445 and the increase in gross profit of $31,162.

Results of Operations by Segment

The Company maintained three (3) business segments through the end of the period covered by this Report:

(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;

(ii) Practice Management Services: which it provided through NPC, its wholly-owned subsidiary acquired on February 28, 2014, which manages non-medical services in three clinics and two surgical centers in the Chicago-land area; and

(iii)

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.

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The detailed segment information of the Company is as follows:

Wellness Center USA, Inc.
Operations by Segments
				For the Three Months Ended
				December 31, 2016
				Corporate		Medical Devices		Mgmt of Medical Practice		Authentication and Encryption			Total
Sales:
	Trade		$	-	$	84,000	$	-	$	5,000		$	89,000
	Consulting services			-		-		-		14,125			14,125
	Management services to related party			-		-		37,402		-			37,402
Total Sales				-		84,000		37,402		19,125			140,527
Cost of goods sold				-		40,033		-		20,467			60,500
Gross profit (loss)				-		43,967		37,402		(1,342)			80,027
Operating expenses				236,905		65,656		78,964		114,002			495,527
Loss from operations			$	(236,905)	$	(21,689)	$	(41,562)	$	(115,344)		$	(415,500)

Revenue for the Medical Devices segment for the three months ended December 31, 2016 and 2015 was $84,000 and $2,224, respectively. Cost of sales for the three months ended December 31, 2016 and 2015 was $40,033 and $6,152, respectively. Gross profit for the three months ended December 31, 2016 was $43,967 and the gross loss for the three months ended December 31, 2015 was $3,928. Operating expenses for the three months ended December 31, 2016 and 2015 was $65,656 and $106,371, respectively. The decrease in operating expenses of $40,715 in fiscal 2017 was due primarily to the reduction of consulting and professional fees. The loss from operations for the three months ended December 31, 2016 and 2015 was $21,689 and $110,299, respectively.

Revenue for the Practice Management Services segment for the three months ended December 31, 2016 and 2015 was $37,402 and $61,702, respectively. The decrease of $24,300 was due to the decrease in management fees received during fiscal 2017. Operating expenses for the three months ended December 31, 2016 and 2015 was $78,964 and $49,812, respectively. The increase in operating expenses of $29,152 in fiscal 2017 was due primarily to the increase in salaries and third party billing services. The loss from operations for the three months ended December 31, 2016 was $41,562 and the income from operations for the three months ended December 31, 2015 was $11,890.

Revenue for the Authentication and Encryption segment for the three months ended December 31, 2016 and 2015 was $19,125 and $12,500, respectively. The increase of $6,625 was due to the increase in consulting services during fiscal 2017. Cost of goods sold for the three months ended December 31, 2016 and 2015 was $20,467 and $21,409, respectively, and the gross loss was $1,342 and $8,909, respectively. The gross loss decrease in fiscal 2017 was primarily due to the write-off of inventories to realizable value in fiscal 2016. Operating expenses for the three months ended December 31, 2016 and 2015 was $114,002 and $67,247, respectively. The increase in operating expenses of $46,755 in fiscal 2017 was due primarily to the increase in stock compensation costs of $38,150. The loss from operations for the three months ended December 31, 2016 and 2015 was $115,344 and $76,156, respectively.

The Corporate segment primarily provides executive management services for the Company. Operating expenses for the three months ended December 31, 2016 and 2015 was $236,905 and $363,160, respectively. The decrease in operating expenses of $126,255 in fiscal 2017 was due primarily to the decrease in professional and consulting fees. The loss from operations for the three months ended December 31, 2016 and 2015 was $236,905 and $363,160, 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 three months ended December 31, 2016, the Company incurred a net loss of $415,500 and used cash in operations of $241,275, and had a shareholders’ deficit of $823,050 as of December 31, 2016. 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.

As of December 31, 2016, our cash balance was $154,724. Our current cash on hand is not sufficient to maintain our daily operations for the next 12 months unless the Company is able to generate positive cash flows from operating activities. If needed, management intends to raise additional capital through equity financing to fund our daily operations through next 12 months and during the three months ended December 31, 2016, raised $309,000 through the sale of its common stock. 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, 2016, has expressed substantial doubt about the Company’s ability to continue as a going concern.

Comparison of three months years ended December 31, 2016 and 2015

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

As of December 31, 2015, we had $89,249 in cash, negative working capital of $787,281 and an accumulated deficit of $17,541,827.

Cash flows used in operating activities

During the three months ended December 31, 2016, the Company used cash flows in operating activities of $241,275 compared to $381,845 used in the three months ended December 31, 2015. During the three months ended December 31, 2016, the Company incurred a net loss of $415,500 and $40,851 of non-cash expenses compared to a net loss of $574,194 and $188,250 of non-cash expenses during the three month period ended December 31, 2015.

Cash flows used in investing activities

During the three months ended December 31, 2016, we had purchases of property and equipment of $2,250. We had no cash flows from investing activities during the three months ended December 31, 2015.

Cash flows provided by financing activities

During the three months ended December 31, 2016, we had proceeds from the sale of common stock and warrants of $309,000. During the three months ended December 31, 2015, we had proceeds from notes payable of $82,300, a repayment of advances from related party of $13,083, proceeds from the sale of common stock and warrants of $409,000 and proceeds from the exercise of stock warrants of $5,000.

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.

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

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

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

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

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

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

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

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

U.S. Patent	Issued	“Title” – Summary
No. 6,647,649	November 18, 2003	“Micro-particle Taggant Systems”  - Generation of Micro-particle codes from marks containing encrypted Micro-particles.
No. 7,720,254	May 18, 2010	“Automatic Micro-particle Mark Reader”  - Automatic readers for interrogating Micro-particle marks.
No. 7,831.042	November 9, 2010	“Three-Dimensional Authentication Of Micro-particle Mark  - Validation of 3D nature of micro-particle mark to protect against counterfeiting of mark.
No. 7,885,428	February 8, 2011	“Automatic Micro-particle Mark Reader”  - Automatic readers for interrogating micro-particle marks (broadened protection).
No. 8,033,450	October 11, 2011	“Expression Codes For Micro-particle Marks Based On Signature Strings”  - Generation of expression codes (“fingerprints”) unique to each micro-particle mark to protect against counterfeiting of marks.
No. 8,223,964	July 17, 2012	“Three-Dimensional Authentication Of Micro-particle Mark  - Validation of 3D nature of micro-particle mark to protect against counterfeiting of marks (broadened protection).

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Europe WO/EP Patent	Issued	“Title” – Summary
Appl. No. 07753043.4	Pending	“Expression Codes For Micro-particle Marks Based On Signature Strings”  - Generation of expression codes (“fingerprints”) unique to each micro-particle mark to protect against counterfeiting of marks.
Appl. No. 07753034.3	Pending	“Three-Dimensional Authentication Of Micro-particle Mark  - Validation of 3D nature of Micro-particle mark to protect against counterfeiting of mark.
Trademarks	Type	Countries
Stealth Mark®	Registered	United States European Community Australia
StealthFire™	Not Registered	United States European Community

Trade Secrets

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

·

Micro-particle Manufacturing

·

Micro-particle Color Systems

·

Technology advancements providing improvements in Automatic Reader performance

·

Software solutions supporting Micro-particle security solutions

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

Employees

We currently employ our executive officers. PDC has several independent contractors; NPC has four full-time employees; SCI has four part-time employees and independent contractors. We have Employment Agreements with key executive management personnel with each subsidiary company, but none with Mr. Kandalepas, who currently serves as our Chairman, President, CEO and CFO.

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, 2016, filed with the Securities and Exchange Commission on January 13, 2017. There have been no material changes to the Company's critical accounting policies that impact the Company's financial condition, results of operations or cash flows for the three months ended December 31, 2016.

Recently Issued Accounting Pronouncements

 

See Management’s discussion of recent accounting policies included in footnote 2 to the condensed consolidated financial statements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not required for smaller reporting Companies.

 

Item 4. Controls and Procedures

Disclosure controls and procedures.

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are not effective as of December 31, 2016 because we do not have sufficient staff to segregate responsibilities and no written documentation of internal control policies. We plan to seek to correct these deficiencies during the current fiscal year or the next.

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.

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

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Item 6. Exhibits

 

__________________

* Filed herewith.

**Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	WELLNESS CENTER USA, INC.
Date: February 10, 2017	By:	/s/ Andrew J. Kandalepas
		Andrew J. Kandalepas
		Chairman, President, Chief Executive Officer, Chief Accounting Officer, and Chief Financial Officer

POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and appoints severally Andrew J. Kandalepas, 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/ Andrew J. Kandalepas		Chairman, President, Chief Executive Officer, Chief Accounting Officer, Chief Financial Officer, and Director		February 10, 2017
Andrew J. Kandalepas
/s/ Jay Joshi, M.D.		Director, President NPC		February 10, 2017
Jay Joshi, M.D.

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