Wellness Center USA, Inc. - Quarter Report: 2016 March (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 March 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.)

1014 E Algonquin Rd, Ste. 111, Schaumburg, IL, 60173

(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      . Accelerated Filer      .		Non-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 May 31, 2016:  74,903,352 shares of issued common stock.

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FORM 10-Q

WELLNESS CENTER USA, INC.

MARCH 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	22
Item 3	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Control and Procedures	28

 

PART II-- OTHER INFORMATION

 

Item 1	Legal Proceedings	28
Item 1A	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mine Safety Disclosures.	28
Item 5.	Other Information	29
Item 6.	Exhibits	29

 

SIGNATURES

  

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Wellness Center USA, Inc.
Condensed Consolidated Balance Sheets
		March 31,		September 30,
		2016		2015
ASSETS		(Unaudited)
Current Assets
Cash	$	200,948	$	34,227
Inventories		186,826		213,501
Current maturity of note receivable - Chairman and CEO		-		36,299
Prepaid expenses and other current assets		3,205		26,571
Total Current Assets		390,979		310,598
Property and equipment, net		19,495		29,624
Intangible assets, net		321,093		356,343
Goodwill, net		55,316		55,316
Note receivable - Chairman and CEO, net of current maturity		-		160,729
Other assets		1,760		1,760
Total Other Assets		397,664		603,772
TOTAL ASSETS	$	788,643	$	914,370
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued expenses	$	568,267	$	602,539
Accrued payroll - officers		132,051		132,051
Deferred revenue		12,500		37,500
Advances from related party		37,504		40,773
Notes payable		126,500		114,000
Total Current Liabilities		876,822		926,863
Shareholders' Deficit
Common stock, par value $0.001, 75,000,000 shares authorized;   74,371,352 and 64,539,684 shares issued and outstanding		74,372		64,540
Additional paid-in capital		15,630,267		14,534,003
Shares to be issued		75,000		-
Accumulated deficit		(15,748,659)		(14,535,935)
Total WCUI shareholders' equity		30,980		62,608
Non-controlling interest		(119,159)		(75,101)
Total Shareholder's deficit		(88,179)		(12,493)
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT	$	788,643	$	914,370
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				Six Months Ended
		March 31,				March 31,
		2016		2015		2016		2015
		(Unaudited)				(Unaudited)
Sales:
Product sales, trade	$	61,287	$	18,460	$	68,511	$	36,279
Product sales, related party		54,117		-		54,117		-
Consulting services		7,500		-		15,000		-
Management services to related party		101,843		98,720		213,545		184,210
Total Sales		224,747		117,180		351,173		220,489
Cost of goods sold		39,641		207		42,128		481
Gross profit		185,106		116,973		309,045		220,008
Operating expenses		721,393		575,271		1,422,439		1,157,797
Loss from operations		(536,287)		(458,298)		(1,113,394)		(937,789)
Other income (expenses)
Change in derivative liabilities		-		515,476		-		569,740
Gain on debt redemption		-		53,531		-		53,531
Loss on conversion of loans payable to equity		(146,301)		-		(146,301)
Interest income -  related party		-		-		2,913		2,284
		(146,301)		569,007		(143,388)		625,555
NET INCOME (LOSS)		(682,588)		110,709		(1,256,782)		(312,234)
Net loss attributable to non-controlling interest		11,420		-		44,058		-
NET INCOME (LOSS) ATTRIBUTABLE TO   WCUI SHAREHOLDERS	$	(671,168)	$	110,709	$	(1,212,724)	$	(312,234)
BASIC AND DILUTED INCOME (LOSS) PER SHARE	$	(0.01)	$	0.00	$	(0.02)	$	(0.01)
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC AND DILUTED		72,858,366		52,153,706		67,066,885		49,141,409
The accompanying notes are an integral part of these condensed consolidated financial statements.

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6

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Wellness Center USA, Inc.
Condensed Consolidated Statements of Cash Flows
		Six Months Ended
		March 31,
		2016		2015
		(Unaudited)
Cash Flows from Operating Activities
Net loss	$	(1,256,782)	$	(312,234)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation expense		10,649		7,736
Amortization expense		35,249		135,217
Gain on redemption of debts		-		(53,531)
Loss on shares issued for repayment of accounts payable		40,000		-
Loss on conversion of loans payable		146,301		-
Fair value of common stock issued for services		118,000		149,633
Fair value of stock options and warrants issued for services		11,294		66,482
Amortization of convertible note discount		-		152,185
Change in fair value of derivative liability		-		(569,740)
Note receivable from officer written-off as compensation		197,028		-
Changes in Assets and Liabilities
(Increase) Decrease in:
Inventories		26,675		(536)
Prepaid expenses and other current assets		23,366		(25,919)
Interest receivable on note receivable from Chairman and CEO		-		(2,284)
(Decrease) Increase in:
Accounts payable and accrued expenses		25,729		42,056
Deferred revenue		(25,000)		(18,214)
Net cash used in operating activities		(647,491)		(429,149)
Cash Flows from Investing Activities
Note receivable- PDC JV		-		(60,000)
Purchases of property and equipment		(520)		(1,284)
Patent application cost		-		(1,215)
Net cash used in investing activities		(520)		(62,499)
Cash Flows from Financing Activities
Proceeds from loans payable		82,300		-
Repayment of note receivable - Chairman and CEO		-		35,894
Repayment of advances from related party		(3,269)		(54,209)
Proceeds from other payable		-		100,000
Repayments of convertible notes payable		-		(100,000)
Proceeds from sale of common stock and warrants net of issuance cost		655,701		418,825
Exercise of stock options and warrants		5,000		-
Proceeds received before shares were issued		75,000		-
Net cash provided by financing activities		814,732		400,510
Net increase (decrease) in cash		166,721		(91,138)
Cash beginning of period		34,227		175,671
Cash end of period	$	200,948	$	84,533
Supplemental cash flows disclosures:
Interest paid	$	-	$	-
Taxes paid	$	-	$	-
Supplemental non-cash financing disclosures:
Conversion of loans payable to equity	$	69,800	$	-
Issuance of common stock for repayment of accounts payable of $60,000	$	100,000	$	-
Reclassification of equity instrument to derivative liabilities	$	-	$	(616,964)
Issuance of common stock for convertible notes conversion	$	-	$	194,822
Reclassification of derivative liabilities to equity	$	-	$	55,222
Issuance of common stock for accrued interest	$	-	$	26,667
Non-controlling interest's share in losses of a subsidiary	$	44,058	$	-
The accompanying notes are an integral part of these condensed consolidated financial statements.

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WELLNESS CENTER USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED MARCH 31, 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 and six months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending September 30, 2016.  

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. Upon consummation of the share exchange agreements with CNS-Wellness Florida, LLC and Psoria-Shield Inc., the Company currently operates in the following business segments: (i) distribution of targeted Ultra Violet ("UV") phototherapy devices for dermatology; (ii) management of top-tier medical practices in the interventional and multi-modal pain management sector; and (iii) authentication and encryption products and services.

Going Concern

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, the Company has not yet generated significant revenues and has incurred recurring net losses. During the six months ended March 31, 2016, the Company incurred a net loss of $1,256,782 and used cash in operations of $647,491. 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, 2015 financial statements, has raised substantial doubt about the Company's ability to continue as a going concern.

At March 31, 2016, the Company had cash on hand in the amount of $200,948. Management estimates that the current funds on hand will be sufficient to continue operations through June 2016. 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.

 

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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WELLNESS CENTER USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED MARCH 31, 2016 AND 2015

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%

The consolidated financial statements include all accounts of the Company, PSI, NPC, StealthCo and PDC as of reporting periods end date and for the reporting periods then ended from their respective dates of acquisition and disposition.

 

Inter-company balances and transactions have been eliminated.

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 valuing our intangible assets and goodwill for impairment, inventory valuations and stock-based compensation calculations, among others. Actual results could differ from these estimates.

Income (Loss) Per Share Calculations

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 and six months ended March 31, 2016 and 2015, the basic and diluted shares outstanding were the same, as potentially dilutive shares were considered anti-dilutive. At March 31, 2016 and September 30, 2015, the dilutive impact of outstanding stock options for 5,097,500 and 5,172,500 shares, respectively, and outstanding warrants for 43,876,412 and 36,371,578 shares, respectively, have been excluded because their impact on the loss per share is anti-dilutive.

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WELLNESS CENTER USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED MARCH 31, 2016 AND 2015

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.

(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 March 31, 2016 and December 31, 2015 was $12,500and $37,500, respectively.

Property and Equipment

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

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

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

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

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WELLNESS CENTER USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED MARCH 31, 2016 AND 2015

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Income Taxes

Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized. The Company recorded a valuation allowance against its deferred tax assets as of March 31, 2016 and September 30, 2015.

 

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

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.

Goodwill

Goodwill represents the excess of the cost of an acquired entity over the fair value of the net assets at the date of acquisition. Goodwill acquired in a business combination with indefinite useful lives is not amortized; rather, goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate the asset might be impaired.

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WELLNESS CENTER USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED MARCH 31, 2016 AND 2015

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Intangible Assets Other Than Goodwill

The Company amortizes the acquisition costs of intangible assets other than goodwill on a straight-line basis over the estimated useful lives of the respective assets as follows:

Exclusive license agreements (*)	18 years
Acquired technologies	20 years
Trademarks	7 years
Patents	20 years

(*) Amortized on a straight-line basis over the terms of the exclusive licenses and/or agreements, or the terms of legal lives of the patents, whichever is shorter.

Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.

Carrying Value, Recoverability and Impairment of Long-Lived Assets

The Company follows ASC 360-10-35-17 for its evaluation of impairment for its long-lived assets. An impairment loss shall be recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). That assessment shall be based on the carrying amount of the asset (asset group) at the date it is tested for recoverability. An impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair value. If an impairment loss is recognized, the adjusted carrying amount of a long-lived asset shall be its new cost basis. For a depreciable long-lived asset, the new cost basis shall be depreciated (amortized) over the remaining useful life of that asset. Restoration of a previously recognized impairment loss is prohibited. The Company’s long-lived asset (asset group) is tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The Company tests its long-lived assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events.

Non-controlling Interest

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

Stock-Based Compensation

 

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

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WELLNESS CENTER USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED MARCH 31, 2016 AND 2015

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Stock-Based Compensation (continued)

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.

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.

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

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

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WELLNESS CENTER USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED MARCH 31, 2016 AND 2015

NOTE 3 – INVENTORIES

Inventories consist of the following at March 31, 2016 and September 30, 2015:

		March 31, 2016				September 30, 2015
Raw materials		$	12,732			$	12,718
Purchased parts for assembly			94,416				134,385
Finished goods			79,678				66,398
Total inventories		$	186,826			$	213,501

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following at March 31, 2016 and September 30, 2015:

		March 31, 2016				September 30, 2015
Vehicles		$	15,000			$	15,000
Computer equipment			7,330				6,810
Furniture and fixtures			24,966				24,966
Medical equipment			18,889				18,889
Software			23,207				23,207
Leasehold improvements			15,170				15,170
			104,562				104,042
Less: accumulated depreciation and amortization			(85,067)				(74,418)
Property and equipment, net		$	19,495			$	29,624

Depreciation expense for the three months ended March 31, 2016 and 2015 was $8,359 and $2,491, respectively, and for the six months ended March 31, 2016 and 2015 was $10,649 and $6,452, respectively.

NOTE 5 – INTANGIBLE ASSETS

Intangible assets were as follows at March 31, 2016 and September 30, 2015:

		March 31, 2016				September 30, 2015
Patents and exclusive licenses		$	361,291			$	361,291
Acquired technologies			2,095,000				2,095,000
Trademarks			630,000				630,000
			3,086,291				3,086,291
Less: accumulated amortization			(690,571)				(655,321)
Less: accumulated impairment			(2,074,627)				(2,074,627)
Intangible assets, net		$	321,093			$	356,343

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WELLNESS CENTER USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED MARCH 31, 2016 AND 2015

NOTE 5 – INTANGIBLE ASSETS (CONTINUED)

Patents and Exclusive Licenses

Patents and exclusive licenses were as follows at March 31, 2016 and September 30, 2015:

		March 31, 2016				September 30, 2015
Patents and exclusive licenses		$	361,291			$	361,291
Less: accumulated amortization			(85,982)				(54,848)
Patents and exclusive licenses, net		$	275,309			$	306,443

Amortization expense was $9,654 and $9,043 for the three months ended March 31, 2016 and 2015 and was $31,134 and $18,088 for the six months ended March 31, 2016 and 2015.

Acquired Technologies

 

Acquired technologies, stated at cost, less accumulated amortization and impairment, consists of the following at March 31, 2016 and September 30, 2015:

		March 31, 2016				September 30, 2015
Acquired technologies		$	2,095,000			$	2,095,000
Less: accumulated amortization			(323,651)				(322,973)
Less: accumulated impairment			(1,749,027)				(1,749,027)
Acquired technologies, net		$	22,322			$	23,000

Amortization expense was $563 and $51,481 for the three months ended March 31, 2016 and 2015 and was $678 and $52,374 for the six months ended March 31, 2016 and 2015.

Trademarks

Trademarks, stated at cost, less accumulated amortization and impairment, consists of the following at March 31, 2016 and September 30, 2015:

		March 31, 2016				September 30, 2015
Trademarks		$	630,000			$	630,000
Less: accumulated amortization			(280,938)				(277,500)
Less: accumulated impairment			(325,600)				(325,600)
Trademarks, net		$	23,462			$	26,900

Amortization expense was $2,878 and $22,500 for the three months ended March 31, 2016 and 2015 and was $3,438 and $45,000 for the six months ended March 31, 2016 and 2015.

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WELLNESS CENTER USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED MARCH 31, 2016 AND 2015

NOTE 6 – GOODWILL

Goodwill, stated at cost, less accumulated impairment, consists of the following at March 31, 2016 and September 30, 2015:

		March 31, 2016				September 30, 2015
Goodwill		$	1,716,603			$	2,916,603
Less: accumulated impairment			(1,661,287				(2,861,287)
Goodwill, net		$	55,316			$	55,316

NOTE 7 – LOANS PAYABLE

Loans payable at March 31, 2016 and September 30, 2015 consist of various unsecured note agreements issued between May 14, 2014 and November 18, 2015. The notes have various interest rates, varying between 3% and 10% per annum. Certain loans are due on demand and all loans are due by September 2016. At September 30, 2015, loans payable totaling to $114,000 were outstanding.

During the six months ended March 31, 2016, loans payable of $82,300 were issued for cash and loans payable of $69,800 were converted into 698,000 shares of the Company’s common stock and warrants to issue 1,047,000 shares of the Company’s common stock valued at $216,101 in the aggregate. This resulted in a loss on conversion of $146,301 (see Note 8).  As of March 31, 2016, loans payable of $126,500 were outstanding.

NOTE 8 – SHAREHOLDERS’ EQUITY

During the six month period ending March 31, 2016, the Company issued 1,300,000 shares of its commons stock for services valued at $118,000.  The shares were valued at the trading price of the common stock at the date of issuance.

In December 2015, the Company issued 1,000,000 shares of its common stock valued at $100,000 for repayment of consulting fees due of $60,000. The shares were valued at the trading price of the common stock at the date of issuance. The Company recorded a $40,000 loss from extinguishment of debt relating to the repayment.

During the six months ended March 31, 2016, the Company granted stock options to purchase 125,000 shares of the Company’s common stock to one of its employees. The fair value of the options, using a Black-Scholes pricing model, was $11,294. This amount is included in Additional Paid-in Capital.

During the six months ended March 31, 2016, loans payable of $69,800 were converted into 698,000 shares of the Company’s common stock.  The value of the shares issued was $125,640. In addition, the Company issued warrants to purchase 1,047,000 of the Company’s common stock to the debt holders. The warrants have an exercise price of $0.15 per share and expire in January 2021. The warrants were valued at $90,461, using a Black-Scholes pricing model with the following assumptions:

Exercise price		$	0.15
Expected dividends			-
Expected volatility			140.92	%
Risk free interest rate			1.44	%
Expected life of option			5

The aggregate fair value of the common shares and issued warrants was $216,101. The Company recorded a $146,301 loss from extinguishment of debt relating to the debt conversion.

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WELLNESS CENTER USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED MARCH 31, 2016 AND 2015

NOTE 8 – SHAREHOLDERS’ EQUITY (CONTINUED)

During the six months ended March 31, 2016, the Company raised $655,701 from the sale of 6,333,668 shares of its common stock. In connection with the sale, the Company issued warrants to the shareholders to purchase 8,517,168 shares of the Company’s common stock. The warrants expire five years from the date of grant and have exercise prices ranging from $0.15 per share to $0.18 per share.

Shares to be Issued

In March 2016, the Company received $75,000 from an investor to purchase 750,000 shares of the Company’s common stock.  In connection with the sale, the Company issued warrants to the shareholders to purchase 1,500,000 shares of the Company’s common stock. The warrants expire five years from the date of grant and have an exercise price of $0.15 per share. As of March 31, 2016, the shares had not been issued to the investor.

Stock Options

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

The 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, 2016, the Company issued options to purchase 125,000 shares of its common stock to an officer of the Company with an exercise price of $0.14 per share. The options expire five years from the date of grant. During the six months ended March 31, 2016, the Company recorded $11,294 of stock compensation for the value of the options.

During the six months ended March 31, 2016, stock options were exercised to purchase 200,000 shares of the Company’s common stock for $2,000.

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

	Number of Option  Shares			Exercise Price Range Per Share			Weighted  Average Exercise  Price			Fair Value at Date of Grant
Balance, September 30, 2015		5,172,500		$	0.01 - 2.00		$	0.60		$	1,514,329
Granted		125,000			0. 14			0.14			11,294
Canceled		-			-			-			-
Exercised		(200,000)			0.01			0.01			-
Expired		-			-			-			-
Vested and exercisable, March 31, 2016		5,097,500		$	0.01 - 2.00		$	0.60		$	1,525,613
Unvested, March 31, 2016		-		$	-		$	-		$	-

There was no aggregate intrinsic value for any of the option shares outstanding at March 31, 2016.

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WELLNESS CENTER USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED MARCH 31, 2016 AND 2015

NOTE 8 – SHAREHOLDERS’ EQUITY (CONTINUED)

Stock Options (continued)

The following table summarizes information concerning outstanding and exercisable options as of March 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 - 2.00		5,097,500		4.15	$	0.60		5,097,500		4.15	$	0.60

As of March 31, 2016, there were 2,402,500 shares of stock options remaining available for issuance under the 2010 Plan.

Stock Warrants

During the six months ended March 31, 2016, the Company issued warrants to purchase 8,517,168 shares with exercise prices of $0.15 and $0.18 per share as part of the sale of equity units.  The warrants expire five years from the date of grant.

 

Also during the six months ended March 31, 2016, the Company issued warrants to purchase 1,047,000 shares with an exercise price of $0.15 per share as part of the conversion of loans payable to equity (see Note 7). The warrants expire five years from the date of grant. The warrants, using a Black-Scholes pricing model, were valued at $90,461.

During the six months ended March 31, 2016, warrants were exercised to purchase 300,000 shares of the Company’s common stock for $3,000.

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

	Number of Warrant  Shares			Exercise Price Range Per Share			Weighted  Average Exercise  Price			Fair Value at Date of Issuance			Aggregate Intrinsic Value
Balance, September 30, 2015		36,371,578		$	0.01-2.31		$	0.32		$	1,897,292		$	-
Granted		9,564,168			0.15-0.18			0.15			222,703			-
Canceled		-			-			-			-			-
Exercised		(300,000)			0.01			0.01			(-)			-
Expired		(1,759,334)			-			-			(38)			-
Balance, March 31, 2016		43,876,412		$	0.01 - 2.31		$	0.28		$	2,119,957		$
Earned and exercisable, March 31, 2016		43,876,412		$	0.01 - 2.31		$	0.28		$	2,119,957		$	-
Unvested, March 31, 2016		-		$	-		$	-		$	-		$	-

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WELLNESS CENTER USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED MARCH 31, 2016 AND 2015

NOTE 8 – SHAREHOLDERS’ EQUITY (CONTINUED)

Stock Warrants (continued)

The following table summarizes information concerning outstanding and exercisable warrants as of March 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 – 2.31			43,876,412			3.65		$	0.28			43,876,412			3.65		$	0.28

NOTE 9 – 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 March 31, 2016 and September 30, 2015, advances from shareholders were $37,504 and $40,773, respectively.

Management service agreement between NPC and National Pain Centers, LLC

On February 28, 2014, NPC, Inc. (“NPC”), the Company's wholly-owned subsidiary, entered into a management service agreement with National Pain Centers, LLC ("NPC LLC"), which is owned by Dr. Jay Joshi, the President and CEO of NPC. Per the agreement, NPC LLC engaged NPC to provide management services for a period of five years. During the term of the agreement, NPC LLC shall pay NPC the equivalent of 50% of all funds collected on a monthly basis. Management service revenue related to the collections was $101,843 and $98,720 for the three months ended March 31, 2016 and 2015, and was $213,545 and $184,210 for the six months ended March 31, 2016 and 2015.

Phototherapy Device Sales

During the three months ended March 31, 2016, the Company’s 50% owned subsidiary, PDC, sold one of its Ultra Violet ("UV") phototherapy devices (PL-1000) to NPC LLC for $54,117.

Note Receivable – Chairman, President and CEO

On September 30, 2013, the Company loaned $250,000 to its Chairman, President and CEO. At September 30, 2015, a balance of $160,729 was owed on the loan. During the six months ended March 31, 2016, the loan and all accrued interest of $174,914 were written-off as compensation expense to the officer. No amounts were outstanding under the loan at March 31, 2016.

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WELLNESS CENTER USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED MARCH 31, 2016 AND 2015

NOTE 10 – 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.

The detailed segment information of the Company is as follows:

Assets By Segments

					March 31, 2016
					Corporate		Medical Devices		Mgmt of Medical Practice		Authentication and Encryption		Total
ASSETS
Current Assets
	Cash			$	82,581	$	93,592	$	14,141	$	10,635	$	200,948
	Inventories						174,094				12,732		186,826
	Prepaid expenses and other current assets				-		-		2,700		505		3,205
Total current assets					82,581		267,686		16,841		23,872		390,979
Property and equipment, net					6,739		9,654				3,102		19,495
Intangible assets, net					-		49,465		-		271,628		321,093
Goodwill, net							55,316						55,316
Security deposits							1,760						1,760
Total other assets					6,739		116,195		-		274,730		397,664
TOTAL ASSETS				$	89,320	$	383,881	$	16,841	$	298,601	$	788,643

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Operations by Segments

				For the Six Months Ended
				March 31, 2016
				Corporate		Medical Devices		Mgmt of Medical Practice		Authentication and Encryption		Total
Sales:
	Product sales, trade		$	4,394	$	54,117	$	-	$	10,000	$	68,511
	Product sales, related party			-		54,117		-				54,117
	Consulting services			-		-		-		15,000		15,000
	Management services to related party			-		-		213,545		-		213,545
Total Sales				4,394		108,234		213,545		25,000		351,173
Cost of goods sold				7,140		34,080		-		908		42,128
Gross profit				(2,746)		74,154		213,545		24,092		309,045
		Total operating expenses		838,467		210,705		205,457		167,810		1,422,439
Loss from operations			$	(841,213)	$	(136,551)	$	8,088	$	(143,718)	$	(1,113,394)

NOTE 11 – SUBSEQUENT EVENTS

In April and May 2016, the Company received $81,500 from the sale of 815,000 shares of common stock. In connection with the sale, the Company issued warrants to the shareholders to purchase 1,630,000 shares of the Company’s common stock. The warrants expire five years from the date of grant and have an exercise price of $0.15 per share. The Company also issued 12,000 shares of its common stock to a company in exchange for services.

In May 2016, the Company entered into a new facility lease. The lease term is expected to begin July 1, 2016 and is for seven years and eight months. The beginning base monthly rent is $5,090, but includes escalating rent provisions during each year of the agreement and two free month rent periods during the first four years of the agreement.

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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.

Description of Business

Background

Wellness Center USA, Inc. (the “Company”) was incorporated in the State of Nevada on June 30, 2010.  Following that date, we were engaged in the development of “aminofactory.com”, a web-based online store designed to market customized vitamins and other nutritional supplements to the sports industry and health-minded public, and 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.   

PSI

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

PSI is a medical device design and manufacturing company.  It 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.   PSI intends to enter into agreements with third parties, in the United States and internationally, for the manufacture of component parts that make up the Psoria-Light and to license its proprietary technology to third parties domestically and in selected foreign markets.  

Psoriasis, eczema, and vitiligo, are common skin conditions that can be challenging to treat, and often cause the patient significant psychosocial stress. Patients 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 treatment modality for these disorders.

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

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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.

SCI

SCI was incorporated under the laws of the state of Illinois on March 18, 2014.  It is a Minnesota-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 customers premiere authentication technology for the protection of brands and products from illicit counterfeiting and diversion activities. SCI enables the Company to offer a complete, simple to use, easy to implement, and cost effective turnkey system that is extremely difficult to compromise.

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 and Chris Waugh, of TMA.  Mr. Yorke formed TFGI in 1991, 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, with Mr. Waugh.

Mr. Waugh he founded The ComedIT Group in 1998 to provide an integrated range of services to the medical technology market, including executive search, channel development, business-to-business brokering and consultant staffing.  In 2013, The ComedIT Group became part of TMA, which combines over 75 years’ experience in delivering integrated consulting services to manufacturers, distributors and candidates in the medical device, supply and information technologies arenas.

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. 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.

Analysis of Financial Condition and Results of Operations

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

Revenue and Cost of Goods Sold

Revenue for the three months ended March 31, 2016 and 2015 was $224,747 and $117,180, respectively. The increase of $107,567 was primarily due to the sale of two Ultra Violet ("UV") phototherapy devices (PL-1000’s) for $108,234 from our PDC subsidiary during the second quarter of 2016, as compared to none during the second quarter of the prior year.

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Cost of sales for the three months ended March 31, 2016 and 2015, was $39,641 and $207, respectively. Gross profit for the three months ended March 31, 2016 and 2015, was $185,106 and $116,973, respectively. The gross profit increase of $68,133 was due to the increase in revenue during the second quarter of 2016 as compared to the second quarter of 2015.

Operating Expenses

Operating expenses for the three months ended March 31, 2016 and 2015 was $721,393 and $575,271, respectively. The increase in operating expenses of $146,122 was due primarily to the write-off of a note receivable from the Company’s CEO and Chairman as compensation expense in the amount $197,028 during the second quarter of 2016.

Other Income (Expenses)

Other expenses during the three months ended March 31, 2016 consist of the loss on the conversion of loans payable to equity of $146,301. Other income during the three months ended March 31, 2015 consists of a gain on the change in a derivative liability of $515,476 and a gain on debt redemption of $53,531.

Net Income (Loss)

 

Our net loss for the three months ended March 31, 2016 was $682,588. The net loss during the second quarter of 2016 was primarily due to the increase in operating expenses of $146,122, combined with the loss on the conversion of loans payable to equity of $146,301. Our net income for the three months ended March 31, 2015 was $110,709. The net income during the second quarter of 2015 was a result of the gain on the change in a derivative liability of $515,476 and the gain on debt redemption of $53,531.

Results of Operations for the six months ended March 31, 2016 compared to the six months ended March 31, 2015.

Revenue and Cost of Goods Sold

Revenue for the six months ended March 31, 2016 and 2015 was $351,173 and $220,489, respectively. The increase of $130,684 was primarily due to the sale of two Ultra Violet ("UV") phototherapy devices (PL-1000’s) from our PDC subsidiary for $108,234 during the first six months of 2016, as compared to none during the first six months of the prior year.

Cost of sales for the six months ended March 31, 2016 and 2015, was $42,128 and $481, respectively. Gross profit for the six months ended March 31, 2016 and 2015, was $309,045 and $220,008, respectively. The gross profit increase of $89,037 was due to the increase in revenue during the first six months of 2016 as compared to the first six months of 2015.

Operating Expenses

Operating expenses for the six months ended March 31, 2016 and 2015 was $1,422,439 and $1,157,797, respectively. The increase in operating expenses of $264,642 was due primarily to the write-off of a note receivable from the Company’s CEO and Chairman as compensation expense in the amount $197,028 during the first six months of 2016.

Other Income (Expenses)

Other expenses during the six months ended March 31, 2016 consist of the loss on the conversion of loans payable to equity of $146,301 and the loss on shares issued for repayment of accounts payable of $40,000.  Other income during the six months ended March 31, 2016 consists of interest income from a related party of $2,913. Other income during the six months ended March 31, 2015 consists of a gain on the change in a derivative liability of $569,740 , a gain on debt redemption of $53,531 and interest income from a related party of $2,284.

Net Loss

Our net loss for the six months ended March 31, 2016 was $1,256,782. The net loss during the first six months of 2016 was primarily due to the increase in operating expenses of $224,642, combined with the loss on the conversion of loans payable to equity of $146,301 and the loss on shares issued for repayment of accounts payable of $40,000. Our net loss for the six months ended March 31, 2015 was $312,234. The net loss during the first six months of 2015 was a result of higher operating expenses of 1,157,797, offset by the gain on the change in a derivative liability of $569,740 and the gain on debt redemption of $53,531.

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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.

The detailed segment information of the Company is as follows:

				For the Six Months Ended
				March 31, 2016
				Corporate		Medical Devices		Mgmt of Medical Practice		Authentication and Encryption		Total
Sales:
	Product sales, trade		$	4,394	$	54,117	$	-	$	10,000	$	68,511
	Product sales, related party			-		54,117		-				54,117
	Consulting services			-		-		-		15,000		15,000
	Management services to related party			-		-		213,545		-		213,545
Total Sales				4,394		108,234		213,545		25,000		351,173
Cost of goods sold				7,140		34,080		-		908		42,128
Gross profit				(2,746)		74,154		213,545		24,092		309,045
		Total operating expenses		838,467		210,705		205,457		167,810		1,422,439
Loss from operations			$	(841,213)	$	(136,551)	$	8,088	$	(143,718)	$	(1,113,394)

Liquidity and Capital Resources

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

As of March 31, 2016, our cash balance was $200,948. Management estimated that our current monthly burn rate is approximately $100,000. Our current cash on hand is not sufficient to maintain our daily operations for the next 12 months. Management intends to raise additional capital through debt or equity financing to fund our daily operations through next 12 months. For the six months ended March 31, 2016 we raised $730,701 and $82,300 from debt and equity financing, respectively, to fund our daily operations, 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 the Company will achieve or maintain profitability in the foreseeable future. In the event that we are unable to raise sufficient capital through debt or equity financing or to attain sales levels sufficient to support its operations we may have to curtail our operating activities to keep in operations.

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Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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

PSI received FDA clearance for the Psoria-Light on February 11, 2011 (no. K103540) and was granted permission to affix the CE mark for the Psoria-Light in the fourth quarter of 2011.  PSI’s founder and past president filed provisional patent applications covering certain aspects of the technology that we intend to utilize in the development and commercialization of the Psoria-Light. The provisional patent applications are owned by the founder and past president, who granted PSI the  sole and exclusive, worldwide, paid-up, royalty-free, perpetual license under the provisional patent applications, any non-provisional patent applications filed by him covering the technology described in the initial provisional patent applications, 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:

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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 with three (3) full-time employees, several independent contractors for PSI, four (4) full-time employees within NPC, our full time CEO and four (4) part-time employees and independent contractors within SCI.  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 Significant Accounting Policies.

The Company has identified significant 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 business combinations, 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, 2015, filed with the Securities and Exchange Commission on January 29, 2016.  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, 2016.

Recently Issued Accounting Pronouncements

 

See Management’s discussion of recent accounting policies included in footnote 1 to the condensed consolidated financial statements.

Going Concern

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, the Company has not yet generated significant revenues and has incurred recurring net losses. During the six months ended March 31, 2016, the Company incurred a net loss of $1,256,782 and used cash in operations of $647,491. 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, 2015 financial statements, has raised substantial doubt about the Company's ability to continue as a going concern.

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At March 31, 2016, the Company had cash on hand in the amount of $200,948. Management estimates that the current funds on hand will be sufficient to continue operations through June 2016. 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.

 

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.

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 March 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

 

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.

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Item 5. Other Information

 

None

Item 6. Exhibits

 

Exhibit No.	Description
31.1	Certification of Principal Executive Officer Pursuant to Rule 13a-14*
32.1	CEO and CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act*
101.INS	XBRL Instance Document**
101.SCH	XBRL Taxonomy Extension Schema**
101.CAL	XBRL Taxonomy Extension Calculation Linkbase**
101.DEF	XBRL Taxonomy Extension Definition Linkbase**
101.LAB	XBRL Taxonomy Extension Label Linkbase**
101.PRE	XBRL Taxonomy Extension Presentation Linkbase**

__________________

* Filed herewith.

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

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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: June 1, 2016	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		June 1, 2016
Andrew J. Kandalepas
/s/ Periklis Papadopoulos		Director		June 1, 2016
Periklis Papadopoulos
/s/ Jay Joshi, M.D.		Director, President NPC		June 1, 2016
Jay Joshi, M.D.

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