ITEM 1. 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 four acquisitions: CNS-Wellness LLC (“CNS”); Psoria-Shield Inc. (“PSI”); National Pain Centers, Inc. (“NPC”); and certain assets of SMI Holdings, Inc., d/b/a StealthMark, Inc. acquired through the Company’s wholly-owned subsidiary, Stealthco, Inc. (“SCI”). CNS is a cognitive neuroscience company specializing in the treatment of brain-based behavioral health disorders including developmental, emotional and stress-related problems. PSI is a developer and manufacturer of Ultra Violet (UV) phototherapy devices for the treatment of skin diseases such as; psoriasis, eczema, vitiligo, and others. NPC is a management services provider that manages non-medical services in clinics and surgical centers in the Chicago-land area. SCI is engaged in the business of selling, licensing or otherwise providing certain encryption and authentication products and services.
Description of CNS.
CNS was organized in the State of Florida on May 26, 2009. It was acquired by the Company through a share exchange on August 2, 2012 and was operated as a wholly-owned subsidiary of the Company. CNS provides alternative, scientific approaches to mental health and wellness. It assesses dis-regulations in brain function via EEG-based brain mapping along with other recognized behavioral health assessment tools, such as neuropsychological examinations. Its trained therapists then assist the client to restore brain function to within normative limits using leading-edge modalities, such as LENS, Neurofield EMS therapy, traditional neurofeedback, hemoencephalography, transcranial direct current stimulation, cranial alternating current stimulation, photonic stimulation and heart variability training.
On September 30, 2014, the Company completed the disposition of all of its issued and outstanding membership interests in CNS. CNS operations had been suspended following termination of management in January, 2014. The disposition was part of a settlement of proceedings filed by the Company against said management and an entity affiliated with management. The disposition of interests was in consideration of management’s return of 7,300,000 shares of common stock in the Company issued to management in connection with the Company’s acquisition of CNS in 2012, which shares were returned to the Company’s treasury and then cancelled as part of the settlement. Each party to the proceedings released each of the others, and any and all claims that might be asserted, and the proceedings were dismissed with prejudice by the court.
Description of PSI.
PSI was incorporated under the laws of the State of Florida on June 17, 2009. It was acquired by the Company through a share exchange on August 24, 2012 and is operated as a wholly-owned subsidiary of the Company. 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.
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. PSI submitted a 510(k) application with the FDA for marketing clearance of the device in the United States (application number K103540). 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 also developed an ISO 13485 compliant quality system for the Psoria-Light which was audited in the fourth 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.
Psoria-Light treatment appears to have been beneficial to clients, without demonstrable harmful side effects or safety issues, and PSI has serviced approximately 350 clients since PSI started to sell the device in January 2012. There can be no assurance that the experience to date is indicative of results that might be expected from an expanded sample or base.
Description of 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.
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).
Description of SCI.
SCI was incorporated under the laws of the state of Illinois on March 18, 2014. It is a Minnesota-based provider of StealthMark encryption and authentication solutions offering advanced product security technologies within the security and supply chain management vertical sectors. SCI acquired certain StealthMark assets on April 4, 2014 and operates as a wholly-owned subsidiary of the Company. It provides customers brand protection from counterfeiting and diversion while maintaining the integrity of product authentication. 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.
SCI operations are 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.
Description of Aminofactory.com
Since the acquisitions and disposition described above, we have focused primarily upon development of acquired and disposed products, services and operations. During the period covered by this report, we have continued limited development of our aminofactory.com web-based online store and expansion of a wider range of nutritional supplements, including customized formulas uniquely tailored to suit an individual’s needs. However, this line of business has not presented a material source of revenue and management is currently evaluating whether to continue or to terminate “aminofactory.com” activities.
ITEM 1A.
ITEM 1A. RISK FACTORS
An investment in our securities involves an exceptionally high degree of risk and is extremely speculative in nature. The risks described below are the ones we believe are most important for you to consider. These risks are not the only ones that we face. If events anticipated by any of the following risks actually occur, our business, operating results or financial condition could suffer and the price of our common stock could decline.
WE HAVE RECEIVED A GOING CONCERN OPINION FROM OUR AUDITORS AND WE ARE CURRENTLY OPERATING AT A LOSS, WHICH RAISES SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
We have received a “Going Concern” opinion from our auditors. As reflected in the accompanying consolidated financial statements, the Company had an accumulated deficit at September 30, 2014, a net loss and net cash used in operating activities for the fiscal year then ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The Company is attempting to generate sufficient revenue; however, the Company’s cash position may not be sufficient enough to support the Company’s daily operations. While the Company believes in the viability of its strategy to generate sufficient revenue and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate sufficient revenues.
IT IS MOST LIKELY THAT WE WILL NEED TO SEEK ADDITIONAL FINANCING THROUGH SUBSEQUENT FUTURE PRIVATE OFFERING OF OUR SECURITIES.
Because the Company does not currently have any financing arrangements, and may not be able to secure favorable terms for future financing, the Company may need to raise capital through the sale of its common stock. The sale of additional equity securities will result in dilution to our stockholders.
UNFAVORABLE PUBLICITY OR CONSUMER ACCEPTANCE OF OUR PRODUCTS OR SERVICES GENERALLY COULD REDUCE OUR SALES.
We will be highly dependent upon consumer acceptance of the safety, efficacy and quality of our products and services, as well as similar products or services offered by other companies. Consumer acceptance of products or services can be significantly influenced by scientific research or findings, national media attention and other publicity about product use or services. A product or service may be received favorably, resulting in high sales associated with that product or service that may not be sustainable as consumer preferences change. Future scientific research or publicity could be unfavorable to our industry or any of our particular products and services and may not be consistent with earlier favorable research or publicity. A future research report or publicity that is perceived by our consumers as less than favorable or that question earlier favorable research or publicity could have a material adverse effect on our ability to generate revenue. Adverse publicity in the form of published scientific research, statements by regulatory authorities or otherwise, whether or not accurate, that associates consumption or use of our products or services, or any other similar products and services, with illness or other adverse effects, or that questions the benefits of our or similar products or services, or claims that they are ineffective, could have a material adverse effect on our business, reputation, financial condition or results of operations.
COMPLYING WITH NEW AND EXISTING GOVERNMENT REGULATION, BOTH IN THE U.S. AND ABROAD, COULD SIGNIFICANTLY INCREASE OUR COSTS AND LIMIT OUR ABILITY TO MARKET OUR PRODUCTS AND SERVICES.
The processing, formulation, manufacturing, packaging, labeling, advertising, distribution, licensing and/or sale of our products and services are subject to regulation by several U.S. federal agencies, including the FDA, the Federal Trade Commission, or FTC, the Postal Service, the Consumer Product Safety Commission, the Department of Agriculture and the Environmental Protection Agency, as well as various state, local and international laws and agencies of the localities in which our products and services are offered or are sold. Government regulations may prevent or delay the introduction or require design modifications of our products. Regulatory authorities may not accept the evidence of safety we present for existing or new products or services that we wish to market, or they may determine that a particular product or service presents an unacceptable health risk. If that occurs, we could be required to cease distribution of and/or recall products or terminate marketing of services that present such risks. Authorities may also determine that certain advertising and promotional claims, statements or activities are not in compliance with applicable laws and regulations and may determine that a particular statement is unacceptable an unauthorized version of a food or dietary supplement “health claim.” Failure to comply with any regulatory requirements could prevent us from marketing particular existing or new products or services, or subject us to administrative, civil or criminal penalties.
WE WILL OPERATE IN A HIGHLY COMPETITIVE INDUSTRY, AND OUR FAILURE TO COMPETE EFFECTIVELY COULD ADVERSELY AFFECT OUR MARKET SHARE, FINANCIAL CONDITION AND GROWTH PROSPECTS.
The U.S. healthcare solutions industry is a large and highly fragmented industry. Our potential competitors include specialty retailers, supermarkets, drugstores, mass merchants, multi-level marketing organizations, online merchants, mail-order companies and a variety of other participants in the industry. The principle elements of competition in the industry are price, selection and distribution channel offerings. We believe that the market is also highly sensitive to the introduction of new products and services, which may rapidly capture a significant share of the market. In the U.S., we shall also compete for sales with heavily advertised national brands manufactured by large pharmaceutical and food companies, as well as other retailers. In addition, as some products or services gain market acceptance, we may experience increased competition for those products or services as more participants enter the market. Currently, we are not a manufacturer. To the extent that we become a manufacturer or engage third party manufacturers to produce any product, our manufacturing capabilities may not be adequate or sufficient to compete with large scale, direct or third-party manufacturers. Certain of our potential competitors are larger than us and have longer operating histories, larger customer bases, greater brand recognition and greater resources for marketing, advertising and promotion of their products and services. They may be able to secure inventory from vendors on more favorable terms, operate with a lower cost structure or adopt more aggressive pricing policies. In addition, our potential competitors may be more effective and efficient in introducing new products or services. We may not be able to compete effectively, and our attempt to do so may require us to increase marketing and/or reduce our prices, which may result in lower margins. Failure to effectively compete could adversely affect our market share, financial condition and growth prospects.
OUR DECISIONS TO ACQUIRE PSI, NPC AND SCI WERE BASED UPON ASSUMPTIONS WHICH MAY PROVE TO BE ERRONEOUS.
Our decisions to acquire PSI, NPC and SCI were based upon assumptions regarding their respective existing and prospective operations, products and services, the potential market for their respective products and services, and our ability to integrate their respective operations in a manner that would enable us to launch the marketing and sale of their respective products and services. Our decisions were based upon information available to management, and assumptions made by management, at the time of each respective acquisition, regarding the potential viability of such products and services and our ability to integrate operations.
Our assumptions may prove to be erroneous. Each company is a small development stage company with a limited operating history. Each is currently operating at a loss, and there is no assurance that its business development plans and strategies will ever be successful, or that their respective products and services will be favorably perceived and accepted by our assumed potential customer populations.
PSI PROVIDES ALTERNATIVE SCIENTIFIC APPROACHES TO UV SKIN TREATMENT THAT ARE NOVEL.
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. There can be no assurance that we will be able to achieve and maintain such market acceptance by healthcare providers or clients.
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. ). 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 also developed an ISO 13485 compliant quality system for the Psoria-Light which was audited in the fourth 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.
Traditionally, “non-targeted” therapy was administered by lamps that emitted either UVA or UVB light to both diseased and healthy skin. While sunblocks or other UV barriers may be used to protect healthy skin, the UV administered in this manner must be low dosage to avoid excessive exposure of healthy tissue. Today, “targeted” UV phototherapy devices administer much higher dosages of light only to affected tissue, resulting in “clearance” in the case of psoriasis and eczema, and “repigmentation” in the case of vitiligo, at much faster rates than non-targeted (low dosage) UV treatments.
Targeted UV treatments are typically administered to smaller total body surface areas, and are therefore used to treat the most intense parts of a patient’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 which produces UVB light between 300 and 320 nm as well as UVA light between 350 and 395nm, does not consume dangerous chemicals or require special environmental disposal and is cost effective for clinicians, which will increase 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 patient record integration capabilities; the ability to export to an external USB memory device a PDF file of patient treatment information including a patent pending graph that includes digital images plotted against user tracked metrics which can be submitted to improve medical reimbursements; an accessory port and ability to update software; ease of placement and portability; advanced treatment site detection safety sensor; international language support; a warranty which includes the UV lamp(s); and a non-changeable treatment log (that does not include HIPPA information).
Psoria-Light treatments appear to have been beneficial to clients, without demonstrable harmful side effects or safety issues, but PSI has serviced approximately 350 clients since PSI started to sell the device in January 2012. There can be no assurance that the experience to date is indicative of results that might be expected from an expanded sample or base. Consequently, there can be no assurance that Psoria-Light treatments will ever achieve and maintain market acceptance among healthcare providers and clients. Any failure to satisfy healthcare provider or client demands or to achieve meaningful market acceptance will seriously harm our business and our ability to generate revenues and may prevent us from ever becoming profitable.
WE RELY UPON PSI, NPC AND SCI PERSONNEL TO OPERATE THEIR RESPECTIVE BUSINESSES AND THE LOSS OF KEY PERSONNEL COULD HAVE A MATERIALLY ADVERSE AFFECT ON OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS.
We rely upon the current executive management of PSI, NPC and SCI to operate their respective business operations. Although we have executed employment agreements with key management personnel of PSI, NPC and SCI, we cannot guarantee that any such personnel will remain affiliated with us.
If any of our key personnel were to cease their affiliation with us, our operating results could suffer. Further, we do not maintain key person life insurance on any executive officer. If we lose or are unable to obtain the services of key personnel, our business, financial condition or results of operations could be materially and adversely affected.
PSI, NPC AND SCI HAVE LIMITED EXPERIENCE IN MARKETING THEIR RESPECTIVE PRODUCTS AND SERVICES.
PSI, NPC and SCI each has undertaken initial, limited marketing efforts for their respective products and services. Their sales and marketing teams will compete against the experienced and well-funded sales organizations of competitors. Their revenues and ability to achieve profitability will depend largely on the effectiveness of their respective sales and marketing team. Each will face significant challenges and risks related to marketing its services, including, but not limited to, the following:
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the ability of sales representatives to obtain access to or persuade adequate numbers of healthcare providers to purchase and use their respective products and services;
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the ability to recruit, properly motivate, retain, and train adequate numbers of qualified sales and marketing personnel;
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the costs associated with hiring, training, maintaining, and expanding an effective sales and marketing team; and
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assuring compliance with government regulatory requirements affecting the healthcare industry.
In addition, PSI plans to establish a network of distributors in selected foreign markets to market, sell and distribute the Psoria-Light device. If PSI fails to select or use appropriate foreign distributors, or if the sales and marketing strategies of such distributors prove ineffective in generating sales of the device, our revenues would be adversely affected and we might never become profitable.
COMMERCIALIZATION OF PRODUCTS AND SERVICES WILL REQUIRE US TO BUILD AND MAINTAIN SOPHISTICATED SALES AND MARKETING TEAMS.
None of our subsidiaries has any prior experience with commercializing their respective products and services. To successfully commercialize their products and services we will need to establish and maintain sophisticated sales and marketing teams. Experienced sales representatives may be difficult to locate and retain, and all new sales representatives will need to undergo extensive training. There is no assurance that we will be able to recruit and retain sufficiently skilled sales representatives, or that any new sales representatives will ultimately become productive. If we are unable to recruit and retain qualified and productive sales personnel, our ability to commercialize our product and to generate revenues will be impaired, and our business will be harmed.
WE FACE SIGNIFICANT COMPETITION FROM COMPANIES WITH GREATER RESOURCES AND WELL-ESTABLISHED SALES CHANNELS, WHICH MAY MAKE IT DIFFICULT FOR US TO ACHIEVE MARKET PENETRATION.
The markets for our subsidiaries’ respective products and services are highly competitive and are significantly affected by new treatment and product introductions. Direct competitors may enjoy competitive advantages, including:
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established service and product lines with proven results;
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brand awareness;
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name recognition;
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established product acceptance by healthcare providers and clients;
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established relationships with healthcare providers and clients;
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integrated distribution networks; and
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greater financial resources for product development, sales and marketing, and patent litigation.
Many competitors may have significantly greater funds to spend on the research, development, promotion and sale of new and existing services and products. These resources can enable them to respond more quickly to new or emerging technologies and changes in the market.
WE MAY BECOME INVOLVED IN FUTURE LITIGATION OR CLAIMS THAT MAY NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS.
Healthcare providers and customers that use our subsidiaries’ products or services may bring product liability or other claims against us. To limit such exposure, each subsidiary plans to develop a comprehensive training and education program for persons using their respective products and services. There can be no assurance that such training and education programs will help avoid complications resulting from any provision of products or services. In addition, although they may provide such training and education, they may not be able to ensure proper provision of products or services in each instance and may be unsuccessful at avoiding significant liability exposure as a result. While we may currently maintain and plan to continue to maintain liability insurance in amounts we consider sufficient, such insurance may prove insufficient to provide coverage against any or all asserted claims. In addition, experience ratings and general market conditions may change at any time so as to render us unable to obtain or maintain insurance on acceptable terms, or at all. In addition, regardless of merit or eventual outcome, product liability and other claims may result in:
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the diversion of management’s time and attention from our business and operations;
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the expenditure of large amounts of cash on legal fees, expenses and payment of settlements or damages;
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decreased demand for our products and services; and
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negative publicity and injury to our reputation.
Each and every one of above consequences of claims and litigation occur could have a material adverse effect on us, our subsidiaries, and our business operations and financial condition.
HEALTHCARE PROVIDERS MAY BE UNABLE TO OBTAIN COVERAGE OR REIMBURSEMENT FROM THIRD-PARTY PAYORS FOR PSORIA-LIGHT TREATMENTS, WHICH COULD LIMIT OUR ABILITY TO MARKET PSI PRODUCTS AND SERVICES.
We expect that healthcare providers will bill various third-party payers, such as Medicare, Medicaid, other governmental programs, and private insurers, for Psoria-Light treatments. We believe that the cost of Psoria-Light treatments is generally already reimbursable under governmental programs and most private plans. Accordingly, we believe that healthcare providers will generally not require new billing authorizations or codes in order to be compensated for performing medically necessary procedures using Psoria-Light treatments. There can be no assurance, however, that coverage, coding and reimbursement policies of third-party payers will not change in the future. PSI’s success in selected foreign markets will also depend upon the eligibility of the Psoria-Light device for coverage and reimbursement by government-sponsored healthcare payment systems and third-party payers. In both the United States and foreign markets, healthcare cost-containment efforts are prevalent and are expected to continue. Prospective clients’ failure to obtain sufficient reimbursement could limit our ability to market PSI products and services and decrease our ability to generate revenue.
WE PLAN TO RELY ON THIRD PARTY DISTRIBUTORS FOR PSI SALES, MARKETING AND DISTRIBUTION ACTIVITIES IN FOREIGN COUNTRIES.
Although we plan to market and sell our products and services directly through our own sales representatives in the domestic market, we plan to rely on third party distributors to sell, market, and distribute the Psoria-Light device in selected international markets. Because we intend to rely on third party distributors for sales, marketing and distribution activities in international markets, we will be subject to a number of risks associated with our dependence on these third party distributors, including:
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lack of day-to-day control over the activities of third-party distributors;
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third-party distributors may not fulfill their obligations to us or otherwise meet our expectations;
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third-party distributors may terminate their arrangements with us on limited or no notice or may change the terms of these arrangements in a manner unfavorable to us for reasons outside of our control; and
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disagreements with our distributors could require or result in costly and time-consuming litigation or arbitration.
If we fail to establish and maintain satisfactory relationships with third-party distributors, we may be unable to sell, market and distribute the Psoria-Light device in international markets, our revenues and market share may not grow as anticipated, and we could be subject to unexpected costs which would harm our results of operations and financial condition.
TO THE EXTENT WE ENGAGE IN MARKETING AND SALES ACTIVITIES OUTSIDE THE UNITED STATES, WE WILL BE EXPOSED TO RISKS ASSOCIATED WITH EXCHANGE RATE FLUCTUATIONS, TRADE RESTRICTIONS AND POLITICAL, ECONOMIC AND SOCIAL INSTABILITY.
If we follow through with our plans to sell the Psoria-Light device in foreign markets, we will be subject to various risks associated with conducting business abroad. A foreign government may require us to obtain export licenses or may impose trade barriers or tariffs that could limit our ability to build our international presence. Our operations in some markets also may be adversely affected by political, economic and social instability in foreign countries. We may also face difficulties in managing foreign operations, longer payment cycles, problems with collecting accounts receivable, and limits on our ability to enforce our intellectual property rights. In addition, for financial reporting purposes, our foreign sales will be translated from local currency into U.S. dollars based on exchange rates and, if we do not hedge our foreign currency transactions, we will be subject to the risk of changes in exchange rates. If we are unable to adequately address the risks of doing business abroad, our business may be harmed.
THE PSORIA-LIGHT AND ANY FUTURE MEDICAL DEVICE PRODUCTS ARE SUBJECT TO A LENGTHY AND UNCERTAIN DOMESTIC REGULATORY PROCESS.
PSI’s Psoria-Light device and future medical device products, if any, are subject to extensive regulation in the United States by the FDA. The FDA regulates the research, testing, manufacturing, safety, labeling, storage, record keeping, promotion, distribution and production of medical devices in the United States to ensure that medical products distributed domestically are safe and effective for their intended uses. In order for us to market the Psoria-Light for use in the United States, we were required to first obtain clearance from the FDA pursuant to Section 510(k) of the Federal Food, Drug, and Cosmetic Act (the “FFDCA”).
Clearance under Section 510(k) requires demonstration that a new device is substantially equivalent to another device with 510(k) clearance or grandfather status. If the FDA agrees that a device is substantially equivalent to a predicate device, it will grant clearance to commercially market the device. The FDA has a statutory 90-day period to respond to a 510(k) submission. As a practical matter, clearance often takes longer. The FDA may require further information, including clinical data, to make a determination regarding substantial equivalence. If the FDA determines that a device, or its intended use, is not “substantially equivalent,” the FDA will place the device, or the particular use of the device, into Class III, and the device sponsor must then fulfill much more rigorous pre-marketing requirements.
If the FDA does not act favorably or quickly in its review of a 501(k) submission, the submitting party may encounter significant difficulties and costs in its efforts to obtain FDA clearance or approval, all of which could delay or preclude the sale of a device. The FDA may request additional data or require the submitting party to conduct further testing or compile more data, including clinical data and clinical studies, in support of a 510(k) submission. Instead of accepting a 510(k) submission, the FDA may require the submitting party to submit a pre-market approval application (“PMA”), which is typically a much more complex and burdensome application than a 510(k). To support a PMA, the FDA may require that the submitting party conduct one or more clinical studies to demonstrate that the device is safe and effective. In addition, the FDA may place significant limitations upon the intended use of a device as a condition to a 510(k) clearance or PMA approval. Product applications can also be denied or withdrawn due to failure to comply with regulatory requirements or the occurrence of unforeseen problems following clearance or approval. Any delays or failure to obtain FDA clearance or approvals of any future medical device products we develop, any limitations imposed by the FDA on product use, or the costs of obtaining FDA clearance or approvals could have a material adverse effect on our business, financial condition and results of operations.
PSI submitted its 510(k) for the Psoria-Light to the FDA and on December 3, 2010 was assigned application number K103540. The 510(k) application for Psoria-Light was a traditional application and asserted that the Psoria-Light is “substantially equivalent” in intended use and technology to two predicate devices, the X-Trac Excimer Laser and the Dualight, which are competing targeted UV phototherapy devices. PSI began regulatory testing of the Psoria-Light in December 2010 for EMC and electrical safety (required for FDA and CE mark sales), and completed that testing in the second quarter of 2011. PSI received FDA clearance of the Psoria-Light on February11, 2011 (no. K103540). If the Psoria-Light is significantly modified subsequent to its FDA clearance, the FDA may require submission of a separate 510(k) or PMA for the modified product before it may be marketed in the United States.
If we develop any future medical device products we will be required to seek and obtain FDA approval prior to any marketing or sales in the United States and in accordance with the 510(k) or PMA process.
THE PSORIA-LIGHT WILL BE SUBJECT TO VARIOUS INTERNATIONAL REGULATORY PROCESSES AND APPROVAL REQUIREMENTS. IF WE DO NOT OBTAIN AND MAINTAIN THE NECESSARY INTERNATIONAL REGULATORY APPROVALS, WE WILL NOT BE ABLE TO MARKET AND SELL OUR PRODUCTS IN FOREIGN COUNTRIES.
To be able to market and sell PSI’s Psoria-Light device in other countries, we must obtain regulatory approvals and comply with the regulations of those countries. These regulations, including the requirements for approvals and the time required for regulatory review, vary from country to country. Obtaining and maintaining foreign regulatory approvals are expensive, and we cannot be certain that we will receive regulatory approvals in any foreign country in which we plan to market our product. If we fail to obtain or maintain regulatory approval in any foreign country in which we plan to market our product, our ability to generate revenue will be harmed.
The European Union requires that manufacturers of medical products obtain the right to affix the CE mark to their products before selling them in member countries of the European Union. The CE mark is an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. In order to obtain the right to affix the CE mark to products, a manufacturer must obtain certification that its processes meet certain European quality standards.
PSI began regulatory testing of the Psoria-Light in December 2010 for EMC and electrical safety (required for FDA and CE mark sales), and completed that testing in the second quarter of 2011. PSI was granted permission to affix the CE mark to the Psoria-Light in the fourth quarter of 2011. If we modify the Psoria-Light product or develop other new products in the future, we would expect to apply for permission to affix the CE mark to such products. In addition, we would be subject to annual regulatory audits in order to maintain any CE mark permissions we may obtain. We do not know whether we will be able to obtain permission to affix the CE mark to our initial, future or modified products or that we will continue to meet the quality and safety standards required to maintain any permission we may receive. If we are unable to obtain permission to affix the CE mark to any of our products, we will not be permitted to sell our products in member countries of the European Union, which will have a material adverse effect on our business, financial condition and results of operations. In addition, if after receiving permission to affix the CE mark to our products, we are unable to maintain such permission, we will no longer be able to sell our products in member countries of the European Union.
OUR ABILITY TO ACHIEVE COMMERCIAL SUCCESS WILL DEPEND IN PART ON OBTAINING AND MAINTAINING PATENT PROTECTION (IF ANY) AND TRADE SECRET PROTECTION RELATING TO OUR PRODUCTS, THE TECHNOLOGY ASSOCIATED WITH OUR PRODUCTS, AND ANY OTHER PRODUCTS AND TECHNOLOGY WE MAY DEVELOP, AS WELL AS SUCCESSFULLY DEFENDING OUR PATENT(S) (IF ANY) AND LICENSED PATENTS (IF ISSUED) AGAINST THIRD PARTY CHALLENGES. IF WE ARE UNABLE TO OBTAIN AND MAINTAIN PROTECTION FOR OUR INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY, THE VALUE OF OUR PRODUCTS WILL BE ADVERSELY AFFECTED, AND WE WILL NOT BE ABLE TO PROTECT SUCH TECHNOLOGY FROM UNAUTHORIZED USE BY THIRD PARTIES.
Our commercial success will depend largely on our ability to obtain and maintain patent protection and intellectual property protection covering certain aspects of the technology that we intend to utilize in the development and commercialization of PSI’s initial medical device product, the Psoria-Light, and existing SCI products, to obtain and maintain patent and intellectual property protection for any other products that we may develop and seek to market. In order to protect our competitive position for the Psoria-Light, SCI products, and any other products that we may develop and seek to market, we, or our executive officers, as the case may be, will have to:
·
prevent others from successfully challenging the validity or enforceability of our issued, pending, or licensed patents (if any);
·
prevent others from infringing upon, our issued, pending, or licensed patents (if any) and our other proprietary rights;
·
operate our business, including the manufacture, sale and use of the Psoria-Light and any other products, without infringing upon the proprietary rights of others;
·
successfully enforce our rights to issued, pending, or licensed patents (if any) against third parties when necessary and appropriate; and
·
obtain and protect commercially valuable patents or the rights to patents both domestically and abroad.
PSI was issued one patent on its Psoria-Light technology on July 9th 2013, US 8,481,982, covering a unique patient safety feature. No other patents have been issued for PSI products or methods, or any of the other technology associated with such products, and we cannot guarantee that any other patents will be issued for such products or any of the technology associated with such products.
StealthMark devoted substantial effort and resources to develop and advance micro-particle security technologies in support of its business activities. Protection of the acquired StealthMark intellectual property is maintained through, among other things, five patents issued between November 18, 2003 and October 11, 2011 as US 6,647,649; 7,720,254; 7,831,042; 7,885,428; and 8,033,450 and pending US Application 12/899,110, as well as several pending European Applications.
Protection of intellectual property in the markets in which we compete is highly uncertain and involves complex legal and scientific questions. It may be difficult to obtain patents relating to our products or technology. Furthermore, any changes in, or unexpected interpretations of, the patent laws may adversely affect our ability to enforce our patent position.
WE EXPECT TO RELY ON TRADEMARKS, TRADE SECRET PROTECTIONS, KNOW-HOW AND CONTRACTUAL SAFEGUARDS TO PROTECT OUR NON-PATENTED INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY.
We expect to rely on trademarks, trade secret protections, know-how and contractual safeguards to protect our non-patented intellectual property and proprietary technology. Current employees, consultants and advisors have entered into, and future employees, consultants and advisors will be required to enter into, confidentiality agreements that prohibit the disclosure or use of confidential information. We also intend to enter into confidentiality agreements to protect our confidential information delivered to third parties for research and other purposes. There can be no assurance that we will be able to effectively enforce these agreements or that the subject confidential information will not be disclosed, that others will not independently develop substantially equivalent confidential information and techniques or otherwise gain access to our confidential information or that we can meaningfully protect our confidential information.
Costly and time-consuming litigation could be necessary to enforce and determine the scope and protectability of confidential information, and failure to maintain the confidentiality of confidential information could adversely affect our business by causing us to lose any competitive advantage maintained through such confidential information.
The protection of proprietary technology through claims of trade secret status has been the subject of increasing claims and litigation by various companies both to protect proprietary rights and for competitive reasons even where proprietary claims are unsubstantiated. The prosecution of proprietary claims or the defense of such claims is costly and uncertain given the uncertainty and rapid development of the principles of law pertaining to this area.
Disputes may arise in the future with respect to the ownership of rights to any technology developed with consultants, advisors or collaborators. These and other possible disagreements could lead to delays in the collaborative research, development or commercialization of our products, or could require or result in costly and time-consuming litigation that may not be decided in our favor. Any such event could have a material adverse effect on our business, financial condition and results of operations by delaying or preventing our commercialization of innovations or by diverting our resources away from revenue-generating projects.
OUR ABILITY TO MARKET PRODUCTS IN FOREIGN COUNTRIES MAY BE IMPAIRED BY THE ACTIVITIES AND INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES.
We may elect to market and sell products in select international markets. Except for certain pending StealthMark European Applications, neither the Company nor any of our officers or directors has filed (nor does the Company or any of our officers or directors currently have an intention to file) for any international patent protection for any of our products or any of the technology associated with our products. However, to successfully enter into these international markets and achieve desired revenues internationally, we may need to enforce our patent and trademark rights (if any) against third parties that we believe may be infringing on our rights. The laws of some foreign countries do not protect intellectual property, including patents, to as great an extent as do the laws of the United States. Policing unauthorized use of our intellectual property is difficult, and there is a risk that despite the expenditure of significant financial resources and the diversion of management attention, any measures that we take to protect our intellectual property may prove inadequate in these countries. Our competitors in these countries may independently develop similar technology or duplicate our products, thus likely reducing our potential sales in these countries. Furthermore, our future patent rights (if any) may be limited in enforceability to the United States or certain other select countries, which may limit our intellectual property rights abroad.
NO MARKET CURRENTLY EXISTS FOR OUR SECURITIES AND WE CANNOT ASSURE YOU THAT SUCH A MARKET WILL EVER DEVELOP, OR IF DEVELOPED, WILL BE SUSTAINED.
Our common stock is not currently eligible for trading on any stock exchange and there can be no assurance that our common stock will be listed on any stock exchange in the future. We presently are listed on the NASD OTCQB Bulletin Board trading system pursuant to Rule 15c2-11 of the Securities Exchange Act of 1934, but there can be no assurance we will maintain such a listing. The bulletin board tends to be highly illiquid, in part because there is no national quotation system by which potential investors can track the market price of shares except through information received or generated by a limited number of broker-dealers that make a market in particular stocks. There is a greater chance of market volatility for securities that trade on the bulletin board as opposed to a national exchange or quotation system. This volatility may be caused by a variety of factors, including: the lack of readily available price quotations; the absence of consistent administrative supervision of "bid" and "ask" quotations; lower trading volume; and general market conditions. If no market for our shares materializes, you may not be able to sell your shares or may have to sell your shares at a significantly reduced price.
IF OUR SHARES OF COMMON STOCK ARE ACTIVELY TRADED ON A PUBLIC MARKET, THEY WILL IN ALL LIKELIHOOD BE PENNY STOCKS.
Broker-dealer practices in connection with transactions in “penny stocks” are regulated by certain penny stock rules adopted by the SEC. Penny stocks generally are equity securities with a price per share of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ Stock Market, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally require that prior to a transaction in a penny stock the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules.
WE WILL INCUR ONGOING COSTS AND EXPENSES FOR SEC REPORTING AND COMPLIANCE WITHOUT REVENUE WE MAY NOT BE ABLE TO REMAIN IN COMPLIANCE, MAKING IT DIFFICULT FOR INVESTORS TO SELL THEIR SHARES, IF AT ALL.
We have a very limited number of market makers and are quoted on the OTC Electronic Bulletin Board. To be eligible for quotation, issuers must remain current in their filings with the SEC. In order for us to remain in compliance we will require future revenues to cover the cost of these filings, which could comprise a substantial portion of our available cash resources. If we are unable to generate sufficient revenues to remain in compliance it may be difficult for you to resell any shares you may purchase, if at all.
FAILURE TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND STOCK PRICE.
Section 404 of the Sarbanes-Oxley Act of 2002 (“the Sarbanes-Oxley Act”) requires that we establish and maintain an adequate internal control structure and procedures for financial reporting and include a report of management on our internal control over financial reporting in our annual report on Form 10-K. That report must contain an assessment by management of the effectiveness of our internal control over financial reporting and must include disclosure of any material weaknesses in internal control over financial reporting that we have identified. The Company has six directors with two (2) of whom are independent; accordingly, we cannot establish board committees with independent members to oversee certain functions such as compensation or audit issues for internal control and reporting purposes. Until we have a majority of our board of directors being independent members, if ever, there will be limited oversight of our management’s decisions and activities and little ability of shareholders to challenge or reverse those activities and decisions, even if they are not in the best interests of our shareholders.
THE MARKET PRICE FOR OUR COMMON SHARES IS PARTICULARLY VOLATILE GIVEN OUR STATUS AS A RELATIVELY UNKNOWN COMPANY WITH A SMALL AND THINLY TRADED PUBLIC FLOAT, LIMITED OPERATING HISTORY AND LACK OF PROFITS WHICH COULD LEAD TO WIDE FLUCTUATIONS IN OUR SHARE PRICE. YOU MAY BE UNABLE TO SELL YOUR COMMON SHARES AT OR ABOVE YOUR PURCHASE PRICE, WHICH MAY RESULT IN SUBSTANTIAL LOSSES TO YOU.
The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. First, as noted above, our common shares are sporadically and thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative or “risky” investment due to our limited operating history and lack of profits to date, and uncertainty of future market acceptance for our potential products and services. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. Many of these factors are beyond our control and may decrease the market price of our common shares, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain their current market prices, or as to what effect that the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price.
WE DO NOT PAY DIVIDENDS ON OUR COMMON STOCK.
We have not paid any dividends on our common stock and do not anticipate paying dividends in the foreseeable future. We plan to retain earnings, if any, to finance the development and expansion of our business.
ITEM 2.
ITEM 2. PROPERTIES
Our principal executive offices are located at 1014 E. Algonquin Road, Suite 111, Schaumburg, Illinois 60173. Our telephone number is (847)-925-1885. We occupy the office space pursuant to a sub-lease executed as of December 20, 2010 for a period of one year expiring December 31, 2011, with the base rent of $1,909.50 per month, which has been subsequently extended through December 31, 2014 with the same terms and conditions. The sub-lease is with a related party.
PSI offices are located at 6408 West Linebaugh Avenue, Suite 103, Tampa, Florida 33625. PSI’s telephone number is (866) 725-0969. PSI occupies the office space pursuant to a lease executed as of July 7, 2014, for a period of six months, with monthly base rent of $2,000, which was subject to additional rent in the form of a pro-rata share of common area maintenance operating and maintenance expenses. The lease term has been extended on a month-to-month basis. Suite 103 comprises approximately 2,000 square feet and included office space, a sales area, space for inventory, manufacturing and receiving operations, as well as an engineering lab and video conferencing room.
NPC offices are located at 230 Central Drive, Suite 201, Vernon Hills, Illinois 60061. Its telephone number is (847) 701-3256. NPC occupies the office space pursuant to a lease executed as of January 1, 2015, for a period of twelve (12) months, with monthly base rent of $1,600.
SCI offices are located at 6845 20th Avenue, Centerville, Minnesota 55038. Its telephone number is (651) 765-9560. SCI occupies 3,300 square of office space pursuant to a lease executed as of June 26, 2013, for a period of nineteen months, with monthly base rent of $2,100.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is periodically engaged in legal proceedings arising from and relating to its business operations. We currently are not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our Company, our common stock, any of our subsidiaries or of our Company’s or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
No Public Market for Our Common Stock
The market price of our common stock is subject to significant fluctuations in response to variations in our quarterly operating results, general trends in the market, and other factors, over many of which we have little or no control. In addition, broad market fluctuations, as well as general economic, business and political conditions, may adversely affect the market for our common stock, regardless of our actual or projected performance.
Common Stock
We are 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 September 30, 2014 there were 44,336,795 shares of common stock issued and outstanding. Holders of shares of common stock have full voting rights, one vote for each share held of record. Stockholders are entitled to receive dividends as may be declared by the Board out of funds legally available therefore and share pro rata in any distributions to stockholders upon liquidation. Stockholders have no conversion, pre-emptive or subscription rights. All outstanding shares of common stock are fully paid and non-assessable.
Preferred Stock
The Company does not have any Preferred Stock authorized.
Dividends
We have not paid any cash dividends to our shareholders. The declaration of any future cash dividends is at the discretion of our board of directors and depends upon our earnings, if any, our capital requirements and financial position, and other pertinent conditions. It is our present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations.
Warrants
December 2012 Issuances
In December 2012, the Company issued (i) warrants to purchase 520,999 shares, in aggregate, of the Company’s common stock to the investors with an exercise price of $0.45 per share expiring five (5) years from the date of issuance as part of the sale of equity units.
The Company estimated the relative fair value of the warrants on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company engages in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life of the options or warrants and averaged them as its expected volatility.
The estimated relative fair value of the warrants was $47,514 at the date of issuance using the Black-Scholes Option Pricing Model.
February and March 2013 Issuance
On February 26, 2013 and March 17, 2013, the Company issued warrants to purchase 300,000 shares and 400,000 shares, or 700,000 shares in aggregate, of the Company’s common stock to consultants for future services with an exercise price of $0.30 per share expiring five (5) years from the date of issuance.
The estimated fair value of the warrants was valued using the Black-Scholes option-pricing model with the following weighted-average assumptions:
February 26, 2013
March 17, 2013
Expected life (year)
Expected volatility (*)
62.93%
62.56%
Expected annual rate of quarterly dividends
0.00%
0.00%
Risk-free rate(s)
0.78%
0.81%
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company engages in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life and averaged them as its expected volatility.
The estimated fair value of the warrants was $47,490 and $63,080, or $110,570 in aggregate, on the date of grant using the Black-Scholes Option Pricing Model.
March 2013 Issuances
In March 2013, the Company issued warrants to purchase 3,096,603 shares, in aggregate, of the Company’s common stock to investors with an exercise price of $0.45 per share expiring five (5) years from the date of issuance as part of the sale of equity units.
The Company estimated the relative fair value of the warrants on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company engages in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life of the options or warrants and averaged them as its expected volatility.
The estimated relative fair value of the warrants was $277,764 at the date of issuance using the Black-Scholes Option Pricing Model.
April 2013 Issuance
On April 19, 2013, the Company issued warrants to purchase 601,668 shares of the Company’s common stock to investors with an exercise price of $0.45 per share expiring five (5) years from the date of issuance as part of the sale of equity units.
The estimated relative fair value of the warrants was valued using the Black-Scholes option-pricing model with the following weighted-average assumptions:
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company engages in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life and averaged them as its expected volatility.
The estimated relative fair value of the warrants was $53,789 on the date of grant using the Black-Scholes Option Pricing Model.
May 2013 Issuances
In May 9, 2013, the Company issued warrants to purchase 40,000 shares, in aggregate, of the Company’s common stock to investors with an exercise price of $1.00 per share expiring five (5) years from the date of issuance as part of the sale of equity units.
The Company estimated the relative fair value of the warrants on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company engages in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life of the options or warrants and averaged them as its expected volatility.
The estimated relative fair value of the warrants was $5,220 at the date of issuance using the Black-Scholes Option Pricing Model.
August 2013 Issuances
On August, 2013, the Company issued warrants to purchase 4,371,250 shares, in aggregate, consisting of 4,121,250 warrants with an exercise price of $0.75 per share and 250,000 warrants with an exercise price of $0.40 per share expiring five (5) years from the date of issuance.
The Company estimated the relative fair value of the warrants on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company engages in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life of the options or warrants and averaged them as its expected volatility.
The estimated relative fair value of the warrants was $662,992 at the date of issuance using the Black-Scholes Option Pricing Model.
January 2014 and March 2014 Issuances
On January 13, 2014 and March 28, 2014, the Company issued warrants to purchase 1,171,905 shares, in aggregate, consisting of warrants to purchase (i) 793,333 shares with an exercise price of $0.40 per share; (ii) 228,572 shares with an exercise price of $0.45 per share; and (iii) 150,000 shares with an exercise price of $0.65 per share expiring five (5) years from the date of issuance to the investors as part of the sale of equity units.
The Company estimated the relative fair value of the warrants on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
January 13, 2014
March 28,
Expected life (year)
Expected volatility (*)
58.28%
56.29%
Expected annual rate of quarterly dividends
0.00%
0.00%
Risk-free rate(s)
1.60%
1.73%
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company engages in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life of the options or warrants and averaged them as its expected volatility.
The estimated relative fair value of the warrants was $55,097, $24,480, and $19,170, respectively, or $98,747, in aggregate, at the date of issuance using the Black-Scholes Option Pricing Model.
April 2014 Issuances
On April 4, 2014, the Company issued warrants to purchase 131,266 shares with an exercise price of $0.665 per share expiring five (5) years from the date of issuance in connection with the asset purchase agreement consummated on April 4, 2014.
The Company estimated the fair value of the warrants on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company engages in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life of the options or warrants and averaged them as its expected volatility.
The estimated fair value of the warrants was $0.3282 per warrant share or $43,082, respectively, at the date of issuance using the Black-Scholes Option Pricing Model.
On April 30, 2014, the Company issued warrants to purchase 57,222 shares with an exercise price of $0.65 per share expiring five (5) years from the date of issuance to the investors as part of the sale of equity units.
The Company estimated the relative fair value of the warrants on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company engages in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life of the options or warrants and averaged them as its expected volatility.
The estimated relative fair value of the warrants was $7,210 at the date of issuance using the Black-Scholes Option Pricing Model.
July 2014 Issuances
On July 22, 2014, the Company issued warrants to purchase 348,000 shares with an exercise price of $0.30 per share expiring five (5) years from the date of issuance as part of the sale of equity units.
The Company estimated the fair value of the warrants on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company engages in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life of the options or warrants and averaged them as its expected volatility.
The estimated fair value of the warrants was $0.06 per warrant share or $20,053, respectively, at the date of issuance using the Black-Scholes Option Pricing Model.
Summary of the Company’s Warrants Activities
The table below summarizes the Company’s warrants activities:
The following table summarizes information concerning outstanding and exercisable warrants as of September 30, 2014:
Options
2010 Non-Qualified Stock Option Plan (“2010 Option Plan”)
On December 22, 2010, effective retroactively as of June 30, 2010, the Company’s board of directors approved the adoption of the “2010 Non-Qualified Stock Option Plan” (“2010 Option Plan”) by unanimous consent. The 2010 Option Plan was initiated to encourage and enable officers, directors, consultants, advisors and key employees of the Company to acquire and retain a proprietary interest in the Company by ownership of its common stock. A total of 7,500,000 of the authorized shares of the Company’s common stock may be subject to, or issued pursuant to, the terms of the plan.
Pursuant to Section 7 - Adjustments or Changes in Capitalization of the Stock Option Plan, the number of shares to be received upon the exercise of the option and the exercise price to be paid for a share hereinafter sometimes referred to as “Exercise Price” which may be adjusted from time to time as hereinafter as follows:
7.1
In the event that the outstanding Common Shares of the Company are hereafter changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of merger, consolidation, other reorganization, recapitalization, reclassification, combination of shares, stock split-up or stock dividend:
A.
Prompt, proportionate, equitable, lawful and adequate adjustment shall be made of the aggregate number and kind of shares subject to Stock Options which may be granted under the Plan, such that the Optionee shall have the right to purchase such Common Shares as may be issued in exchange for the Common Shares purchasable on exercise of the NQSO had such merger, consolidation, other reorganization, recapitalization, reclassification, combination of shares, stock split-up or stock dividend not taken place;
B.
Rights under unexercised Stock Options or portions thereof granted prior to any such change, both as to the number or kind of shares and the exercise price per share, shall be adjusted appropriately, provided that such adjustments shall be made without change in the total exercise price applicable to the unexercised portion of such NQSO’s but by an adjustment in the price for each share covered by such NQSO’s; or
C.
Upon any dissolution or liquidation of the Company or any merger or combination in which the Company is not a surviving corporation, each outstanding Stock Option granted hereunder shall terminate, but the Optionee shall have the right, immediately prior to such dissolution, liquidation, merger or combination, to exercise his NQSO in whole or in part, to the extent that it shall not have been exercised, without regard to any installment exercise provisions in such NQSO.
7.2
The foregoing adjustments and the manner of application of the foregoing provisions shall be determined solely by the Committee, whose determination as to what adjustments shall be made and the extent thereof, shall be final, binding and conclusive. No fractional Shares shall be issued under the Plan on account of any such adjustments.
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.
September 6, 2013 Issuance
On September 6, 2013, the Company issued an option to purchase 10,000 shares of its common stock to the consultant with an exercise price of $0.75 per share for advisory board services. The option was vested and exercisable upon grant.
The Company estimated the fair value of the stock options on the date of grant using the Black-Scholes Option Pricing Model with the following weighted-average assumptions:
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company plans to engage in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life and averaged them as its expected volatility.
The estimated fair value of the stock options was $1,491 on the date of grant, which are recorded as consulting fees.
February 28, 2014 Issuance
On February 28, 2014, the Company issued an option to purchase 1,800,000 shares of its common stock to two officers of the Company with an exercise price of $0.40 per share expiring five (5) years from the date of issuance.
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company plans to engage in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life and averaged them as its expected volatility.
The estimated fair value of the stock options was $194,939 on the date of grant, which are recorded as salaries - officers.
September 28, 2014 Issuance
On September 30, 2014, the Company issued an option to purchase 200,000 shares of its common stock to the officer of the Company with an exercise price of $0.125 per share expiring five (5) years from the date of issuance.
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company plans to engage in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life and averaged them as its expected volatility.
The estimated fair value of the stock options was $30,940 on the date of grant, which are recorded as salaries - officers.
Summary of the Company’s Stock Option Activities
The table below summarizes the Company’s stock option activities:
The following table summarizes information concerning outstanding and exercisable options as of September 30, 2014:
As of September 30, 2014, there were 2,240,000 shares of stock options remaining available for issuance under the 2010 Plan.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Action Stock Transfer Corp., having an office situated at 2469 E. Fort Union Blvd, Ste 214, Salt Lake City, UT 84121 and its telephone number is (801) 274-1088.
INTERESTS OF NAMED EXPERTS AND COUNSEL
No expert or counsel named in this Annual Report as having prepared or certified any part of this Annual Report or having given an opinion upon the validity of the securities being registered or upon other legal matters in connection with the registration or offering of the common stock was employed on a contingency basis, or had, or is to receive, in connection with the offering, a substantial interest, direct or indirect, in the registrant or any of its parents or subsidiaries. Nor was any such person connected with the registrant or any of its parents or subsidiaries as a promoter, managing or principal underwriter, voting trustee, director, officer, or employee.
Our consolidated financial statements as of and for the fiscal year ended September 30, 2014 and 2013 are included in this Annual Report in reliance on the report of Li and Company, PC, an independent registered public accounting firm, given on the authority of that firm as experts in auditing and accounting.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATIONS.
Forward Looking Statements
Except for historical information, the following Plan of Operation contains forward-looking statements based upon current expectations that involve certain risks and uncertainties. Such forward-looking statements include statements regarding, among other things, (a) our projected sales and profitability, (b) our growth strategies, (c) anticipated trends in our industry, (d) our future financing plans, (e) our anticipated needs for working capital, (f) our lack of operational experience and (g) the benefits related to ownership of our common stock. Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found under “Management’s Discussion and Analysis or Plan of Operations” and “Description of Business,” as well as in this Annual Report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” and matters described in this Annual Report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Annual Report will in fact occur as projected.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto. This section includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our predictions.
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 four acquisitions: CNS-Wellness LLC (“CNS”), Psoria-Shield Inc. (“PSI”), National Pain Centers. Inc. (“NPC”) and certain assets of SMI Holdings, Inc., d/b/a StealthMark, Inc. CNS is a cognitive neuroscience company specializing in the treatment of brain-based behavioral health disorders including developmental, emotional and stress-related problems. PSI is a developer and manufacturer of Ultra Violet (UV) phototherapy devices for the treatment of skin diseases such as; psoriasis, eczema, vitiligo, and others. NPC is a management services provider that manages non-medical services in clinics and surgical centers in the Chicago-land area. SCI is engaged in the business of selling, licensing or otherwise providing certain authentication and encryption products and services.
CNS
CNS was organized in the State of Florida on May 26, 2009. It was acquired by the Company through a share exchange on August 2, 2012 and was operated as a wholly-owned subsidiary of the Company. CNS provides alternative, scientific approaches to mental health and wellness. It assesses dis-regulations in brain function via EEG-based brain mapping along with other recognized behavioral health assessment tools, such as neuropsychological examinations. Its trained therapists then assist the client to restore brain function to within normative limits using leading-edge modalities, such as LENS, Neurofield EMS therapy, traditional neurofeedback, hemoencephalography, transcranial direct current stimulation, cranial alternating current stimulation, photonic stimulation and heart variability training.
On September 30, 2014, the Company completed the disposition of all of its issued and outstanding membership interests in CNS. CNS operations had been suspended following termination of management in January, 2014. The disposition was part of a settlement of proceedings filed by the Company against said management and an entity affiliated with management. The disposition of interests was in consideration of management’s return of 7,300,000 shares of common stock in the Company issued to management in connection with the Company’s acquisition of CNS in 2012, which shares were returned to the Company’s treasury and then cancelled as part of the settlement. Each party to the proceedings released each of the others, and any and all claims that might be asserted against any of them, and the proceedings were dismissed with prejudice by the court.
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 operated as a wholly-owned subsidiary of the Company, with three full-time employees and several independent contractors. We believe that PSI’s operations and services provide an attractive complement to the Company’s operations and products and represent a viable alternative to current approaches to Ultra Violet (UV) phototherapy treatment of skin diseases.
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.
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.
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.
Traditionally, “non-targeted” therapy was administered by lamps that emitted either UVA or UVB light to both diseased and healthy skin. While sunblocks or other UV barriers may be used to protect healthy skin, the UV administered in this manner must be low dosage to avoid excessive exposure of healthy tissue. Today, “targeted” UV phototherapy devices administer much higher dosages of light only to affected tissue, resulting in “clearance” in the case of psoriasis and eczema, and “repigmentation” in the case of vitiligo, at much faster rates than non-targeted (low dosage) UV treatments.
Targeted UV treatments are typically administered to smaller total body surface areas, and are therefore used to treat the most intense parts of a patient’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 which produces UVB light between 300 and 320 nm as well as UVA light between 350 and 395nm, does not consume dangerous chemicals or require special environmental disposal and is cost effective for clinicians, which will increase 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 patient record integration capabilities; the ability to export to an external USB memory device a PDF file of patient treatment information including a patent pending graph that includes digital images plotted against user tracked metrics which can be submitted to improve medical reimbursements; an accessory port and ability to update software; ease of placement and portability; advanced treatment site detection safety sensor; international language support; a warranty which includes the UV lamp(s); and a non-changeable treatment log (that does not include HIPPA information).
Mr. Scot L. Johnson, the founder of PSI, led initial steps to develop and market the Psoria-Light device. He served as PSI’s president through April 11, 2014, continuing to provide technical and support consulting services thereafter pursuant to a Consulting Agreement dated as of April 11, 2014. He has substantial experience in promoting difficult-to-sell medical devices (i.e., medical devices that are expensive and that do not have an established billing code for reimbursement) in difficult-to-penetrate and non-traditional markets (i.e., military and space markets). He also has a solid track record of working together to develop space technology partnerships and technical product marketing programs. Mr. Johnson has extensive experience in medical device and LED-based optics design, manufacturing and sales. In addition, on October 24, 2014, the Company entered into an Agency Agreement with The Medical Alliance, Inc., a Florida-based corporation (“TMA”), to work together in the further development, marketing, licensing and/or sale of PSI technology and products, resulting in the execution of a Joint Venture Agreement, effective as of January 12, 2015, with TMA for such purposes.
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 has registered a variety of domain names and established an initial website to include in depth information regarding psoriasis, eczema, vitiligo, and the Psoria-Light device. It has developed informational videos, flyers, booklets and tradeshow materials, as well as a database of U.S. dermatologists that can be used to assist sales personnel in contacting dermatologists that might be interested in the Psoria-Light device.
We expect to build upon PSI’s current development and marketing efforts, however, PSI only started to sell the devices since January 2012 with a limited operating history. 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, and PSI has serviced approximately 350 clients since PSI started to sell the device in January 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 with four (4) full-time employees. 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 ("NPCLLC"), which is owned by Dr. Jay Joshi, the president and CEO of NPC. Pursuant the 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.
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 Minnesota-based provider of StealthMark encryption and authentication solutions offering advanced product security technologies within the security and supply chain management vertical sectors. SCI acquired certain StealthMark assets on April 4, 2014 and operates as a wholly-owned subsidiary of the Company with two full-time and two part-time employees. It provides customers brand protection from counterfeiting and diversion while maintaining the integrity of product authentication. 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.
SCI operations are 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.
Aminofactory.com
Since the acquisitions and disposition described above, we have focused primarily upon development of acquired and disposed products, services and operations. During the period covered by this report, we have continued limited development of our aminofactory.com web-based online store and expansion of a wider range of nutritional supplements, including customized formulas uniquely tailored to suit an individual’s needs. However, this line of business has not presented a material source of revenue and management is currently evaluating whether to continue or to terminate “aminofactory.com” activities.
Supplements offered through our website are produced by unaffiliated third party manufacturers and/or product fulfillment suppliers, specializing in nutritional supplement production. Supplements produced for us can be also provided to our competitors by our suppliers and/or manufacturers. However, we are able to specifically select our product portfolio and market it through our website with our custom packaging and pricing, under a supplier or manufacturer’s, or under our own label, in the event that management decides to continue this line of business.
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.
We rely upon PSI’s current executive management, Mr. Kandalepas, to operate PSI’s business. We also rely upon PSI’s founder and past president, Mr. Scot Johnson, to provide technical and support consulting services. He has substantial experience in promoting difficult-to-sell medical devices in difficult-to-penetrate and non-traditional markets. Mr. Johnson has extensive experience in medical device and LED-based optics design, manufacturing and sales. In addition, the Company entered into a Joint Venture Agreement, effective as of January 12, 2015, with The Medical Alliance, Inc., a Florida-based corporation, to work together in the further development, marketing, licensing and/or sale of PSI technology and products.
We rely upon NPC’s current executive management, Jay Joshi, M.D., DABA, DABAPM, FABAPM, to operate 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.
We rely upon SCI’s current executive management, Mr. Ricky Howard, to operate 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.
Results of Operations
For the Fiscal Year Ended September 30, 2014
For the fiscal year ended September 30, 2014, we earned $225,184 in revenues, incurred $3,113 in cost of revenues, resulting $222,071 in gross profit. We expended $234,711, $233,241, $74,698, $855,251, $34,928, $541,342 and $3,308,925 in consulting fees, professional fees, rent, personnel, selling, general and administrative expenses and impairment of intangible assets and goodwill, respectively.
The Company maintained five (5) business segments through the end of the period covered by this Report:
(i)
Nutritional Supplement Distribution: nutritional supplement business segment engages in the development of an internet online store business to market nutritional supplement solutions through the Company's website www.aminofactory.com;
(ii)
Client Services: which it provided through CNS, its wholly-owned subsidiary acquired on August 2, 2012, a client service provider specializing in the treatment of brain-based behavioral health disorders including developmental, emotional and stress-related problems;
(iii)
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;
(iv)
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
(v)
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 StealthMark, Inc., including StealthMark 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:
Liquidity and Capital Resources
As of September 30, 2014, our cash balance was $175,671 inclusive $7,881 held by WCUI, $165,874 held by NPC, $1,358 held by SCI, and $558 held by PSI. The management estimated that our current monthly burn rate to be approximate $456,874 inclusive of $426,338 for WCUI, $20,076 for PSI and $10,460 for NPC, respectively. Our current cash on hand is not sufficient to maintain our daily operations for the next 12 months. The management of the Company intends to raise additional capital through private equity transactions or debt financing to fund our daily operations through next 12 months, however no assurance can be given that we will be successful in raising additional capital through private equity transactions or debt financing during the period. For the Period from October 1, 2013 through September 30, 2014, the Company has raised approximately $351,250 through the sale of certain equity units inclusive of one (1) share of our common stock and a warrant to purchase one (1) share of our common stock and warrants exercised. In the event that we are unable to raise sufficient capital through private equity transactions or debt financing we may have to reduce our operating expenses and maintain minimum level of operations.
Our independent registered public accounting firm issued a going concern opinion. This means that there is substantial doubt that we can continue as an on-going business for the next twelve months unless we obtain additional capital to pay our bills.
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.
Mr. Johnson 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 by Mr. Johnson 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 Mr. Johnson, 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 Mr. Johnson 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.
Mr. Johnson 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. This second provisional patent application is owned by Mr. Johnson who has granted PSI the sole and exclusive, worldwide, paid-up, royalty-free, perpetual license under this second provisional patent application, any non-provisional patent applications filed by Mr. Johnson 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, StealthMark devoted substantial effort and resources to develop and advance micro-particle security technologies in support of its business activities. Protection of the acquired StealthMark 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.
Appl. No. 12/899,110
Pending (Notice of Allowance received)
“Three-Dimensional Authentication Of Micro-particle Mark
- Validation of 3D nature of micro-particle mark to protect against counterfeiting of marks (broadened protection).
Europe
WO/EP Patent
Issued
“Title” - Summary
Appl. No. 07753042.6
Pending
“Automatic Micro-particle Mark Reader”
- Automatic readers for interrogating Micro-particle marks.
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, three (3) full-time employees and several independent contractors within PSI, four (4) full-time employees within NPC, and two (2) full-time employees and two (2) part-time employees 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’s significant accounting policies are presented in the Notes to the Consolidated Financial Statements (see Note 2 of the audited consolidated financial statements included herein).
ITEM 7A.
ITEM 7A. QUANTITIATIVE AND QUALITATIVE DISCLOUSURES ABOUT MARKET RISK
Not applicable to a smaller reporting company.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements are contained in pages through which appear at the end of this annual report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Regulations under the Securities Exchange Act of 1934 (the “Exchange Act”) require public companies to maintain “disclosure controls and procedures,” which are defined as controls and other procedures that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
The Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of September 30, 2014, the end of the period covered by this report. Based upon that evaluation, the Company’s CEO concluded that the Company’s disclosure controls and procedures are not effective at the reasonable assurance level due to the material weaknesses described below:
1.
The Company does not have written documentation of its internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act which is applicable to the Company. Management evaluated the impact of its failure to have written documentation of its internal controls and procedures on its assessment of its disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
2.
The Company’s board of directors has no audit committee, independent director or member with financial expertise which causes ineffective oversight of the Company’s external financial reporting and internal control over financial reporting.
3.
The Company does not have sufficient segregation of duties within its accounting functions, which is a basic internal control. Due to its size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of its failure to have segregation of duties on its assessment of its disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
4.
The Company has had, and continues to have, a significant number of audit adjustments. Audit adjustments are the result of a failure of the internal controls to prevent or detect misstatements of accounting information. The failure could be due to inadequate design of the internal controls, a misapplication or override of controls, or the lack of any board member with financial expertise. Management evaluated the impact of the significant number of audit adjustments and has concluded that the control deficiency that resulted represented a material weakness.
In light of the material weaknesses, the management of the Company performed additional analysis and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with the accounting principles generally accepted in the United States of America. Accordingly, we believe that our consolidated financial statements included herein fairly present, in all material respects, our consolidated financial condition, consolidated results of operations and cash flows as of and for the reporting periods then ended.
Remediation of Material Weaknesses
We intend to remediate the material weaknesses in our disclosure controls and procedures identified above by adding independent directors or members with financial expertise and/or hiring a full-time CFO, with SEC reporting experience, in the future when working capital permits and by working with our independent registered public accounting firm and refining our disclosure controls and procedures. To date, we have not been successful in reducing the number of audit adjustments, but will continue our efforts in the coming fiscal year as more fully detailed below.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officer and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:
·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the issuer; and
·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
As of the end of our most recent fiscal year, management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") and SEC guidance on conducting such assessments. Based on that evaluation, they concluded that, as of September 30, 2014, such internal control over financial reporting was not effective. This was due to deficiencies that existed in the design or operation of our internal control over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.
The matters involving internal control over financial reporting that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; (2) inadequate segregation of duties consistent with control objectives of having segregation of the initiation of transactions, the recording of transactions and the custody of assets; and (3) ineffective controls over period end financial disclosure and reporting processes. The aforementioned material weaknesses were identified by our Chief Executive Officer in connection with the review of our financial statements as of September 30, 2014.
To address the material weaknesses set forth in items (2) and (3) discussed above, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.
This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to the rules of the SEC that permit the Company to provide only the management's report in this annual report.
Management's Remediation Initiatives
In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated, or plan to initiate, the following series of measures:
We will increase our personnel resources and technical accounting expertise within the accounting function when funds are available to us. First, we will create a position to segregate duties consistent with control objectives of having separate individuals perform (i) the initiation of transactions, (ii) the recording of transactions and (iii) the custody of assets. Second, we will create a senior position to focus on financial reporting and standardizing and documenting our accounting procedures with the goal of increasing the effectiveness of the internal controls in preventing and detecting misstatements of accounting information. Third, we plan to appoint one or more outside directors to our board of directors who shall be appointed to an audit committee resulting in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls and procedures such as reviewing and approving estimates and assumptions made by management when funds are available to us.
Management believes that the appointment of one or more outside directors, who shall be appointed to a fully functioning audit committee, will remedy the lack of a functioning audit committee and a lack of a majority of outside directors on our Board.
We anticipate that these initiatives will be at least partially, if not fully, implemented by September 30, 2015 when funding is available. Additionally, we plan to test our updated controls and remediate our deficiencies by September 30, 2015.
Changes in internal controls
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15 (f) under the Exchange Act) during the fourth quarter of our fiscal year 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Directors, Executive Officer and Control Persons
The following table sets forth the names and ages of our current directors and executive officers. Also the principal offices and positions with us held by each person and the date such person became a director or executive officer. Each executive officer was appointed by our Board of Directors. Our directors serve until the earlier occurrence of the election of his or her successor at the next meeting of stockholders, death, resignation or removal by the Board of Directors. There are no family relationships among our directors, and executive officers.
Name
Age
Position
Date
Andrew J. Kandalepas
Chairman, President, Chief Executive Officer and Chief Financial Officer
June 2010
Periklis Papadopoulos
Director
Nov. 2010
Dr. Jay Joshi, M.D.
Director, Secretary, President, NPC
Feb. 2014
Ricky Howard
President, CEO, SCI
April 2014
Audit Committee
The Board of Directors determined not to establish an audit committee at present because of our limited resources and limited operating activities do not warrant the formation of an audit committee or the expense of doing so. We do not have a financial expert serving on the Board of Directors who meets the criteria for a financial expert under Item 401(e) of Regulation S-B due to our limited financial resources.
Certain Legal Proceedings
No director, nominee for director, or executive officer of the Company has appeared as a party in any legal proceeding material to an evaluation of his ability or integrity during the past five years.
Compliance With Section 16(A) Of The Exchange Act.
Section 16(a) of the Exchange Act requires the Company’s officers and directors, and persons who beneficially own more than 10% of a registered class of the Company’s equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and are required to furnish copies to the Company.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
Summary Compensation Table
Other Annual
Restricted
Options
LTIP
All Other
Year
Salary
Compensation
Stock
Awards
SARs
Payouts
Compensation
Name and Position
($)
($)
Bonus ($)
(Shares)
(Shares)
($)
($)
($)
Andrew J. Kandalepas,
198,193
Chairman, President and CEO
200,000
(1)
3,665,000
1,600,000
Periklis Papadopoulos, Ph.D.,
Director
(2)
225,000
100,000
Evan T. Manolis, MD(2)
(2)
225,000
100,000
Dr Jay Joshi, President of NPC, Director
200,000
600,000
Rick Howard, President, CEO of StealthCo
100,000
250,000
(1)
Upon formation the Company issued to the Company’s founder (i) 3,665,000 shares of its common stock valued at par, or $3,665 and (ii) an option to purchase 1,600,000 shares of its common stock with an exercise price of $0.01 per share expiring five (5) years from the date of issuance valued at nil, on the date of grant, as officer's compensation.
(2)
On June 30, 2011 the Company issued 125,000 shares each or 250,000 shares of its common stock in aggregate, valued at $250 on the date of issuance to the two (2) then outside members of the board of directors as compensation.
There are no annuity, pension or retirement benefits proposed to be paid to officers, directors or employees in the event of retirement at normal retirement date pursuant to any presently existing plan provided or contributed to by the Company or any of its subsidiaries, if any.
Employment Agreements
We have Employment Agreements with our executive officers (excluding Mr. Kandalepas), and with key executive management personnel of each of our subsidiary companies. Each agreement is for a term of three years and provides an annual base salary ranging from $100,000 to $200,000, subject to increase, but not decrease, from time to time as determined by the Board of Directors. Employment under each agreement is at will and terminable by either party at any time. If an Employment Agreement is terminated by the executive for good reason (as defined therein), or by the Company other than for cause (as defined therein), the executive is entitled to pay through the termination date plus severance pay of up to three (3) month’s base pay for each full year of service then remaining. If an Employment Agreement is terminated by the executive for other than good reason, or by the Company for cause, the executive is entitled only to pay through the termination date and a portion of Company shares, options or warrants, if any, held by him or for his benefit are subject to forfeiture. Each Employment Agreement contains covenants not to compete, secrecy and non-interference which apply during employment and continue for a period of two years following termination.
Stock Option Plan
On December 22, 2010, effective retroactively as of June 30, 2010, the Company’s Board of Directors approved the adoption of the “2010 Non-Qualified Stock Option Plan” (“2010 Option Plan”) by unanimous consent. The 2010 Option Plan was initiated to encourage and enable officers, directors, consultants, advisors and key employees of the Company to acquire and retain a proprietary interest in the Company by ownership of its common stock. A total of 7,500,000 of the authorized shares of the Company’s common stock may be subject to, or issued pursuant to, the terms of the plan. The number of shares to be received upon the exercise of an option and the exercise price to be paid for a share may be adjusted from time to time as provided in Section 7 of the plan, which is presented in the Notes to the Consolidated Financial Statements (see Note 12 of the audited consolidated financial statements included herein).
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.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Shareholders
The following table presents certain information regarding the beneficial ownership of all shares of common stock at the date of this Annual Report, for each executive officer and director of our Company and for each person known to us who owns beneficially more than five percent (5%) of the issued and outstanding shares of our common stock.
(1)
Except as otherwise noted below, the address of each of the persons shown in the above table is c/o Wellness Center USA, Inc. 1014 E Algonquin Rd, Ste. 111, Schaumburg, IL, 60173.
(2)
Includes, where applicable, shares of common stock issuable upon the exercise of options or warrants to acquire common stock held by such person that may be exercised within 60 days after September 30, 2013. Also includes unvested shares of restricted stock as to which such person has voting power but no dispositive power. Unless otherwise indicated, we believe that all persons named in the table above have sole voting power and/or investment power with respect to all shares of common stock beneficially owned by them.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Party Transactions
Related parties with whom the Company had transactions are:
Related Parties
Relationship
Andrew J. Kandalepas
Chairman, CEO, significant stockholder and director
CADserv Corporation
An entity owned and controlled by significant stockholder
Jay Joshi, MD
Chief Medical Officer of the Company, President and CEO of NPC, stockholder and director
Ricky Howard
President and CEO of SCI and stockholder
Advances from Stockholders
From time to time, stockholders of the Company advance funds to the Company for working capital purpose. Those advances are unsecured, non-interest bearing and due on demand.
Management service agreement between NPC and National Pain Centers, LLC
On February 28, 20124, NPC, the Company's wholly-owned subsidiary, entered into a management service agreement with National Pain Centers, LLC ("NPCLLC"), which is owned by Dr. Jay Joshi, the president and CEO of NPC. Per the 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.
Note Receivable - Chairman, President and CEO
Note Payable - Related Party
Director Independence
Currently, the Company does not have a policy that its directors or a majority of its directors be independent of management. The Company intends to implement a policy that a majority of the Board members be independent of the Company’s management as the members of the board of directors increases.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
We were billed $68,000 and $85,000 for the audit and reviews of our financial statements included in our periodic and other reports filed with the Securities and Exchange Commission for our fiscal year ended September 30, 2014 and 2013, respectively.
Tax Fees
For the fiscal year ended September 30, 2014 and 2013, we were billed $0 and $7,950 for professional services rendered for tax compliance, respectively.
All Other Fees
For the fiscal year ended September 30, 2014 and 2013, we were billed $0 and $29,750 for professional services rendered for the review of super 8-K, pro forma combined financial statements and response to the SEC comments, respectively.
Pre-approval of All Services from the Independent Auditors
Effective May 6, 2003, the Securities and Exchange Commission adopted rules that require that before our auditor is engaged by us or our subsidiaries to render any auditing or permitted non-audit related service, the engagement be:
·
approved by our audit committee; or
·
entered into pursuant to pre-approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular service, the audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee's responsibilities to management.
We do not have an audit committee, however our board of directors acts as the audit committee, established pre-approval policies and procedures as to the particular service which do not include delegation of the audit committee's responsibilities to management. Our board of directors pre-approves all services provided by our independent auditors and is informed of each service.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
a) Documents filed as part of this Annual Report
1. Financial Statements
2. Financial Statement Schedules
3. Exhibits
Exhibit Number
Description of Document
Filed Herewith
Incorporated by Reference To:
2.1
Exchange Agreement dated May 30, 2012 by and between CNS Wellness Florida LLC and Wellness Center USA, Inc.
Exhibit 2.1 to the Registrant’s Amended Current Report on Form 8-KA3 filed on January 22, 2013.
2.2
Exchange Agreement dated June 21, 2012 by and between Psoria-Shield Inc. and Wellness Center USA, Inc.
Exhibit 2.2 to the Registrant’s Amended Current Report on Form 8-KA3 filed on January 22, 2013.
2.3
Letter of Understanding dated September 20, 2011 by and between Wellness Center USA, Inc. and Protein Factory.
Exhibit 2.3 to the Registrant’s Amended Current Report on Form 8-KA3 filed on January 22, 2013.
2.4
Exchange Agreement dated February 28, 2014 by and between National Pain Centers, Inc. and Wellness Center USA, Inc.
Exhibit 2.4 to the Registrant’s Current Report on Form 8-K filed on February 28, 2014.
2.5
Purchase Agreement dated March 31, 2014 by and between SMI Holdings, Inc. d/b/a StealthMark, Inc. and Stealthco, Inc., a wholly-owned subsidiary of Wellness Center USA, Inc.
Exhibit 2.5 to the Registrant’s Current Report on Form 8-K filed on April 9, 2014.
3.1
Articles of Incorporation of the Registrant as filed with the Secretary of State of Nevada.
Exhibits 3.2 to the Registrant’s Amended Registration Statement on Form S-1A1 filed on July 7, 2011.
3.2
Bylaws of the registrant.
Exhibits 3.2 to the Registrant’s Amended Registration Statement on Form S-1A1 filed on July 7, 2011.
4.1
Subscription Agreement
Exhibits 99.1 to the Registrant’s Amended Registration Statement on Form S-1A1 filed on July 7, 2011.
4.2
Form of warrant
Exhibits 99.2 to the Registrant’s Amended Registration Statement on Form S-1A1 filed on July 7, 2011.
4.3
2010 Non-Qualified Stock Compensation Plan
Exhibits 99.3 to the Registrant’s Amended Registration Statement on Form S-1A1 filed on July 7, 2011.
5.1
Employment Agreement dated as of August 2, 2012 by and between William A. Lambos and Wellness Center USA, Inc.
Exhibit 5.1 to the Registrant’s Amended Current Report on Form 8-KA3 filed on January 22, 2013.
5.2
Employment Agreement dated as of August 2, 2012 by and between Peter A. Hannouche and Wellness Center USA, Inc.
Exhibit 5.2 to the Registrant’s Amended Current Report on Form 8-KA3 filed on January 22, 2013.
5.3
Employment Agreement dated as of August 24, 2012 by and between Scot L. Johnson and Wellness Center USA, Inc.
Exhibit 5.3 to the Registrant’s Amended Current Report on Form 8-KA3 filed on January 22, 2013.
5.4
Employment Agreement dated as of February 28, 2014 by and between Jay Joshi, M.D. and Wellness Center USA, Inc.
Exhibit 5.4 to the Registrant’s Current Report on Form 8-K filed on February 28, 2014.
5.5
Employment Agreement dated as of July 1, 2014 by and between Randy Howard and Wellness Center USA, Inc.
√
5.6
Consulting Agreement dated as of April 11, 2014 by and between Scot L. Johnson and Wellness Center USA, Inc.
Exhibit 5.6 to the Registrant’s Current Report on Form 8-K filed on April 17, 2014.
10.1
Note dated August 9, 2010 by CNS Wellness Florida LLC in favor of a family member of one of its members in the principal amount of $37,139.
Exhibit 10.1 to the Registrant’s Amended Current Report on Form 8-KA3 filed on January 22, 2013.
10.2
Note dated August 2, 2012 by CNS Wellness Florida LLC in favor of William A. Lambos in the amount of $ 120,886.30.
Exhibit 10.2 to the Registrant’s Amended Current Report on Form 8-KA3 filed on January 22, 2013.
10.3
Note dated August 2, 2012 by CNS Wellness Florida LLC in favor of Peter A. Hannouche in the amount of $ 75,322.14.
Exhibit 10.3 to the Registrant’s Amended Current Report on Form 8-KA3 filed on January 22, 2013.
10.4
License Agreement dated as of August 25, 2009 by and between Psoria-Shield Inc. and Scot L. Johnson.
Exhibit 10.4 to the Registrant’s Amended Current Report on Form 8-KA3 filed on January 22, 2013.
10.5
License Agreement dated as of December 11, 2010 by and between Psoria-Shield Inc. and Scot L. Johnson.
Exhibit 10.5 to the Registrant’s Amended Current Report on Form 8-KA3 filed on January 22, 2013.
10.6
Management Service Agreement dated as of February 28, 2014 by and between National Pain Centers, Inc. and National Pain Centers, LLC
√
10.7
Agency Agreement dated as of October 24, 2014 by and between The Medical Alliance, Inc., Psoria-Shield, Inc. and Wellness Center USA, Inc.
√
10.8
Joint Venture Agreement dated as of January12, 2015 by and between The Medical Alliance, Inc., Psoria-Shield, Inc. and Wellness Center USA, Inc.
√
21.1
List of subsidiaries of the Registrant
√
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (*)
31.2
Certification of Principal Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (**)
32.1
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (*)
32.2
Certification of Principal Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (***)
101.INS
XBRL Instance Document ****
√
101. SCH
XBRL Taxonomy Extension Schema Linkbase Document ****
√
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document ****
√
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document ****
√
101.LAB
XBRL Taxonomy Extension Label Linkbase Document ****
√
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document ****
√
(*)
Filed herewith.
(**)
Included in Exhibit 32.1
(***)
Included in Exhibit 32.2
(****)
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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
WELLNESS CENTER USA, INC.
Date: January 14, 2015
By: /s/ Andrew J. Kandalepas
Andrew J. Kandalepas
Chairman, President, Chief Executive Officer, Chief Accounting Officer and Chief Financial Officer
(Duly Authorized Principal Executive 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 and Chief Financial Officer
January 14, 2015
Andrew J. Kandalepas
/s/ Periklis Papadopoulos
Director
January 14, 2015
Periklis Papadopoulos
/s/ Jay Joshi, M.D.
Director, President NPC
January 14, 2015
Wellness Center USA, Inc.
September 30, 2014 and 2013
Index to the Consolidated Financial Statements
Contents
Page(s)
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at September 30, 2014 and 2013
Consolidated Statements of Operations for the Reporting Period Ended September 30, 2014 and 2013
Consolidated Statement of Changes in Stockholders’ Equity for the Reporting Period Ended September 30, 2014 and 2013
Consolidated Statements of Cash Flows for the Reporting Period Ended September 30, 2014 and 2013
Notes to the Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Wellness Center USA, Inc.
We have audited the consolidated balance sheets of Wellness Center USA, Inc. (the “Company”) as of September 30, 2014 and 2013 and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the reporting periods then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2014 and 2013 and the results of its operations and its cash flows for the reporting periods then ended in conformity with accounting principles generally accepted in the United States of America.
The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company had an accumulated deficit at September 30, 2014, a net loss and net cash used in operating activities for the reporting period then ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/Li and Company, PC
Li and Company, PC
Skillman, New Jersey
January 15, 2015
Wellness Center USA, Inc.
Consolidated Statements of Operations
See accompanying notes to the consolidated financial statements.
Wellness Center USA, Inc.
Consolidated Statements of Cash Flows
See accompanying notes to the consolidated financial statements.
Wellness Center USA, Inc.
September 30, 2014 and 2013
Notes to the Consolidated Financial Statements
Note 1 - Organization and Operations
Wellness Center USA, Inc.
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) nutritional supplement sales; (ii) distribution of targeted Ultra Violet ("UV") phototherapy devices for dermatology; (iii) management of top-tier medical practices in the interventional and multi-modal pain management sector; and (iv) authentication and encryption products and services.
Acquisition of CNS-Wellness Florida, LLC
On May 30, 2012, the Company entered into an Exchange Agreement (“Exchange Agreement”) to acquire all of the limited liability company interests in CNS-Wellness Florida, LLC (“CNS”), a Tampa, Florida,based cognitive neuroscience company, specializing in the treatment of brain-based behavioral health disorders including developmental, emotional and stress-related problems.
On August 2, 2012, the Company consummated the Exchange Agreement and acquired all of the issued and outstanding limited liability company interests in CNS for and in consideration of the issuance of 7.3 million shares of the Company’s common stock pursuant to the Exchange Agreement. The 7.3 million common shares issued in connection with the share exchange represented 32.2% of the 22,704,773 shares of issued and outstanding common stock of the Company as of the closing date of the share exchange under the Exchange Agreement.
CNS Wellness Florida, LLC, the Successor of Cognitive Neuro Sciences, Inc.
Cognitive Neuro Sciences, Inc. (the ''CNS Predecessor") was incorporated on March 14, 2006 under the laws of the State of Florida. The CNS Predecessor specialized in the treatment of brain-based behavioral health disorders including developmental, emotional and stress-related problems. On May 26, 2009, the stockholders of CNS Predecessor decided to dissolve CNS Predecessor and form a Limited Liability Company (“LLC”) to carry on the business of CNS Predecessor.
CNS was formed on May 26, 2009 under the laws of the State of Florida. The sole purpose of CNS was to carry on the business of CNS Predecessor in the form of an LLC. The assets and liabilities of CNS Predecessor were carried forward to CNS and recorded at the historical cost on the date of conversion.
Suspension of the Operations and Discontinuance of CNS Wellness Florida, LLC
As of January 24, 2014 the operations of CNS Wellness Florida, LLC were suspended. The Company impaired the remaining balances of all intangible assets associated with the acquisition of CNS as of January 24, 2014..
On September 30, 2014 the Company sold CNS Wellness Florida, LLC to the former members of CNS Wellness in exchange for the return of the 7,300,000 shares issued to the former members.
The consolidated financial statements for the reporting period ended September 30, 2014 and 2013 have been presented to give retroactive effect to the discontinuance of the CNS Wellness Florida, LLC's operations.
Acquisition of Psoria-Shield Inc.
On June 21, 2012, the Company entered into an Exchange Agreement (“Exchange Agreement”) to acquire all of the issued and outstanding shares of capital stock in Psoria-Shield Inc. (“PSI”), a Tampa, Florida, based developer and manufacturer of targeted Ultra Violet ("UV") phototherapy devices for the treatment of skin diseases, for and in consideration of the issuance of 7,686,797 shares of common stock in the Company.
On August 24, 2012, the Company consummated the share exchange and acquired all of the issued and outstanding shares of stock in PSI for and in consideration of the issuance of 7,686,797 shares of its common stock pursuant to the Exchange Agreement. The 7,686,797 common shares issued in connection with the share exchange represented 25.3% of the 30,391,570 shares of issued and outstanding common stock of the Company as of the closing date of the share exchange under the Exchange Agreement.
Psoria-Shield Inc.
Psoria-Shield Inc. (“PSI”) was incorporated on June 17, 2009 under the laws of the State of Florida. PSI engages in the business of research and development, manufacturing, and marketing and distribution of Ultra Violet ("UV") phototherapy devices for the treatment of skin diseases.
Acquisition of National Pain Centers, Inc.
On January 28, 2014, the Company entered into an Exchange Agreement (“Exchange Agreement”) to acquire all of the issued and outstanding shares of common stock of National Pain Centers, Inc. ("NPC"), a Nevada holding corporation based in Deer Park, Illinois.
On February 28, 2014, the Company consummated the Exchange Agreement and acquired all of the issued and outstanding shares of common stock of NPC for and in consideration of the issuance of 5,000,000 shares of common stock of the Company pursuant to the Exchange Agreement valued at $0.24 per share or $1,200,000, the relative fair value of the PPM consummated on January 13, 2014 with a relative value of $0.11 per share for the warrants on the $0.35 offering immediately prior to the consummation of the Exchange Agreement, which was recorded as goodwill as NPC is a newly formed entity. NPC is now operated as a wholly-owned subsidiary of the Company.
National Pain Centers, Inc. ("NPC")
National Pain Centers, Inc. ("NPC") was incorporated on January 24, 2014 under the laws of the State of Nevada. NPC engages in management of top-tier medical practices in the interventional and multi-modal pain management sector.
Formation of StealthCo, Inc. and Acquisition of Certain Assets of SMI Holdings, Inc.
On March 18, 2014, the Company formed a wholly-owned subsidiary, StealthCo, Inc. (“StealthCo” or “SCI”) under the laws of the State of Illinois. Prior to the acquisition of certain assets from SMI Holdings, Inc., a Minnesota corporation d/b/a StealthMark, Inc. (“SMI”)
As of April 4, 2014, StealthCo engages in the business of selling, licensing or otherwise providing certain authentication and encryption products and services from facilities located in Centerville, Minnesota upon entry into an Asset Purchase Agreement (“Purchase Agreement”) and consummation of the acquisition of certain assets of SMI and settlement of certain debt.
Note 2 - Significant and Critical Accounting Policies and Practices
The Management of the Company is responsible for the selection and use of appropriate accounting policies and the appropriateness of accounting policies and their application. Critical accounting policies and practices are those that are both most important to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. The Company’s significant and critical accounting policies and practices are disclosed below as required by generally accepted accounting principles.
Basis of Presentation
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Fiscal Year End
The Company elected September 30th as its fiscal year end date upon its formation.
Use of Estimates and Assumptions and Critical Accounting Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date(s) of the financial statements and the reported amounts of revenues and expenses during the reporting period(s).
Critical accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or operating performance is material. The Company’s critical accounting estimates and assumptions affecting the financial statements were:
(i)
Assumption as a going concern: Management assumes that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
(ii)
Allowance for doubtful accounts: Management’s estimate of the allowance for doubtful accounts is based on historical sales, historical loss levels, and an analysis of the collectability of individual accounts; and general economic conditions that may affect a client’s ability to pay. The Company evaluated the key factors and assumptions used to develop the allowance in determining that it is reasonable in relation to the financial statements taken as a whole.
(iii)
Inventory Obsolescence and Markdowns: The Company’s estimate of potentially excess and slow-moving inventories is based on evaluation of inventory levels and aging, review of inventory turns and historical sales experiences. The Company’s estimate of reserve for inventory shrinkage is based on the historical results of physical inventory cycle counts.
(iv)
Fair value of long-lived assets: Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives. The Company considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes. The Company evaluates acquired assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events.
(v)
Valuation allowance for deferred tax assets: Management assumes that the realization of the Company’s net deferred tax assets resulting from its net operating loss (“NOL”) carry-forwards for Federal income tax purposes that may be offset against future taxable income was not considered more likely than not and accordingly, the potential tax benefits of the net loss carry-forwards are offset by a full valuation allowance. Management made this assumption based on (a) the Company has incurred recurring losses, (b) general economic conditions, and (c) its ability to raise additional funds to support its daily operations by way of a public or private offering, among other factors.
(vi)
Estimates and assumptions used in valuation of equity instruments: Management estimates expected term of share options and similar instruments, expected volatility of the Company’s common shares and the method used to estimate it, expected annual rate of quarterly dividends, and risk free rate(s) to value share options and similar instruments.
These significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly.
Actual results could differ from those estimates.
Principles of Consolidation
The Company applies the guidance of Topic 810 “Consolidation” of the FASB Accounting Standards Codification ("ASC") to determine whether and how to consolidate another entity. Pursuant to ASC Paragraph 810-10-15-10 all majority-owned subsidiaries-all entities in which a parent has a controlling financial interest-shall be consolidated except (1) when control does not rest with the parent, the majority owner; (2) if the parent is a broker-dealer within the scope of Topic 940 and control is likely to be temporary; (3) consolidation by an investment company within the scope of Topic 946 of a non-investment-company investee. Pursuant to ASC Paragraph 810-10-15-8 the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree. The Company consolidates all less-than-majority-owned subsidiaries, if any, in which the parent’s power to control exists.
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
CNS Wellness Florida, LLC (“CNS”)
The State of Florida
May 26, 2009
(August 2, 2012)
(September 30, 2014)
100%
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%
The consolidated financial statements include all accounts of the Company, CNS, PSI, NPC and StealthCo as of reporting periods end date and for the reporting periods then ended from their respective dates of acquisition and disposition.
All inter-company balances and transactions have been eliminated.
Reclassification
Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported losses.
Business Combinations
The Company applies Topic 805 “Business Combinations” of the FASB Accounting Standards Codification (formerly Statement of Financial Accounting Standards No. 141 (R) “Business Combinations” (“SFAS No. 141(R)”)) for transactions that represent business combinations to be accounted for under the acquisition method. Pursuant to ASC Paragraph 805-10-25-1 in order for a transaction or other event to be considered as a business combination it is required that the assets acquired and liabilities assumed constitute a business. Upon determination of transactions representing business combinations the Company then (i) identifies the accounting acquirer; (ii) identifies and estimates the fair value of the identifiable tangible and intangible assets acquired, separately from goodwill; (iii) estimates the business enterprise value of the acquired entities; (iv) allocates the purchase price of acquired entities to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values at the date of acquisition. The excess of the liabilities assumed and the purchase price over the assets acquired was recorded as goodwill and the excess of the assets acquired over the liabilities assumed and the purchase price was recorded as a gain from bargain purchase.
Identification of the Accounting Acquirer
The Company used the existence of a controlling financial interest to identify the acquirer-the entity that obtains control of the acquiree in accordance with ASC paragraph 805-20-25-5 and identifies the acquisition date, which is the date on which it obtains control of the acquiree in accordance with ASC paragraph 805-20-25-6. The date on which the acquirer obtains control of the acquiree generally is the date on which the acquirer legally transfers the consideration, acquires the assets, and assumes the liabilities of the acquiree-the closing date.
Intangible Assets Identification, Estimated Fair Value and Useful Lives
In accordance with ASC Section 805-20-25 as of the acquisition date, the acquirer shall recognize, separately from goodwill, the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. Recognition of identifiable assets acquired and liabilities assumed is subject to the conditions specified in ASC paragraphs 805-20-25-2 through 25-3.
The recognized intangible assets of the acquiree were valued through the use of the market, income and/or cost approach, as appropriate. The Company utilizes the income approach on a debt-free basis to estimate the fair value of the identifiable assets acquired in the acquiree at the date of acquisition with the assistance of the third party valuation firm. This method eliminates the effect of how the business is presently financed and provides an indication of the value of the total invested capital of the Company or its business enterprise value.
Business Enterprise Valuation
The Company utilizes the income approach - discounted cash flows method to estimate the business enterprise value with the assistance of the third party valuation firm. The income approach considers a given company's future sales, net cash flow and growth potential. In valuing the business enterprise value of business acquired, the Company forecasted sales and net cash flow for the acquiree for five (5) years into the future and used a discounted net cash flow method to determine a value indication of the total invested capital of the acquiree. The basic method of forecasting involves using past experience to forecast the future. The next step was to discount these projected net cash flows to their present values. One of the key elements of the income approach is the discount rate used to discount the projected cash flows to their present values. Determining an appropriate discount rate is one of the more difficult parts of the valuation process. The applicable rate of return or discount rate, the rate investors in closely-held companies require as a condition of acquisition, varies from time to time, depending on economic and other conditions. The discount rate is determined after considering the overall risk of the investment, which includes: (1) operating and financial risk in the business enterprise or asset; (2) current and projected profitability and growth; (3) risk of the respective industry; and (4) the equity risk premium relative to Treasury bonds. The discount rate is also affected by an analyst's judgment regarding the credibility of the income projections. The discount rate rises as the projections become increasingly optimistic, or falls as the degree of certainty increases.
Inherent Risk in the Estimates
Management makes estimates of fair values based upon assumptions believed to be reasonable. These estimates are based on historical experience and information obtained from the management of the acquired companies. Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows from revenues, customer relationships, key management and market positions, assumptions about the period of time the acquired trade names will continue to be used in the Company’s combined portfolio of products and/or services, and discount rates used to establish fair value. These estimates are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.
Acquisition-Related Costs
Pursuant to FASB ASC Paragraph 805-10-25-23 acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder’s fees; advisory, legal, accounting, valuation, and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. The acquirer shall account for acquisition related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities shall be recognized in accordance with other applicable GAAP.
Fair Value of Financial Instruments
The Company follows paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments and paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
Level 1
Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2
Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3
Pricing inputs that are generally observable inputs and not corroborated by market data.
Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.
The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable, notes and interest receivable from Chairman and CEO, prepayment and other current assets, accounts payable, accrued payroll - officers, accrued warranty, credit cards payable, deferred rent, and accrued expenses and other current liabilities approximate their fair values because of the short maturity of these instruments.
Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.
Fair Value of Non-Financial Assets or Liabilities Measured on a Recurring Basis
The Company’s non-financial assets include inventories. The Company identifies potentially excess and slow-moving inventories by evaluating turn rates, inventory levels and other factors. Excess quantities are identified through evaluation of inventory aging, review of inventory turns and historical sales experiences. The Company provides lower of cost or market reserves for such identified excess and slow-moving inventories. The Company establishes a reserve for inventory shrinkage, if any, based on the historical results of physical inventory cycle counts.
Carrying Value, Recoverability and Impairment of Long-Lived Assets
The Company has adopted Section 360-10-35 of the FASB Accounting Standards Codification for its long-lived assets. Pursuant to ASC Paragraph 360-10-35-17 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. Pursuant to ASC Paragraph 360-10-35-20 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.
Pursuant to ASC Paragraph 360-10-35-21 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 considers the following to be some examples of such events or changes in circumstances that may trigger an impairment review: (a) significant decrease in the market price of a long-lived asset (asset group); (b) A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition; (c) A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator; (d) An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group); (e) A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group); and (f) A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The Company tests its long-lived assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events.
Pursuant to ASC Paragraphs 360-10-45-4 and 360-10-45-5 an impairment loss recognized for a long-lived asset (asset group) to be held and used shall be included in income from continuing operations before income taxes in the income statement of a business entity. If a subtotal such as income from operations is presented, it shall include the amount of that loss. A gain or loss recognized on the sale of a long-lived asset (disposal group) that is not a component of an entity shall be included in income from continuing operations before income taxes in the income statement of a business entity. If a subtotal such as income from operations is presented, it shall include the amounts of those gains or losses.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Pursuant to FASB ASC paragraph 310-10-35-47 trade receivables that management has the intent and ability to hold for the foreseeable future shall be reported in the balance sheet at outstanding principal adjusted for any charge-offs and the allowance for doubtful accounts.. The Company follows FASB ASC paragraphs 310-10-35-7 through 310-10-35-10 to estimate the allowance for doubtful accounts. Pursuant to FASB ASC paragraph 310-10-35-9 Losses from uncollectible receivables shall be accrued when both of the following conditions are met: (a) Information available before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) indicates that it is probable that an asset has been impaired at the date of the financial statements, and (b) The amount of the loss can be reasonably estimated. Those conditions may be considered in relation to individual receivables or in relation to groups of similar types of receivables. If the conditions are met, accrual shall be made even though the particular receivables that are uncollectible may not be identifiable. The Company reviews individually each trade receivable for collectability and performs on-going credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by the review of their current credit information; and determines the allowance for doubtful accounts based on historical write-off experience, customer specific facts and general economic conditions that may affect a client’s ability to pay. Bad debt expense is included in general and administrative expenses, if any.
Pursuant to FASB ASC paragraph 310-10-35-41 Credit losses for trade receivables (uncollectible trade receivables), which may be for all or part of a particular trade receivable, shall be deducted from the allowance. The related trade receivable balance shall be charged off in the period in which the trade receivables are deemed uncollectible. Recoveries of trade receivables previously charged off shall be recorded when received. The Company charges off its trade account receivables against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
There was no allowance for doubtful accounts at September 30, 2014 or 2013.
Off-Balance-Sheet Credit Exposures
Pursuant to FASB ASC paragraph 310-10-50-9 an entity shall disclose a description of the accounting policies and methodology the entity used to estimate its liability for off-balance-sheet credit exposures and related charges for those credit exposures. Such a description shall identify the factors that influenced management's judgment (for example, historical losses and existing economic conditions) and a discussion of risk elements relevant to particular categories of financial instruments.
The Company does not have any off-balance-sheet credit exposure to its customers at September 30, 2014 or 2013.
Inventories
Inventory Valuation
The Company values inventory, consisting of finished goods, at the lower of cost or market. Cost is determined on the first-in and first-out (“FIFO”) method. The Company reduces inventory for the diminution of value, resulting from product obsolescence, damage or other issues affecting marketability, equal to the difference between the cost of the inventory and its estimated market value. Factors utilized in the determination of estimated market value include (i) estimates of future demand, and (ii) competitive pricing pressures.
Inventory Obsolescence and Markdowns
The Company evaluates its current level of inventory considering historical sales and other factors and, based on this evaluation, classify inventory markdowns in the income statement as a component of cost of goods sold pursuant to Paragraph 420-10-S99 of the FASB Accounting Standards Codification to adjust inventory to net realizable value. These markdowns are estimates, which could vary significantly from actual requirements if future economic conditions, customer demand or competition differ from expectations.
There was no inventory obsolescence for the reporting period ended September 30, 2014 or 2013.
There was no lower of cost or market adjustments for the reporting period ended September 30, 2014 or 2013.
Property and Equipment
Property and equipment is recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation is computed by the straight-line method (after taking into account their respective estimated residual values) over the estimated useful lives of the respective assets as follows:
(*) Amortized on a straight-line basis over the term of the lease or the estimated useful lives, whichever is shorter.
Upon sale or retirement, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the statements of operations.
Leases
Lease agreements are evaluated to determine whether they are capital leases or operating leases in accordance with paragraph 840-10-25-1 of the FASB Accounting Standards Codification (“Paragraph 840-10-25-1”). Pursuant to Paragraph 840-10-25-1 a lessee and a lessor shall consider whether a lease meets any of the following four criteria as part of classifying the lease at its inception under the guidance in the Lessees Subsection of this Section (for the lessee) and the Lessors Subsection of this Section (for the lessor): a. Transfer of ownership. The lease transfers ownership of the property to the lessee by the end of the lease term. This criterion is met in situations in which the lease agreement provides for the transfer of title at or shortly after the end of the lease term in exchange for the payment of a nominal fee, for example, the minimum required by statutory regulation to transfer title. b. Bargain purchase option. The lease contains a bargain purchase option. c. Lease term. The lease term is equal to 75 percent or more of the estimated economic life of the leased property. d. Minimum lease payments. The present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at lease inception over any related investment tax credit retained by the lessor and expected to be realized by the lessor. In accordance with paragraphs 840-10-25-29 and 840-10-25-30, if at its inception a lease meets any of the four lease classification criteria in Paragraph 840-10-25-1, the lease shall be classified by the lessee as a capital lease; and if none of the four criteria in Paragraph 840-10-25-1 are met, the lease shall be classified by the lessee as an operating lease. Pursuant to Paragraph 840-10-25-31 a lessee shall compute the present value of the minimum lease payments using the lessee's incremental borrowing rate unless both of the following conditions are met, in which circumstance the lessee shall use the implicit rate: a. It is practicable for the lessee to learn the implicit rate computed by the lessor. b. The implicit rate computed by the lessor is less than the lessee's incremental borrowing rate. Capital lease assets are depreciated on a straight line method, over the capital lease assets estimated useful lives consistent with the Company’s normal depreciation policy for tangible fixed assets. Interest charges are expensed over the period of the lease in relation to the carrying value of the capital lease obligation.
Operating leases primarily relate to the Company’s leases of office spaces. When the terms of an operating lease include tenant improvement allowances, periods of free rent, rent concessions, and/or rent escalation amounts, the Company establishes a deferred rent liability for the difference between the scheduled rent payment and the straight-line rent expense recognized, which is amortized over the underlying lease term on a straight-line basis as a reduction of rent expense.
Intangible Assets Other Than Goodwill
The Company has adopted Subtopic 350-30 of the FASB Accounting Standards Codification for intangible assets other than goodwill. Under the requirements, 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:
(*) 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
(**) Amortized on a straight-line basis over the terms of the agreements
Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.
Goodwill
The Company follows Subtopic 350-20 of the FASB Accounting Standards Codification for 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. Under paragraph 350-20-35-1 of the FASB Accounting Standards Codification, goodwill acquired in a business combination with indefinite useful lives are not amortized; rather, goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate the asset might be impaired.
Website Development Costs
The Company has adopted Subtopic 350-50 of the FASB Accounting Standards Codification for website development costs. Under the requirements of Sections 350-50-15 and 350-50-25, the Company capitalizes costs incurred to develop a website as website development costs, which are amortized on a straight-line basis over the estimated useful lives of three (3) years. Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.
Customer Deposits
Customer deposits primarily represent amounts received from customers for future delivery of products, which are fully or partially refundable depending upon the terms and conditions of the sales agreements.
Related Parties
The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.
Pursuant to Section 850-10-20 the Related parties include a. affiliates (“Affiliate” means, with respect to any specified Person, any other Person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such Person, as such terms are used in and construed under Rule 405 under the Securities Act) of the Company; b. entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825-10-15, to be accounted for by the equity method by the investing entity; c. trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d. principal owners of the Company; e. management of the Company; f. other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g. other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
The financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: a. the nature of the relationship(s) involved; b. a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c. the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d. amount due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Product Warranty
The Company estimates future costs of warranty obligations in accordance with ASC 460-10, which requires an entity to disclose and recognize a liability for the fair value of the obligation it assumes upon issuance of a warranty. The Company warrants most of its products for a specific period of time, usually 12 months, against material defects. The Company provides for the estimated future costs of warranty obligations in cost of revenues when the related revenues are recognized. The accrued warranty costs represent the best estimate at the time of sale of the total costs that the Company will incur to repair or replace product parts that fail while still under warranty. The amount of the accrued estimated warranty costs obligation for established products is primarily based on historical experience as to product failures adjusted for current information on repair costs. For new products, estimates include the historical experience of similar products, as well as reasonable allowance for warranty expenses associated with new products. On a quarterly basis, the Company reviews the accrued warranty costs and updates the historical warranty cost trends, if required.
Commitment and Contingencies
The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
Revenue Recognition
The Company follows paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company will recognize 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 medical practices. The Company earns and records 50% of the fees the medical practice collects as management fees when collected per management service agreement.
Shipping and Handling Costs
The Company accounts for shipping and handling fees in accordance with paragraph 605-45-45-19 of the FASB Accounting Standards Codification. While amounts charged to customers for shipping products are included in revenues, the related costs are classified in cost of goods sold as incurred.
Stock-Based Compensation for Obtaining Employee Services
The Company accounts for share-based payment transactions issued to employees under the guidance of the Topic 718 Compensation-Stock Compensation of the FASB Accounting Standards Codification (“ASC Topic 718”).
Pursuant to ASC Section 718-10-20 an employee is an individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. Internal Revenue Service (“IRS”) Revenue Ruling 87-41. A non-employee director does not satisfy this definition of employee. Nevertheless, non-employee directors acting in their role as members of a board of directors are treated as employees if those directors were elected by the employer’s shareholders or appointed to a board position that will be filled by shareholder election when the existing term expires. However, that requirement applies only to awards granted to non-employee directors for their services as directors. Awards granted to non-employee directors for other services shall be accounted for as awards to non-employees.
Pursuant to ASC Paragraphs 718-10-30-2 and 718-10-30-3 a share-based payment transaction with employees shall be measured based on the fair value of the equity instruments issued and an entity shall account for the compensation cost from share-based payment transactions with employees in accordance with the fair value-based method, i.e., the cost of services received from employees in exchange for awards of share-based compensation generally shall be measured based on the grant-date fair value of the equity instruments issued or the fair value of the liabilities incurred/settled.
Pursuant to ASC Paragraphs 718-10-30-6 and 718-10-30-9 the measurement objective for equity instruments awarded to employees is to estimate the fair value at the grant date of the equity instruments that the entity is obligated to issue when employees have rendered the requisite service and satisfied any other conditions necessary to earn the right to benefit from the instruments (for example, to exercise share options). That estimate is based on the share price and other pertinent factors, such as expected volatility, at the grant date. As such, the fair value of an equity share option or similar instrument shall be estimated using a valuation technique such as an option pricing model. For this purpose, a similar instrument is one whose fair value differs from its intrinsic value, that is, an instrument that has time value.
If the Company’s common shares are traded in one of the national exchanges the grant-date share price of the Company’s common stock will be used to measure the fair value of the common shares issued, however, if the Company’s common shares are thinly traded the use of share prices established in its most recent private placement memorandum (“PPM”), or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
Pursuant to ASC Paragraph 718-10-55-21 if an observable market price is not available for a share option or similar instrument with the same or similar terms and conditions, an entity shall estimate the fair value of that instrument using a valuation technique or model that meets the requirements in paragraph 718-10-55-11 and takes into account, at a minimum, all of the following factors:
a.
The exercise price of the option.
b.
The expected term of the option, taking into account both the contractual term of the option and the effects of employees’ expected exercise and post-vesting employment termination behavior: The expected life of options and similar instruments represents the period of time the option and/or warrant are expected to be outstanding. Pursuant to paragraph 718-10-S99-1, it may be appropriate to use the simplified method, i.e., expected term = ((vesting term + original contractual term) / 2), if (i) A company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its equity shares have been publicly traded; (ii) A company significantly changes the terms of its share option grants or the types of employees that receive share option grants such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term; or (iii) A company has or expects to have significant structural changes in its business such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term. The Company uses the simplified method to calculate expected term of share options and similar instruments as the company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
c.
The current price of the underlying share.
d.
The expected volatility of the price of the underlying share for the expected term of the option. Pursuant to ASC Paragraph 718-10-55-25 a newly publicly traded entity might base expectations about future volatility on the average volatilities of similar entities for an appropriate period following their going public. A nonpublic entity might base its expected volatility on the average volatilities of otherwise similar public entities. For purposes of identifying otherwise similar entities, an entity would likely consider characteristics such as industry, stage of life cycle, size, and financial leverage. Because of the effects of diversification that are present in an industry sector index, the volatility of an index should not be substituted for the average of volatilities of otherwise similar entities in a fair value measurement. Pursuant to paragraph 718-10-S99-1 if shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market. The Company uses the average historical volatility of the comparable companies over the expected term of the share options or similar instruments as its expected volatility.
e.
The expected dividends on the underlying share for the expected term of the option. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments.
f.
The risk-free interest rate(s) for the expected term of the option. Pursuant to ASC 718-10-55-28 a U.S. entity issuing an option on its own shares must use as the risk-free interest rates the implied yields currently available from the U.S. Treasury zero-coupon yield curve over the contractual term of the option if the entity is using a lattice model incorporating the option’s contractual term. If the entity is using a closed-form model, the risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the assumption in the model.
Pursuant to ASC Paragraphs 718-10-30-11 and 718-10-30-17 a restriction that stems from the forfeitability of instruments to which employees have not yet earned the right, such as the inability either to exercise a non-vested equity share option or to sell non-vested shares, is not reflected in estimating the fair value of the related instruments at the grant date. Instead, those restrictions are taken into account by recognizing compensation cost only for awards for which employees render the requisite service and a non-vested equity share or non-vested equity share unit awarded to an employee shall be measured at its fair value as if it were vested and issued on the grant date.
Pursuant to ASC Paragraphs 718-10-35-2 and 718-10-35-3 the compensation cost for an award of share-based employee compensation classified as equity shall be recognized over the requisite service period, with a corresponding credit to equity (generally, paid-in capital). The requisite service period is the period during which an employee is required to provide service in exchange for an award, which often is the vesting period. The total amount of compensation cost recognized at the end of the requisite service period for an award of share-based compensation shall be based on the number of instruments for which the requisite service has been rendered (that is, for which the requisite service period has been completed). An entity shall base initial accruals of compensation cost on the estimated number of instruments for which the requisite service is expected to be rendered. That estimate shall be revised if subsequent information indicates that the actual number of instruments is likely to differ from previous estimates. The cumulative effect on current and prior periods of a change in the estimated number of instruments for which the requisite service is expected to be or has been rendered shall be recognized in compensation cost in the period of the change. Previously recognized compensation cost shall not be reversed if an employee share option (or share unit) for which the requisite service has been rendered expires unexercised (or unconverted).
Under the requirement of ASC Paragraph 718-10-35-8 the Company made a policy decision to recognize compensation cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service period for the entire award.
Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services
The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under the guidance of Sub-topic 505-50 of the FASB Accounting Standards Codification (“Sub-topic 505-50”).
Pursuant to ASC paragraph 505-50-25-7, if fully vested, non-forfeitable equity instruments are issued at the date the grantor and grantee enter into an agreement for goods or services (no specific performance is required by the grantee to retain those equity instruments), then, because of the elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement date has been reached. A grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement is entered into). Whether the corresponding cost is an immediate expense or a prepaid asset (or whether the debit should be characterized as contra-equity under the requirements of paragraph 505-50-45-1) depends on the specific facts and circumstances. Pursuant to ASC paragraph 505-50-45-1, a grantor may conclude that an asset (other than a note or a receivable) has been received in return for fully vested, non-forfeitable equity instruments that are issued at the date the grantor and grantee enter into an agreement for goods or services (and no specific performance is required by the grantee in order to retain those equity instruments). Such an asset shall not be displayed as contra-equity by the grantor of the equity instruments. The transferability (or lack thereof) of the equity instruments shall not affect the balance sheet display of the asset. This guidance is limited to transactions in which equity instruments are transferred to other than employees in exchange for goods or services.
Pursuant to Paragraphs 505-50-25-8 and 505-50-25-9, an entity may grant fully vested, non-forfeitable equity instruments that are exercisable by the grantee only after a specified period of time if the terms of the agreement provide for earlier exercisability if the grantee achieves specified performance conditions. Any measured cost of the transaction shall be recognized in the same period(s) and in the same manner as if the entity had paid cash for the goods or services or used cash rebates as a sales discount instead of paying with, or using, the equity instruments. A recognized asset, expense, or sales discount shall not be reversed if a stock option that the counterparty has the right to exercise expires unexercised.
Pursuant to ASC Paragraphs 505-50-30-2 and 505-50-30-11 share-based payment transactions with nonemployees shall be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The issuer shall measure the fair value of the equity instruments in these transactions using the stock price and other measurement assumptions as of the earlier of the following dates, referred to as the measurement date: (a) The date at which a commitment for performance by the counterparty to earn the equity instruments is reached (a performance commitment); or (b) The date at which the counterparty's performance is complete. If the Company’s common shares are traded in one of the national exchanges the grant-date share price of the Company’s common stock will be used to measure the fair value of the common shares issued, however, if the Company’s common shares are thinly traded the use of share prices established in the Company’s most recent private placement memorandum (“PPM”), or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
Pursuant to ASC Paragraph 718-10-55-21 if an observable market price is not available for a share option or similar instrument with the same or similar terms and conditions, an entity shall estimate the fair value of that instrument using a valuation technique or model that meets the requirements in paragraph 718-10-55-11 and takes into account, at a minimum, all of the following factors:
a.
The exercise price of the option.
b.
The expected term of the option, taking into account both the contractual term of the option and the effects of employees’ expected exercise and post-vesting employment termination behavior: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and holder’s expected exercise behavior into the fair value (or calculated value) of the instruments. The Company uses historical data to estimate holder’s expected exercise behavior. If the Company is a newly formed corporation or shares of the Company are thinly traded the contractual term of the share options and similar instruments is used as the expected term of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
c.
The current price of the underlying share.
d.
The expected volatility of the price of the underlying share for the expected term of the option. Pursuant to ASC Paragraph 718-10-55-25 a newly publicly traded entity might base expectations about future volatility on the average volatilities of similar entities for an appropriate period following their going public. A nonpublic entity might base its expected volatility on the average volatilities of otherwise similar public entities. For purposes of identifying otherwise similar entities, an entity would likely consider characteristics such as industry, stage of life cycle, size, and financial leverage. Because of the effects of diversification that are present in an industry sector index, the volatility of an index should not be substituted for the average of volatilities of otherwise similar entities in a fair value measurement. Pursuant to paragraph 718-10-S99-1 if shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market. The Company uses the average historical volatility of the comparable companies over the expected term of the share options or similar instruments as its expected volatility.
e.
The expected dividends on the underlying share for the expected term of the option. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments.
f.
The risk-free interest rate(s) for the expected term of the option. Pursuant to ASC 718-10-55-28 a U.S. entity issuing an option on its own shares must use as the risk-free interest rates the implied yields currently available from the U.S. Treasury zero-coupon yield curve over the contractual term of the option if the entity is using a lattice model incorporating the option’s contractual term. If the entity is using a closed-form model, the risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the assumption in the model.
Pursuant to ASC paragraph 505-50-S99-1, if the Company receives a right to receive future services in exchange for unvested, forfeitable equity instruments, those equity instruments are treated as unissued for accounting purposes until the future services are received (that is, the instruments are not considered issued until they vest). Consequently, there would be no recognition at the measurement date and no entry should be recorded.
Deferred Tax Assets and Income Tax Provision
The Company accounts for income taxes under Section 740-10-30 of the FASB Accounting Standards Codification, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the fiscal year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Statements of Income and Comprehensive Income in the period that includes the enactment date.
The Company adopted section 740-10-25 of the FASB Accounting Standards Codification (“Section 740-10-25”) with regards to uncertainty income taxes. Section 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under Section 740-10-25, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Section 740-10-25 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.
The estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying consolidated balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred tax assets recorded on its consolidated balance sheets and provides valuation allowances as management deems necessary.
Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
Tax years that remain subject to examination by major tax jurisdictions
The Company discloses tax years that remain subject to examination by major tax jurisdictions pursuant to the ASC Paragraph 740-10-50-15.
Earnings per Share
Earnings per share ("EPS") is the amount of earnings attributable to each share of common stock. For convenience, the term is used to refer to either earnings or loss per share. EPS is computed pursuant to section 260-10-45 of the FASB Accounting Standards Codification. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16 Basic EPS shall be computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Income available to common stockholders shall be computed by deducting both the dividends declared in the period on preferred stock (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned) from income from continuing operations (if that amount appears in the income statement) and also from net income. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued during the period to reflect the potential dilution that could occur from common shares issuable through contingent shares issuance arrangement, stock options or warrants.
Pursuant to ASC Paragraphs 260-10-45-45-21 through 260-10-45-45-23 Diluted EPS shall be based on the most advantageous conversion rate or exercise price from the standpoint of the security holder. The dilutive effect of outstanding call options and warrants (and their equivalents) issued by the reporting entity shall be reflected in diluted EPS by application of the treasury stock method unless the provisions of paragraphs 260-10-45-35 through 45-36 and 260-10-55-8 through 55-11 require that another method be applied. Equivalents of options and warrants include non-vested stock granted to employees, stock purchase contracts, and partially paid stock subscriptions (see paragraph 260-10-55-23). Anti-dilutive contracts, such as purchased put options and purchased call options, shall be excluded from diluted EPS. Under the treasury stock method: a. Exercise of options and warrants shall be assumed at the beginning of the period (or at time of issuance, if later) and common shares shall be assumed to be issued. b. The proceeds from exercise shall be assumed to be used to purchase common stock at the average market price during the period. (See paragraphs 260-10-45-29 and 260-10-55-4 through 55-5.) c. The incremental shares (the difference between the number of shares assumed issued and the number of shares assumed purchased) shall be included in the denominator of the diluted EPS computation.
The Company’s contingent shares issuance arrangement, stock options or warrants are as follows:
There were approximate 7,975,808 and 11,380,773 potentially outstanding dilutive common shares for the reporting period ended September 30, 2014 and 2013, respectively, which were excluded from the diluted earnings per share calculation as they were anti-dilutive.
Cash Flows Reporting
The Company adopted paragraph 230-10-45-24 of the FASB Accounting Standards Codification for cash flows reporting, classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation method (“Indirect method”) as defined by paragraph 230-10-45-25 of the FASB Accounting Standards Codification to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income that do not affect operating cash receipts and payments. The Company reports the reporting currency equivalent of foreign currency cash flows, using the current exchange rate at the time of the cash flows and the effect of exchange rate changes on cash held in foreign currencies is reported as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents and separately provides information about investing and financing activities not resulting in cash receipts or payments in the period pursuant to paragraph 830-230-45-1 of the FASB Accounting Standards Codification.
Segment Information
The Company follows Topic 280 of the FASB Accounting Standards Codification for segment reporting. Pursuant to Paragraph 280-10-50-1 an operating segment is a component of a public entity that has all of the following characteristics: a. It engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same public entity). b. Its operating results are regularly reviewed by the public entity's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. c. Its discrete financial information is available. In accordance with Paragraph 280-10-50-5 the term chief operating decision maker identifies a function, not necessarily a manager with a specific title. That function is to allocate resources to and assess the performance of the segments of a public entity. Often the chief operating decision maker of a public entity is its chief executive officer or chief operating officer, but it may be a group consisting of, for example, the public entity's president, executive vice presidents, and others. Pursuant to Paragraph 280-10-50-10 a public entity shall report separately information about each operating segment that meets both of the following criteria: a. Has been identified in accordance with paragraphs 280-10-50-1 and 280-10-50-3 through 50-9 or results from aggregating two or more of those segments in accordance with the following paragraph; and b. Exceeds the quantitative thresholds in paragraph 280-10-50-12. In accordance with Paragraph 280-10-50-12 a public entity shall report separately information about an operating segment that meets any of the following quantitative thresholds: a. Its reported revenue, including both sales to external customers and intersegment sales or transfers, is 10 percent or more of the combined revenue, internal and external, of all operating segments. b. The absolute amount of its reported profit or loss is 10 percent or more of the greater, in absolute amount, of either: 1. The combined reported profit of all operating segments that did not report a loss, or 2. The combined reported loss of all operating segments that did report a loss. c. Its assets are 10 percent or more of the combined assets of all operating segments. Pursuant to Paragraphs 280-10-50-22 and 280-10-50-29, a public entity shall report a measure of profit or loss and total assets for each reportable segment and provide an explanation of the measurements of segment profit or loss and segment assets for each reportable segment. At a minimum, a public entity shall disclose all of the following: a. The basis of accounting for any transactions between reportable segments. b. The nature of any differences between the measurements of the reportable segments' profits or losses and the public entity's consolidated income (loss) before income tax provision, extraordinary items, and discontinued operations (if not apparent from the reconciliations described in paragraphs 280-10-50-30 through 50-31). c. The nature of any differences between the measurements of the reportable segments’ assets and the public entity's consolidated assets (if not apparent from the reconciliations described in paragraphs 280-10-50-30 through 50-31). d. The nature of any changes from prior periods in the measurement methods used to determine reported segment profit or loss and the effect, if any, of those changes on the measure of segment profit or loss. e. The nature and effect of any asymmetrical allocations to reportable segments.
Subsequent Events
The Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate subsequent events through the date when the financial statements were issued. Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed to users, such as through filing them on EDGAR.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued the FASB Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”).
This guidance amends the existing FASB Accounting Standards Codification, creating a new Topic 606, Revenue from Contracts with Customer. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
To achieve that core principle, an entity should apply the following steps:
1.
Identify the contract(s) with the customer
2.
Identify the performance obligations in the contract
3.
Determine the transaction price
4.
Allocate the transaction price to the performance obligations in the contract
5.
Recognize revenue when (or as) the entity satisfies a performance obligations
The ASU also provides guidance on disclosures that should be provided to enable financial statement users to understand the nature, amount, timing, and uncertainty of revenue recognition and cash flows arising from contracts with customers. Qualitative and quantitative information is required about the following:
1.
Contracts with customers - including revenue and impairments recognized, disaggregation of revenue, and information about contract balances and performance obligations (including the transaction price allocated to the remaining performance obligations)
2.
Significant judgments and changes in judgments - determining the timing of satisfaction of performance obligations (over time or at a point in time), and determining the transaction price and amounts allocated to performance obligations
3.
Assets recognized from the costs to obtain or fulfill a contract.
ASU 2014-09 is effective for periods beginning after December 15, 2016, including interim reporting periods within that reporting period for all public entities. Early application is not permitted.
In June 2014, the FASB issued the FASB Accounting Standards Update No. 2014-12 “Compensation-Stock Compensation (Topic 718) : Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (“ASU 2014-12”).
The amendments clarify the proper method of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The Update requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered.
The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted.
In August 2014, the FASB issued the FASB Accounting Standards Update No. 2014-15 “Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).
In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to b
e issued). The term probable is used consistently with its use in Topic 450, Contingencies.
When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate the substantial doubt. The mitigating effect of management’s plans should be considered only to the extent that (1) it is probable that the plans will be effectively implemented and, if so, (2) it is probable that the plans will mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.
If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the footnotes):
a.
Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)
b.
Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
c.
Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.
If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). Additionally, the entity should disclose information that enables users of the financial statements to understand all of the following:
a.
Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern
b.
Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
c.
Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.
The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.
Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying financial statements.
Note 3 - Going Concern
The Company has elected to adopt early application of Accounting Standards Update No. 2014-15, “Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).
The Company’s consolidated financial statements have been prepared assuming that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As reflected in the consolidated financial statements, the Company had an accumulated deficit at September 30, 2014, a net loss and net cash used in operating activities for the reporting period then ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The Company is attempting to further implement its business plan and generate sufficient revenue; however, the Company’s cash position may not be sufficient to support its daily operations. While the Company believes in the viability of its strategy to further implement its business plan and generate sufficient revenue and in its ability to raise additional funds by way of a public or private offering, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon its ability to further implement its business plan and generate sufficient revenue and its ability to raise additional funds by way of a public or private offering.
The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 4 - Business Acquisitions
(i) Acquisition of National Pain Centers, Inc
On January 28, 2014, the Company entered into an Exchange Agreement (“Exchange Agreement”) to acquire all of the issued and outstanding shares of common stock of National Pain Centers, Inc. ("NPC"), a Nevada holding corporation based in Deer Park, Illinois.
On February 28, 2014, the Company consummated the Exchange Agreement and acquired all of the issued and outstanding shares of common stock of NPC for and in consideration of the issuance of 5,000,000 shares of common stock of the Company valued at $0.24 per share or $1,200,000, the relative fair value of the PPM consummated on January 13, 2014, immediately prior to the consummation of the Exchange Agreement, which was recorded as goodwill as NPC is a newly formed entity. NPC is now operated as a wholly-owned subsidiary of the Company.
(ii) Acquisition of Certain Assets and Settlement of Certain Debt of SMI Holdings, Inc.
On April 4, 2014, StealthCo consummated an Asset Purchase Agreement (“Purchase Agreement”) and acquired certain assets of SMI. In consideration for the purchased assets, the Company issued 375,820 shares of $0.001 par value common stock (“WCUI Shares”) and warrants (“Warrants”) to acquire 90,505 WCUI Shares with an exercise price of $0.665 per share expiring five years from the date of issuance. In addition, the Company settled certain debt of SMI through the issuance of 105,093 shares of $0.001 par value common stock (“WCUI Shares”) and warrants (“Warrants”) to acquire 40,761 WCUI Shares with an exercise price of $0.665 per share expiring five years from the date of issuance.
Pursuant to the terms and conditions of the Purchase Agreement, the Company would be obligated to pay royalties for a period commencing with the Closing Date and continuing through the third anniversary of the Closing Date or the date upon which the aggregate, cumulative royalties paid equal $250,000, whichever first occurs. The Company would pay royalties annually in an amount equal to 5% of Net Revenues collected by the Company and arising from or relating to the sale of SMI authentication and encryption products and services, subject to an aggregate cap of $250,000.
Identification of the Accounting Acquirer
The Company used the existence of a controlling financial interest to identify the acquirer-the entity that obtains control of the acquiree in accordance with ASC paragraph 805-20-25-5 and identifies the acquisition date, which is the date on which it obtains control of the acquiree in accordance with ASC paragraph 805-20-25-6. The management of the Company specifically addressed (i) the ownership interest of each party after the acquisition; (ii) the members of the board of directors from both companies; and (iii) senior management from both companies and determined that Wellness Center USA, Inc. was the accounting acquirer for the merger between Wellness Center USA, Inc. and SMI.
The specific control factors considered to determine which entity was the accounting acquirer are as follows:
Intangible Assets Identification, Estimated Fair Value and Useful Lives
The Company considered this acquisition a bargain purchase and did not identify any separate recognizable intangible assets that possessed economic value at the date of acquisition.
Valuation of Consideration and Allocation of Purchase Price
In consideration for the purchased assets and settlement of certain debt, the Company issued to the stockholders and debt holders of SMI (i) 375,820 and 105,093 shares, or 480,913 shares in aggregate of $0.001 par value common stock (“WCUI Shares”) and (ii) warrants (“Warrants”) to acquire 90,505 and 40,761 WCUI Shares, or 131,266 WCUI shares in aggregate with an exercise price of $0.665 per share expiring five years from the date of issuance, respectively. Pursuant to ASC Paragraphs 505-50-30-2 and 505-50-30-11 share-based payment transactions with nonemployees shall be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The Company determined that the fair value of the equity instruments issued is more reliably measurable and valued (i) 480,913 common shares issued at $0.665 per share, the weekly average stock price proceeding the acquisition date (the measurement date), or $319,907; and (ii) 131,266 WCUI shares in aggregate with an exercise price of $0.665 per share expiring five years from the date of issuance at $0.3282 per warrant share or $43,082 on the date of grant (the measurement date) using the Black-Scholes option-pricing model.
The purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed, and any non-controlling interest, if any, based on their estimated fair values at the date of acquisition as follows:
Note 5 - Inventories
Inventories consisted of the following:
*
PSI's purchased parts from vendors and assembled them to finished goods. Due to the short duration time for the assembly, PSI did not capitalize the assembly time to finished good and there was no material work-in-process inventory at September 30, 2014 or 2013.
Slow-Moving or Obsolescence Markdowns
The Company recorded no inventory obsolescence adjustments for the reporting period ended September 30, 2014 or 2013.
Note 6 - Property and Equipment
Property and equipment, stated at cost, less accumulated depreciation consisted of the following:
(i)
Depreciation Expense
Depreciation expense was $26,093 and $33,367 for the reporting period ended September 30, 2014 and 2013, respectively.
(ii)
Impairment
The Company completed the annual impairment test of property and equipment and determined that there was no impairment as the fair value of property and equipment, exceeded their carrying values at September 30, 2014.
Note 7 - Intangible Assets Other Than Goodwill
Exclusive License Agreements
(i)
Exclusive License Agreement for Provisional Patent No. 1 Signed on August 25, 2009
Grant of License
An exclusive license agreement ("Exclusive License Agreement") was made and entered into on August 25, 2009, by and among Scot L. Johnson ("Johnson"), Edwin T. Longo ("Longo", and together with Johnson collectively referred to herein as "Licensors"), and Psoria-Shield Inc. (“PSI” or "Licensee").
Upon the execution of the Exclusive License Agreement, Licensee acquired, and Licensors granted to Licensee, for the duration of the License Term (as defined below), the sole and exclusive (including to the exclusion of Licensors), worldwide, paid-up, royalty-free right and license under the Licensed Patents, Know-how, Technical Data, and any Improvements as defined in the Exclusive License Agreement to develop, make, have made, use, sell, offer to sell, distribute, export, import, and otherwise commercialize the Licensed Product(s) in the Field. This license shall include the right of Licensee to grant sublicenses and distribution rights in the Field.
Consideration for License
As the sole and exclusive consideration for the rights and license granted in the Exclusive License Agreement, each of the Licensors received, on the date of signing, 3,000,000 shares of the common stock of PSI, or 6,000,000 shares of PSI in aggregate, which were valued at the stockholders’ cost basis of nil.
License Term
The term of the rights and license granted herein shall commence upon the date of signing of the Exclusive License Agreement and shall continue in effect in perpetuity unless and to the extent terminated as set forth in Sections 5.2 through 5.4 of the License Term of the Exclusive License Agreement.
The License may be terminated at any time by the mutual written agreement of each of the Licensors and Licensee.
(ii)
Exclusive License Agreement for Provisional Patent No. 2 Signed on December 11, 2010
Grant of License
An exclusive license agreement ("Exclusive License Agreement") was made and entered into on December 11, 2010, by and between Scot L. Johnson ("Johnson" or referred to herein as "Licensor"), and Psoria-Shield Inc. (“PSI” or "Licensee").
Upon the execution of the Exclusive License Agreement, Licensee acquired, and Licensor granted to Licensee, for the duration of the License Term (as defined below), the sole and exclusive (including to the exclusion of Licensor), worldwide, paid-up, royalty-free right and license under the Licensed Patents, Know-how, Technical Data, and any Improvements as defined in the Exclusive License Agreement to develop, make, have made, use, sell, offer to sell, distribute, export, import, and otherwise commercialize the Licensed Product(s) in the Field. This license shall include the right of Licensee to grant sublicenses and distribution rights in the Field.
Consideration for License
As the sole and exclusive consideration for the rights and license granted in the Exclusive License Agreement, the Licensor received, on the date of signing, 5,000 shares of the common stock of PSI, which was valued at the stockholder’s cost basis of $5,000.
License Term
The term of the rights and licenses granted herein shall commence upon the date of signing of the Exclusive License Agreement and shall continue in effect in perpetuity unless and to the extent terminated as set forth in Sections 5.2 through 5.4 of the License Term of the Exclusive License Agreement.
The License may be terminated at any time by the mutual written agreement of each of the Licensors and Licensee.
Amortization Expense
Amortization expense was $187 each for the reporting period ended September 30, 2014 and 2013.
Patents - StealthCo
The Company follows the guidelines as set out in paragraph 350-30-25-3 and paragraph 350-30-35-6 of the FASB Accounting Standards Codification for patent. For acquired patents the Company records the costs to acquire patents as patent and amortizes the patent acquisition cost over its remaining legal life, or estimated useful life, or the term of the contract, whichever is shorter. For internal developed patents, all costs incurred to the point when a patent application is to be filed are expended as incurred as research and development expense; patent application costs, generally legal costs, thereafter incurred are capitalized, which are to be amortized once the patents are granted or expended if the patent application is rejected. The Company amortizes the internal developed patents over the shorter of the expected useful lives or the legal lives of the patents, which are generally 17 to 20 years for domestic patents and 5 to 20 years for foreign patents from the date when the patents are granted. The costs of defending and maintaining patents are expended as incurred. Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.
The Company acquired certain patents from the acquisition of certain assets from SMI and amortizes the acquisition cost over patent acquisition cost over its remaining legal life.
(i)
Amortization Expense
Amortization expense was $11,218 for the reporting period ended September 30, 2014.
Summary of Patents and Exclusive Licenses
The patents and exclusive licenses were as follows:
Acquired Technologies
Acquired technologies, stated at cost, less accumulated amortization consisted of the following:
Amortization Expense
Amortization expense was $112,872 and $120,996 for the reporting period ended September 30, 2014 and 2013, respectively
Non-compete Agreements
Non-compete agreements, stated at cost, less accumulated amortization consisted of the following:
Amortization Expense
Amortization expense was $49,998 and $69,996 for the reporting period ended September 30, 2014 and 2013, respectively.
Trademarks
Trademarks, stated at cost, less accumulated amortization consisted of the following:
Amortization Expense
Amortization expense was $96,114 and $102,228 for the reporting period ended September 30, 2014 and 2013, respectively.
Impairment
The Company completed the annual impairment test of intangible assets other than goodwill inclusive of acquired technologies, exclusive licenses, non-compete agreements and trademarks and determined that there was total $440,880 impairment to the fair value of intangible assets other than goodwill inclusive of acquired technologies, exclusive licenses, non-compete agreements, and trademarks.
Note 8 - Goodwill
Goodwill, stated at cost, less accumulated impairment, if any, consisted of the following:
Impairment
The Company completed the impairment test of goodwill and determined that there was an impairment of $2,868,045 to the goodwill at September 30, 2014.
Note 9 - Website Development Costs
Website development costs, stated at cost, less accumulated amortization consisted of the following:
(i)
Amortization Expense
Amortization expense was $8,435 and $5,928 for the reporting period ended September 30, 2014 and 2013, respectively.
(ii)
Impairment
The Company completed the annual impairment test of website development costs and determined that there was no impairment as the fair value of website development costs, exceeded their carrying values at September 30, 2013.
Note 10 - Convertible Notes Payable - JMJ
(i) April 16, 2014 Note Payable
General Terms
On April 16, 2014, the Company (the “Borrower”) entered into a Promissory Note Agreement (the “Note”) with an investor (the “Lender”) for up to $350,000 principal that is to be transferred in tranches. The consideration is $315,000 payable with a 10% original interest discount and will mature after two years from the date of each payment. The Lender shall pay $150,000 of Consideration upon closing of this Note. The Lender may pay additional Consideration to the Borrower in such amounts and at such dates as Lender may choose in its sole discretion.
Zero Percent Interest for the First Three Months
The Company may repay each payment of consideration on or before 90 days from the payment date with zero percent interest and a one-time interest charge of 12% shall be applied to principal sum after 90 days from the effective date.
Conversion
The Lender has the right, at any time after 180 days from the effective date, to convert the outstanding and unpaid notes principal and interest due into the Company’s common shares. The conversion price is the lesser of $0.70 or 65% of the average of the two lowest closing prices in the 25 trading days previous to the conversion.
Piggyback Registration Rights
The Company shall include on the next registration statement the Company files with SEC (or on the subsequent registration statement if such registration statement is withdrawn) all shares issuable upon conversion of this Note. Failure to do so will result in liquidated damages of 25% of the outstanding principal balance of this Note, but not less than $25,000, being immediately due and payable to the Holder at its election in the form of cash payment or addition to the balance of this Note.
Events of Default
The following are events of default under this Note: (i) the Borrower shall fail to pay any principal under the Note when due and payable (or payable by conversion) thereunder; or (ii) the Borrower shall fail to pay any interest or any other amount under the Note when due and payable (or payable by conversion) thereunder: or (iii) a receiver, trustee or other similar official shall be appointed over the Borrower nr a material part of its assets and such appointment shall remain uncontested for twenty (20) days or shall not be dismissed or discharged within sixty (60) days; or (iv) the Borrower shall become insolvent or generally fails to pay, or admits in writing its inability to pay its debt as they become due, subject to applicable grace periods, if any; or (v) the Borrower shall make a general assignment for the benefit of creditors: or (vi) the Borrower shall file a petition for relief under any bankruptcy, insolvency or similar law (domestic or foreign); or (vii) an involuntary proceeding shall be commenced or filed against the Borrower: or (viii) the Borrower shall lose its status as "DTC Eligible" or the borrower's shareholders shall lose the ability to deposit (either electronically or by physical certificates. or otherwise) shares into the OTC System: or (ix) the Borrower shall become delinquent in its filing requirements as a fully-reporting issuer registered with the SEC; or (x) the Borrower shall fail to meet all requirements to satisfy the availability of Rule 144 to the Lender or its assigns including but not limited to timely fulfillment of its filing requirements as a fully reporting issuer registered with the SEC requirements for XBRL filings, and requirements for disclosure of financial statements on its website.
Remedies
In the event of any default the outstanding principal amount of this Note, plus accrued but unpaid interest, liquidated damages, fees and other amounts owing in respect thereof through the date of acceleration, shall become, at the Lender's election, immediate due and payable in cash at the Mandatory Default amount. The Mandatory Default Amount means the greater of (i) the outstanding principal amount of the Note, plus all accrued and unpaid interest, liquidated damages, fees and other amounts hereon, divided by the Conversion price on the date the Mandatory Default Amount is either demanded or paid in full, whichever has a lower Conversion Price, multiplied by the volume weighted average price (“VWAP”) on the date the Mandatory Default Amount is either demanded or paid in full, whichever has a higher VWAP, or (ii) 150% or the outstanding principal amount of this Note, plus 100% of accrued and unpaid interest, liquidated damages, fees and other amounts hereon. Commencing five (5) days after the occurrence of any event of default that results in the eventual acceleration of this Note, the interest rate on this Note shall accrue at an interest rate equal to the lessor of 18% per annum or the maximum rate permitted under applicable law.
The notes payable are as follows:
Note 11 - Related Party Transactions
Related Parties
Related parties with whom the Company had transactions are:
Advances from Stockholders
From time to time, stockholders of the Company advance funds to the Company for working capital purpose. Those advances are unsecured, non-interest bearing and due on demand.
Management service agreement between NPC and National Pain Centers, LLC
On February 28, 20124, 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 engages NPC to provide Management services for a 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.
Note Receivable - Chairman, President and CEO
Note Payable - Related Party
Note 12 - Commitments and Contingencies
Employment Agreements - NPC
Employment Agreement - Jay Joshi, MD
On February 28, 2014, the Company entered into an employment agreement (the “Employment Agreement”) with Jay Joshi, MD, a physician (the “Executive”). Under the Employment Agreement, the Company acquired from the Executive all of the Executive’s shares of common stock in National Pain Centers, Inc, a Nevada corporation, in exchange for 5,000,000 shares of $0.001 par value common stock of the Company, for the consideration given and received herein, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Executive and the Company hereby agree as follows:
Term
The Executive’s employment under this Agreement shall commence on the date hereof, and this Agreement shall commence as of that date and shall continue in effect until February 27, 2019. The parties expressly understand that nothing in this Agreement is a guarantee or assurance of employment for any specific period of time. Rather, subject to the notice provisions set forth in Section 6(c), the Executive understands that he is an at-will Executive, and that the Company may terminate his employment at any time, and the Executive is similarly free to resign at any time.
Duties
The Executive is engaged to serve as the Chief Medical Officer of the Company and the President and CEO of the Company’s wholly-owned subsidiary, NPC. Executive shall have such duties as are customarily associated with such positions including but not limited to overall responsibility and authority for general operations, management, and employment matters and relationships, as well as such other senior executive duties as may from time to time be reasonably assigned to him by the Company’s CEO and/or Board of Directors. In addition, at every election for the Company's Board of Directors while the Executive is employed by the Company hereunder, the Company will nominate the Executive to be elected to serve on the Board of Directors.
Compensations
(a) Base Salary. The Company shall pay to the Executive as compensation for services rendered by the Executive hereunder a base annual salary of $200,000, subject to increase, but not decrease, from time to time by the CEO and/or the Board of Directors of the Company. The base salary paid to the Executive is subject to such payroll and other deductions as may be agreed upon by the parties or required by law. This salary shall be paid in accordance with Company's customary biweekly payroll procedure.
(b) Benefits. Upon the signing of the agreement, Executive shall be issued a signing stock option to purchase 400,000 Shares at an exercise price of $0.40. Further, provided Executive remains employed by the Company, he will be granted additional stock options to buy up to an aggregate total of 1,000,000 shares of the Company’s common stock, at a vesting schedule of 200,000 per quarter, starting with the quarter ending September 30, 2014. Each Stock option tranche shall carry an exercise price equal to the then market closing price, at the end of each quarter. All other terms and conditions not specified herein will be treated in accordance with the Company’s 2010 Non-Qualified Stock Compensation Plan. In the event of an acquisition or merger of the Company, all options granted or scheduled to be granted shall convert immediately into the incumbent company’s shares or be paid in cash on a cashless provision.
Termination
The Executive or the Company may voluntarily elect to terminate this Agreement (a termination "Without Cause") by delivering to the other party, at least ninety (90) days prior to the date upon which termination is desired, by written notice of such intention to terminate.
Covenant not to Compete
The Executive covenants and agrees that during the term of the Executive's employment, whether pursuant to this Agreement, any renewal hereof, or otherwise, and for a period of one year (the “Restricted Period”) after the later of the expiration of this Agreement or the termination of his employment with the Company, in the State(s) in which the Company conducts business as of the Executive's termination of employment, he will not, directly or indirectly (through one or more intermediaries), whether individually, or as an officer, director, agent, shareholder of 5% or more of the applicable company’s outstanding equity shares, member, partner, joint venturer, investor (other than as a passive trader in publicly traded securities), consultant or otherwise, compete in whole or in part with the business then engaged in by the Company.
Employment Agreements - Stealthco Inc.
Employment Agreement - Ricky Howard
On July 1, 2014, the Company entered into an employment agreement (the “Employment Agreement”) with Ricky Howard, (the “Executive”). The Executive and the Company hereby agree as follows:
Term
The Executive’s employment under this Agreement shall commence on the date hereof, and this Agreement shall commence as of that date and shall continue in effect until June 30, 2017. The parties expressly understand that nothing in this Agreement is a guarantee or assurance of employment for any specific period of time. Rather, subject to the notice provisions set forth in Section 6(c), the Executive understands that he is an at-will Executive, and that the Company may terminate his employment at any time, and the Executive is similarly free to resign at any time.
Duties
The Executive is engaged to serve as the Chief Executive Officer of the Company’s wholly-owned Subsidiary “StealthCo”, reporting to the Company’s CEO. Executive shall have such duties as are customarily associated with such positions including but not limited to overall responsibility and authority for general operations, management, and employment matters and relationships, as well as such other senior executive duties as may from time to time be reasonably assigned to him by the Company’s CEO and/or Board of Directors.
Compensations
(a) Base Salary. The Company shall pay to the Executive as compensation for services rendered by the Executive hereunder a base annual salary of $100,000, subject to increase, but not decrease, from time to time by the CEO and/or the Board of Directors of the Company. The base salary paid to the Executive is subject to such payroll and other deductions as may be agreed upon by the parties or required by law. This salary shall be paid in accordance with Company's customary biweekly payroll procedure.
(b) Benefits. Upon the signing of the agreement, Executive shall be (i) entitled to receive a cash signing bonus of $8,500, payable over a period of three months, (ii) issued a signing stock option to purchase 250,000 shares at an exercise price of $0.40 per share. Further, provided Executive remains employed by the Company, he will be granted additional stock options to buy up to 750,000 shares of the Company’s common stock, at a vesting schedule of 62,500 per quarter, starting with the quarter ending September 30, 2014. Each Stock option tranche shall carry an exercise price equal to the then market closing price, at the end of each quarter. All other terms and conditions not specified herein will be treated in accordance with the Company’s 2010 Non-Qualified Stock Compensation Plan. In the event of an acquisition or merger of the Company, all options granted or scheduled to be granted shall convert immediately into the incumbent company’s shares or be paid in cash on a cashless provision.
Termination
The Executive or the Company may voluntarily elect to terminate this Agreement (a termination "Without Cause") by delivering to the other party, at least ninety (45) days prior to the date upon which termination is desired, by written notice of such intention to terminate.
Covenant not to Compete
The Executive covenants and agrees that during the term of the Executive's employment, whether pursuant to this Agreement, any renewal hereof, or otherwise, and for a period of one year (the “Restricted Period”) after the later of the expiration of this Agreement or the termination of his employment with the Company, in the State(s) in which the Company conducts business as of the Executive's termination of employment, he will not, directly or indirectly (through one or more intermediaries), whether individually, or as an officer, director, agent, shareholder of 5% or more of the applicable company’s outstanding equity shares, member, partner, joint venturer, investor (other than as a passive trader in publicly traded securities), consultant or otherwise, compete in whole or in part with the business then engaged in by the Company.
Employment Agreements - WCUI
Employment Agreement - Donald Swanson
On February 28, 2014, the Company entered into an employment agreement (the “Employment Agreement”) with Donald Swanson (the “Executive”) for the consideration given and received herein, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Executive and the Company hereby agree as follows:
Term
The Executive’s employment under this Agreement shall commence on the date hereof, and this Agreement shall commence as of that date and shall continue in effect until February 27, 2017. The parties expressly understand that nothing in this Agreement is a guarantee or assurance of employment for any specific period of time. Rather, subject to the notice provisions set forth in Section 6(c), the Executive understands that he is an at-will Executive, and that the Company may terminate his employment at any time, and the Executive is similarly free to resign at any time.
Duties
The Executive is engaged to serve as the Chief Operating Officer of the Company, reporting to the Company's CEO. Executive shall have such duties as are customarily associated with such positions including but not limited to overall responsibility and authority for general operations, management, employment matters and relationships, as well as such other senior executive duties as may from time to time be reasonably assigned to him by the Company's CEO and/or Board of Directors. The Executive shall perform such services subject to the direction, supervision, and rules and regulations of the Company and the Company's Board of Directors.
Compensations
(a) Base Salary. The Company shall pay to the Executive as compensation for services rendered by the Executive hereunder a base annual salary of $200,000, subject to increase, but not decrease, from time to time by the CEO and/or the Board of Directors of the Company. The base salary paid to the Executive is subject to such payroll and other deductions as may be agreed upon by the parties or required by law. This salary shall be paid in accordance with Company's customary biweekly payroll procedure.
(b) Benefits. Upon the signing of the agreement, Executive shall be issued a signing stock option to purchase 1,400,000 Shares at an exercise price of $0.40. Further, provided Executive remains employed by the Company, he will be granted additional stock options to buy up to an aggregate total of 1,000,000 shares of the Company’s common stock, at a vesting schedule of 200,000 per quarter, starting with the quarter ending September 30, 2014. Each Stock option tranche shall carry an exercise price equal to the then market closing price, at the end of each quarter. All other terms and conditions not specified herein will be treated in accordance with the Company’s 2010 Non-Qualified Stock Compensation Plan. In the event of an acquisition or merger of the Company, all options granted or scheduled to be granted shall convert immediately into the incumbent company’s shares or be paid in cash on a cashless provision.
Termination
The Executive or the Company may voluntarily elect to terminate this Agreement (a termination "Without Cause") by delivering to the other party, at least ninety (90) days prior to the date upon which termination is desired, by written notice of such intention to terminate.
Covenant not to Compete
The Executive covenants and agrees that during the term of the Executive's employment, whether pursuant to this Agreement, any renewal hereof, or otherwise, and for a period of one year (the “Restricted Period”) after the later of the expiration of this Agreement or the termination of his employment with the Company, in the State(s) in which the Company conducts business as of the Executive's termination of employment, he will not, directly or indirectly (through one or more intermediaries), whether individually, or as an officer, director, agent, shareholder of 5% or more of the applicable company’s outstanding equity shares, member, partner, joint venturer, investor (other than as a passive trader in publicly traded securities), consultant or otherwise, compete in whole or in part with the business then engaged in by the Company.
Separation Agreement
On June 10, 2014, Donald Swanson entered into a separation agreement (“Separation Agreement”) with the Company where he resigned from all positions and employment with the Company and the Employment agreement with the Company was terminated. The Company shall pay the Executive in the amount of $1,180 representing all the payable compensation as well as $3,820 representing all the reimbursement expense through the separation date. The Company acknowledges that the Executive currently holds options to purchase 1,400,000 shares of the Company’s common stock at an exercise price of $0.40 per share.
Operating Lease with a Related Party - WCUI
On December 20, 2010 the Company entered into a non-cancellable sub-lease for office space in Illinois with CADserv Corporation for $1,909.50 per month for a period of 12 months from January 1, 2011 through December 31, 2011, which had been renewed annually and expired on December 31, 2014. WCUI currently leases its office on an month-to-month basis.
Future minimum lease payments required under the non-cancelable operating lease are as follows:
Operating Lease - PSI
On January 4, 2011 the Company entered into a non-cancellable lease for office space of approximately 3,050 square feet of rentable area in aggregate in Tampa, Florida with a third party for a period of 12 months from the date of signing at $3,000 per month plus tax and common charges.
On January 4, 2012 the Company renewed the non-cancellable lease for an additional 12 months expiring January 3, 2013 with the same terms and conditions.
On January 4, 2013 the Company renewed the non-cancellable lease for an office space of approximately 2,000 square feet of rentable area for an additional 12 months expiring January 3, 2014 at $2,000 per month plus tax and common charges.
The Company and the landlord have tentatively agreed to renew the non-cancellable lease for an office space of approximately 2,000 square feet of rentable area for an additional 12 months expiring January 3, 2015 at $2,000 per month plus tax and common charges.
The Company and the landlord have agreed to lease the office on a monthly basis from January 3, 2015.
Future minimum lease payments inclusive of related tax required under the non-cancelable operating lease are as follows:
Operating Lease - SCI
On June 26, 2013, the Company entered into a non-cancellable lease for office space of approximately 3,300 square feet of rentable area in aggregate in Centerville, Minnesota with a third party for a period of 19 months from the date of signing at $2,100 per month.
Future minimum lease payments required under the non-cancelable operating lease are as follows:
Operating Lease - NPC
On January 1, 2015, the Company entered into a non-cancellable lease for office space in Vernon Hills, Illinois with a third party for a period of 12 months from the date of signing at $1,600 per month.
Future minimum lease payments required under the non-cancelable operating lease are as follows:
Note 13 - Stockholders’ Equity
Shares Authorized
Upon formation the total number of shares of all classes of stock which the Company is authorized to issue is Seventy Five Million (75,000,000) shares of which Seventy Five Million (75,000,000) shares shall be Common Stock, par value $.001 per share.
Common Stock
Sale of Common Stock or Equity Units
On November 29, 2012 the Company issued a total of 1,447,550 shares of its common stock at $0.10 per share for an aggregate of $144,755 in cash.
Between December 4, 2012 and December 29, 2012 the Company sold a total of 520,999 equity units consisting of one (1) common share and a warrant to purchase one (1) common share with an exercise price of $0.45 per share expiring five (5) years from the date of issuance at $0.30 per unit or $156,300 in cash, $108,786 ($0.21 per common share) and $47,514 ($0.09 per warrant share) of which were allocated as the relative fair value of the common stock and warrants, respectively.
During the quarter ended December 31, 2012, warrants to purchase 1,777,000 shares with an exercise price of $0.01 per share were exercised by shareholders for an aggregate of $17,770 in cash.
During the quarter ended March 31, 2013 the Company sold 3,096,603 equity units consisting of one (1) common share and a warrant to purchase one (1) common share with an exercise price of $0.45 per share, expiring five (5) years from the date of issuance, at $0.30 per unit or $928,980; $651,216 ($0.21 per common share) and $277,764 ($0.09 per warrant share) were allocated as the relative fair value of the common stock and warrants, respectively.
During the quarter ended March 31, 2013, warrants to purchase 80,000 shares with an exercise price of $0.01 per share were exercised by shareholders for an aggregate of $800 in cash.
During the quarter ended June 30, 2013 the Company sold 601,668 equity units consisting of one (1) common share and a warrant to purchase one (1) common share with an exercise price of $0.45 per share, expiring five (5) years from the date of issuance, at $0.30 per unit or $180,500; $126,109 ($0.21 per common share) and $53,789 ($0.09 per warrant share) were allocated as the relative fair value of the common stock and warrants, respectively.
On May 9, 2013 the Company sold 40,000 equity units consisting of one (1) common share and a warrant to purchase one (1) common share with an exercise price of $1.00 per share, expiring five (5) years from the date of issuance, at $0.50 per unit or $20,000; $14,740 ($0.37 per common share) and $5,220 ($0.13 per warrant share) were allocated as the relative fair value of the common stock and warrants, respectively.
On April 19, 2013, the placement agent exercised its warrant to purchase 59,201 shares of the Company’s common stock with an exercise price of $0.30 per share, on a cashless basis, per the placement agent agreement, and the Company issued 44,643 shares of its common stock to the placement agent.
On May 7, 2013, warrants to purchase 100,000 shares with an exercise price of $0.01 per share were exercised by a shareholder for $1,000 in cash.
On May 29, 2013, warrants to purchase 100,001 shares with an exercise price of $0.45 per share were exercised by a shareholder for $45,000 in cash.
During the quarter ended September 30, 2013, the Company raised $1,648,500 from the issuance of (i) 4,121,250 common shares of the Company; (ii) warrants to purchase 4,121,250 common shares with an exercise price of $0.75 per share, expiring five (5) years from the date of issuance, and (iii) warrants to purchase 250,000 common shares with an exercise price of $0.45 per share expiring five (5) years from the date of issuance; of which $1,281,297 ($0.31 per common share) and $367,203 ($0.29 per warrant share) were allocated as the relative fair value of the common stock and warrants, respectively. In connection with this tranche of equity finance the Company paid certain placement agents finder's fee at 10%, or $148,550 in the aggregate.
On July 13 and September 13, 2013, warrants to purchase 87,000 shares with an exercise price of $0.01 per share were exercised by shareholders for $870 in cash.
For the period between January 1, 2014 and March 28, 2014, the Company raised $266,450 from the issuance of (i) 775,239 common shares of the Company; (ii) warrants to purchase 793,333 common shares with an exercise price of $0.30 per share, expiring five (5) years from the date of issuance, and (iii) warrants to purchase 228,572 common shares with an exercise price of $0.35 per share expiring five (5) years from the date of issuance; and (iv) warrants to purchase 150,000 common shares with an exercise price of $0.45 per share expiring five (5) years from the date of issuance.
In April and May, 2014, the Company sold 57,222 equity units consisting of one (1) common share and a warrant to purchase one (1) common share with an exercise price of $0.65 per share, expiring five (5) years from the date of issuance, at $0.45 per unit or $25,750; $18,482 ($0.32 per common share) and $7,210 ($0.13 per warrant share) were allocated as the relative fair value of the common stock and warrants, respectively.
On July 21, 2014, the Company sold 174,000 equity units consisting of 174,000 common share and a warrant to purchase 348,000 common shares with an exercise price of $0.30 per share, expiring five (5) years from the date of issuance, at $0.25 per unit or $43,500; $23,447 ($0.13 per common share) and $20,053 ($0.06 per warrant share) were allocated as the relative fair value of the common stock and warrants, respectively.
On July 21 and August 28, 2014, warrants to purchase 15,500 shares with an exercise price of $0.01 per share were exercised by a shareholder for $15,500 in cash.
Issuance of Common Stock or Equity Units for Employee Services
On July 3, 2013, the Company issued 244,260 common shares to two employees for their past services, valued at $24,260 based on more reliably measurable employee services received.
Issuance of Common Stock or Equity Units to Parties Other Than Employees for Acquiring Goods or Services
On March 13, 2012, the Company entered into a consulting agreement (the "Consulting Agreement") with a Consultant (the "Consultant”) for a period of one (1) year from the date of signing whereby the Company agreed to retain the Consultant and the Consultant agreed to identify possible sources of working capital for the Company. As consideration for the services, the Company granted (i) 50,000 shares of its common stock and (ii) options to purchase 50,000 shares of common stock with an exercise price of $0.44 per share expiring five (5) years from the date of issuance to the Consultant. The common shares and warrants are earned ratably over the term of the Consulting Agreement, every three (3) months, and the unearned shares are forfeitable in the event of non-performance by the Consultant. Pursuant to Paragraph 505-50-S99-1, if the Company receives a right to receive future services in exchange for unvested, forfeitable equity instruments, those equity instruments are treated as unissued for accounting purposes until the future services are received (that is, the instruments are not considered issued until they vest). Consequently, there would be no recognition at the date of issuance and no entry should be recorded. 12,500 common shares and an option to purchase 12,500 common shares with an exercise price of $0.44 per share each are to be earned on a quarterly basis. For the quarter ended June 30, 2012, 12,500 common shares were earned and valued at $1.10 per share, then PPM price, or $13,750 and the option to purchase 12,500 common shares was earned and valued at $3,565. For the quarter ended September 30, 2012, 12,500 common shares were earned and valued at $0.30 per share, then PPM price, or $3,750 and option to purchase 12,500 common shares was earned and valued at $3,565. For the quarter ended December 31, 2012, 12,500 common shares were earned and valued at $0.30 per share, then PPM price, or $3,750 and option to purchase 12,500 common shares was earned and valued at $3,565. For the quarter ended March 31, 2013, 12,500 common shares were earned and valued at $0.30 per share, then PPM price, or $3,750 and option to purchase 12,500 common shares was earned and valued at $3,570.
On September 11, 2012, the Company entered into a consulting agreement (the "Consulting Agreement") with a consulting firm (the "Consultant”). Under the terms and conditions of the Consulting Agreement, the Company agreed to retain the Consultant and the Consultant agreed to identify possible sources of working capital for the Company for a period of one (1) year from the date of signing. As consideration for the services, the Company would pay the consultant monthly for four (4) terms: (i) cash of $8,000 each month for the first term of three (3) months; grant 35,000 common shares monthly for the first term of three (3) months to the Consultant. (ii) cash of $10,000 each month for the second term of three (3) months; grant 30,000 common shares monthly for the second term of three (3) months. (iii) cash of $17,000 each month for the third term of three (3) months; grant 25,000 common shares monthly for the third term of three (3) months. (iv) cash of $20,000 each month for the fourth term of three (3) months; grant 20,000 common shares monthly for the fourth term of three (3) months. For the quarter ended September 30, 2012, the Company paid $8,000 in cash and issued 35,000 common shares valued at $0.38 per share, or $13,300. On October 15, 2012 the Consultant and the Company agreed to terminate the Consulting Agreement. For the period from October 1, 2012 through October 15, 2012, the Company did not pay any cash to the Consultant and issued 70,000 common shares in aggregate which were valued at $0.43 per share, or $30,100.
On October 26, 2012, the Company entered into a Placement Agreement ("Placement Agreement") with Security Research Associates, Inc. ("SRA" or the "Placement Agent")) that SRA was engaged during the engagement period commencing on the date of this Placement Agreement and ending on the earlier to occur of May 31, 2013 or the termination of this Agreement (“Engagement Period”), as exclusive placement agent on a "best-efforts" basis in connection with a proposed private placement of securities to be issued by the Company in accordance with the proposed terms. The Company agrees to pay to SRA a transaction fee (the "Transaction Fee") consisting of (i) 8% (eight percent) of the gross proceeds from the Financing received by the Company from all investors (the "Investors"), and (ii) 5 year Warrants (the "Warrant") to acquire a number of shares of the Company's Common Shares equal to 8% (eight percent) of the aggregate gross proceeds from the Financing received by the Company divided by the effective price per share of the Company's common shares paid by all of the Investors in the Financing received by the Company at closing (the "SRA Warrants"). The Transaction Fee shall be payable with respect to any Financing consummated during the Engagement Period and also with respect to any similar financing consummated within 12 months of the end of the Engagement Period. The SRA Warrants issued by the Company pursuant to this Placement Agreement will have an exercise price which will be the same as the price of such warrants issued to the Investors in the Financing. SRA Warrants issued pursuant to the Placement Agreement shall have piggyback registration rights, will include customary adjustments in the event of stock dividends and/or stock splits, reclassifications, reorganizations and/or business combinations involving the Company, will have a "cashless exercise" provision and, in the event Investors receive warrants, will contain such additional rights as are contained in the warrants issued to the Investors. On April 19, 2013, the Company issued a warrant to purchase 59,201 shares of the Company’s common stock with an exercise price of $0.30 per share to the Placement Agent. The Company estimated the relative fair value of the warrant at $9,289 at the date of issuance using the Black-Scholes Option Pricing Model. The Placement Agent exercised its warrant to purchase 59,201 shares of the Company’s common stock, on a cashless basis, on April 19, 2013, and the Company issued 44,643 shares of its common stock to the Placement Agent pursuant to the Placement Agreement.
On February 26, 2013, the Company entered into a Consulting agreement (the "Consulting Agreement"), with a Consultant (the "Consultant”). Under the terms and conditions of the Consulting Agreement, the Company agreed to retain the Consultant and the Consultant agreed to identify possible sources of working capital for the Company for a period of one (1) year from the date of signing. As consideration for services, the Company would (i) pay $20,000 in cash; and (ii) grant (a) 550,000 shares of its common stock and (b) an option to purchase 300,000 shares of common stock with an exercise price of $0.30 per share, expiring five (5) years from the date of issuance, to the Consultant. The Company ratably recognizes the $20,000 payment in cash over the term of the Consulting Agreement. 550,000 common shares were valued at $0.30 per share, the PPM price, or $165,000, and the option to purchase 300,000 shares of common stock were valued at $47,490, or $212,490 in aggregate, all of which were expensed as consulting fees upon signing of the agreement as these common shares and warrants were issued upon signing the agreement and are fully vested and non-forfeitable.
On March 17, 2013, the Company entered into a Financing Service agreement (the "Financing Service Agreement"), with a Consultant (the "Consultant”). Under the terms and conditions of the Financing Service Agreement, the Company agreed to retain the Consultant and the Consultant agreed to identify possible sources of working capital for the Company for a period of one (1) year from the date of signing. As consideration for services, the Company would grant (i) 600,000 shares of its common stock and (ii) an option to purchase 400,000 shares of its common stock with an exercise price of $0.30 per share expiring five (5) years from the date of issuance to the Consultant. 600,000 common shares were valued at $0.30 per share, the PPM price, or $180,000 and the option to purchase 400,000 shares of common stock were valued at $63,080, or $243,080 in aggregate, all of which were expensed as consulting fees upon signing of the agreement as these common shares and warrants are issued upon signing the agreement and are fully vested and non-forfeitable.
On April 9, 2013, the Company issued 50,000 shares of its common stock to a consultant for consulting services. These fully vested and non-forfeitable shares were valued at $0.30 per share, the PPM price, or $15,000, all of which were expensed as consulting fees.
On April 9, 2013, the Company issued 30,000 shares of its common stock to a foundation. These fully vested and non-forfeitable shares were valued at $0.30 per share, the most recent PPM price, or $9,000, which were recorded as charitable contribution.
On July 18, 2013, the Company entered into a Consulting agreement (the "Consulting Agreement") with a consulting firm (the "Consultant”). Under the terms and conditions of the Consulting Agreement, the Consultant agreed to provide marketing and promotion services for the Company for a period of one (1) year from the date of signing. As consideration for services, the Company would (i) pay $20,000 per month in cash; and (ii) grant (a) 50,000 shares of its common stock for the first month of engagement and (b) 20,000 shares of common stock per subsequent month. During the period ending September 30, 2013, the Company issued 70,000 common shares in aggregate to the consultant valued at $0.40 per share, the most recent PPM price, or $28,000, all of which were expensed as consulting fees. On October 8, 2013, the Company issued 20,000 common shares to the consultant valued at $0.40 per share, the most recent PPM price, or $8,000, all of which were expensed as consulting fees during the period ending December 31, 2013. On April 21, 2014, the Company issued 120,000 common shares to the consultant for the service period from November 2013 to April 2014, valued at $0.40 per share, the most recent PPM price, or $48,000, all of which were expensed as consulting fees upon issuance.
On September 3, 2013, the Company entered into a service agreement (the "Service Agreement") with a marketing firm (the "Consultant”). Under the terms and conditions of the Service Agreement, the Consultant agreed to provide marketing and public relation services for the Company through the end of 2013. As consideration for the services, the Company would pay (i) $2,000 per month in cash; and (ii) $2,000 worth of the Company’s common stock. The Company also entered another public event service agreement with the consultant for compensation of $4,600 in cash and $2,250 worth of common stock. The Company issued 10,625 common shares in aggregate to the consultant valued at $0.40 per share, the most recent PPM price, or $4,250, all of which were expensed as consulting fees.
Stock Options
2010 Non-Qualified Stock Option Plan (“2010 Option Plan”)
On December 22, 2010, effective retroactively as of June 30, 2010, the Company’s board of directors approved the adoption of the “2010 Non-Qualified Stock Option Plan” (“2010 Option Plan”) by unanimous consent. The 2010 Option Plan was initiated to encourage and enable officers, directors, consultants, advisors and key employees of the Company to acquire and retain a proprietary interest in the Company by ownership of its common stock. A total of 7,500,000 of the authorized shares of the Company’s common stock may be subject to, or issued pursuant to, the terms of the plan.
Pursuant to Section 7 - Adjustments or Changes in Capitalization of the Stock Option Plan, the number of shares to be received upon the exercise of the option and the exercise price to be paid for a share hereinafter sometimes referred to as “Exercise Price” which may be adjusted from time to time as hereinafter as follows:
7.1
In the event that the outstanding Common Shares of the Company are hereafter changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of merger, consolidation, other reorganization, recapitalization, reclassification, combination of shares, stock split-up or stock dividend:
A.
Prompt, proportionate, equitable, lawful and adequate adjustment shall be made of the aggregate number and kind of shares subject to Stock Options which may be granted under the Plan, such that the Optionee shall have the right to purchase such Common Shares as may be issued in exchange for the Common Shares purchasable on exercise of the NQSO had such merger, consolidation, other reorganization, recapitalization, reclassification, combination of shares, stock split-up or stock dividend not taken place;
B.
Rights under unexercised Stock Options or portions thereof granted prior to any such change, both as to the number or kind of shares and the exercise price per share, shall be adjusted appropriately, provided that such adjustments shall be made without change in the total exercise price applicable to the unexercised portion of such NQSO’s but by an adjustment in the price for each share covered by such NQSO’s; or
C.
Upon any dissolution or liquidation of the Company or any merger or combination in which the Company is not a surviving corporation, each outstanding Stock Option granted hereunder shall terminate, but the Optionee shall have the right, immediately prior to such dissolution, liquidation, merger or combination, to exercise his NQSO in whole or in part, to the extent that it shall not have been exercised, without regard to any installment exercise provisions in such NQSO.
7.2
The foregoing adjustments and the manner of application of the foregoing provisions shall be determined solely by the Committee, whose determination as to what adjustments shall be made and the extent thereof, shall be final, binding and conclusive. No fractional Shares shall be issued under the Plan on account of any such adjustments.
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.
September 6, 2013 Issuance
On September 6, 2013, the Company issued an option to purchase 10,000 shares of its common stock to the consultant with an exercise price of $0.75 per share for advisory board services. The option was vested and exercisable upon grant.
The Company estimated the fair value of the stock options on the date of grant using the Black-Scholes Option Pricing Model with the following weighted-average assumptions:
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company plans to engage in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life and averaged them as its expected volatility.
The estimated fair value of the stock options was $1,491 on the date of grant, which are recorded as consulting fees.
February 28, 2014 Issuance
On February 28, 2014, the Company issued an option to purchase 1,800,000 shares of its common stock to two officers of the Company with an exercise price of $0.40 per share expiring five (5) years from the date of issuance.
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company plans to engage in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life and averaged them as its expected volatility.
The estimated fair value of the stock options was $194,939 on the date of grant, which are recorded as salaries - officers.
September 28, 2014 Issuance
On September 30, 2014, the Company issued an option to purchase 200,000 shares of its common stock to an officer of the Company with an exercise price of $0.125 per share expiring five (5) years from the date of issuance.
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company plans to engage in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life and averaged them as its expected volatility.
The estimated fair value of the stock options was $30,940 on the date of grant, which are recorded as salaries - officers.
Summary of the Company’s Stock Option Activities
The table below summarizes the Company’s stock option activities:
The following table summarizes information concerning outstanding and exercisable options as of September 30, 2014:
As of September 30, 2014, there were 2,240,000 shares of stock options remaining available for issuance under the 2010 Plan.
Warrants
Significant terms of the warrants
Significant terms of the warrants issued in connection with the Company's equity unit offering include Section (F) Anti-dilution provisions and (G) Registration rights.
Pursuant to Section (F) Anti-dilution provisions of the warrant, the number of shares to be received upon the exercise of the warrant and the exercise price to be paid for a share hereinafter sometimes referred to as “Exercise Price” which may be adjusted from time to time as hereinafter provided:
(1)
In case the Company shall issue Shares as a dividend upon Shares or in payment of a dividend thereon, or shall subdivide the number of outstanding Shares into a greater number of shares or shall contract the number of outstanding Shares into a lesser number of shares, the Exercise Price then in effect shall be adjusted, effective at the close of business on the record date for the determination of shareholders entitled to receive the same, to the price (computed to the nearest cent) determined by dividing: (a) the product obtained by multiplying the Exercise Price in effect immediately prior to the close of business on such record date by the number of Shares outstanding prior to such dividend, subdivision or contraction; by (b) the sum of the number of Shares outstanding immediately after such dividend, subdivision, or contraction.
(2)
If any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the Holder of each Warrant shall thereafter have the right to purchase and receive upon the basis and upon the terms and conditions specified in the Warrant and in lieu of the Shares of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented by such Warrant, such Shares, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding Shares immediately theretofore purchasable and receivable upon the exercise of the rights represented by such Warrant had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provision shall be made with respect to the rights and interest of the Holder to the end that the provisions of the Warrant (including, without limitation, provisions for adjustment of the Exercise Price and of the number of Shares issuable upon the exercise of Warrants) shall thereafter be applicable as nearly as may be practicable in relation to any shares of stock, securities, or assets thereafter deliverable upon exercise of Warrants. The Company shall not affect any such consolidation, merger or sale unless prior to or simultaneously with the consummation thereof, the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets shall assume, by written instrument, the obligation to deliver to the Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, the Holder may be entitled to purchase.
(3)
Upon each adjustment of the Exercise Price pursuant to this Section (F), the number of shares of Common Stock specified in each Warrant shall thereupon evidence the right to purchase that number of shares of Common Stock (calculated to the nearest hundredth of a share of Common Stock) obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock purchasable immediately by the Exercise Price in effect after such adjustment.
(4)
Irrespective of any adjustment of the number or kind of securities issuable upon exercise of Warrants or the Exercise Price, Warrants theretofore or thereafter issued may continue to express the same number of Shares and Exercise Price as are stated in similar Warrants previously issued.
(5)
The Company may, at its sole option, retain the independent public accounting firm regularly retained by the Company, or another firm of independent public accountants of recognized standing selected by the Company's Board of Directors, to make any computation required under this Section (F) and a certificate signed by such firm shall be conclusive evidence of any computation made under this Section (F).
(6)
Whenever there is an adjustment in the Exercise Price or in the number or kind of securities issuable upon exercise of the Warrants, or both, as provided in this Section (F), the Company shall: (i) promptly file in the custody of its Secretary or Assistant Secretary a certificate signed by the Chairman of the Board or the President or a Vice President of the Company and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Company, showing in detail the facts requiring such adjustment and the number and kind of securities issuable upon exercise of each Warrant after such adjustment; and (ii) cause a notice stating that such adjustment has been effected and stating the Exercise Price then in effect and the number and kind of securities issuable upon exercise of each Warrant to be sent to each registered holder of Warrant.
(7)
In addition to the adjustments otherwise set forth in this Section (F), the Company, in its sole discretion, may reduce the Exercise Price or extend the expiration date of the Warrant.
(8)
The Exercise Price and the number of Shares issuable upon exercise of a Warrant shall be adjusted in the manner and only upon the occurrence of the events heretofore specifically referred to in this Section (F).
Pursuant to Section (G) Registration rights of the warrant, the warrant holder shall have piggyback registration rights as set forth in paragraph 12 of that certain Stockholder Subscription Agreement by and between the Company and the warrant holder.
December 2012 Issuances
In December 2012, the Company issued (i) warrants to purchase 520,999 shares, in aggregate, of the Company’s common stock to the investors with an exercise price of $0.45 per share expiring five (5) years from the date of issuance as part of the sale of equity units.
The Company estimated the relative fair value of the warrants on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company engages in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life of the options or warrants and averaged them as its expected volatility.
The estimated relative fair value of the warrants was $47,514 at the date of issuance using the Black-Scholes Option Pricing Model.
February and March 2013 Issuance
On February 26, 2013 and March 17, 2013, the Company issued warrants to purchase 300,000 shares and 400,000 shares, or 700,000 shares in aggregate, of the Company’s common stock to consultants for future services with an exercise price of $0.30 per share expiring five (5) years from the date of issuance.
The estimated fair value of the warrants was valued using the Black-Scholes option-pricing model with the following weighted-average assumptions:
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company engages in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life and averaged them as its expected volatility.
The estimated fair value of the warrants was $47,490 and $63,080, or $110,570 in aggregate, on the date of grant using the Black-Scholes Option Pricing Model.
March 2013 Issuances
In March 2013, the Company issued warrants to purchase 3,096,603 shares, in aggregate, of the Company’s common stock to investors with an exercise price of $0.45 per share expiring five (5) years from the date of issuance as part of the sale of equity units.
The Company estimated the relative fair value of the warrants on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company engages in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life of the options or warrants and averaged them as its expected volatility.
The estimated relative fair value of the warrants was $277,764 at the date of issuance using the Black-Scholes Option Pricing Model.
April 2013 Issuance
On April 19, 2013, the Company issued warrants to purchase 601,668 shares of the Company’s common stock to investors with an exercise price of $0.45 per share expiring five (5) years from the date of issuance as part of the sale of equity units.
The estimated relative fair value of the warrants was valued using the Black-Scholes option-pricing model with the following weighted-average assumptions:
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company engages in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life and averaged them as its expected volatility.
The estimated relative fair value of the warrants was $53,789 on the date of grant using the Black-Scholes Option Pricing Model.
May 2013 Issuances
In May 9, 2013, the Company issued warrants to purchase 40,000 shares, in aggregate, of the Company’s common stock to investors with an exercise price of $1.00 per share expiring five (5) years from the date of issuance as part of the sale of equity units.
The Company estimated the relative fair value of the warrants on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company engages in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life of the options or warrants and averaged them as its expected volatility.
The estimated relative fair value of the warrants was $5,220 at the date of issuance using the Black-Scholes Option Pricing Model.
August 2013 Issuances
On August, 2013, the Company issued warrants to purchase 4,371,250 shares, in aggregate, consisting of 4,121,250 warrants with an exercise price of $0.75 per share and 250,000 warrants with an exercise price of $0.40 per share expiring five (5) years from the date of issuance.
The Company estimated the relative fair value of the warrants on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company engages in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life of the options or warrants and averaged them as its expected volatility.
The estimated relative fair value of the warrants was $662,992 at the date of issuance using the Black-Scholes Option Pricing Model.
January 2014 and March 2014 Issuances
On January 13, 2014 and March 28, 2014, the Company issued warrants to purchase 1,171,905 shares, in aggregate, consisting of warrants to purchase (i) 793,333 shares with an exercise price of $0.40 per share; (ii) 228,572 shares with an exercise price of $0.45 per share; and (iii) 150,000 shares with an exercise price of $0.65 per share expiring five (5) years from the date of issuance to the investors as part of the sale of equity units.
The Company estimated the relative fair value of the warrants on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company engages in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life of the options or warrants and averaged them as its expected volatility.
The estimated relative fair value of the warrants was $55,097, $24,480, and $19,170, respectively, or $98,747, in aggregate, at the date of issuance using the Black-Scholes Option Pricing Model.
April 2014 Issuances
On April 4, 2014, the Company issued warrants to purchase 131,266 shares with an exercise price of $0.665 per share expiring five (5) years from the date of issuance in connection with the asset purchase agreement consummated on April 4, 2014.
The Company estimated the fair value of the warrants on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company engages in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life of the options or warrants and averaged them as its expected volatility.
The estimated fair value of the warrants was $0.3282 per warrant share or $43,082, respectively, at the date of issuance using the Black-Scholes Option Pricing Model.
On April 30, 2014, the Company issued warrants to purchase 57,222 shares with an exercise price of $0.65 per share expiring five (5) years from the date of issuance to the investors as part of the sale of equity units.
The Company estimated the relative fair value of the warrants on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company engages in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life of the options or warrants and averaged them as its expected volatility.
The estimated relative fair value of the warrants was $7,210 at the date of issuance using the Black-Scholes Option Pricing Model.
July 2014 Issuances
On July 22, 2014, the Company issued warrants to purchase 348,000 shares with an exercise price of $0.30 per share expiring five (5) years from the date of issuance as part of the sale of equity units.
The Company estimated the fair value of the warrants on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
*
As a newly formed entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within nutritional supplements industry which the Company engages in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life of the options or warrants and averaged them as its expected volatility.
The estimated fair value of the warrants was $0.06 per warrant share or $20,053, respectively, at the date of issuance using the Black-Scholes Option Pricing Model.
Summary of the Company’s Warrants Activities
The table below summarizes the Company’s warrants activities:
The following table summarizes information concerning outstanding and exercisable warrants as of September 30, 2014:
Note 14 - Discontinuance of CNS Wellness Florida Operations
As of January 24, 2014, the operation of CNS Wellness Florida, LLC was suspended. The Company impaired the remaining balances of all intangible assets associated with the acquisition of CNS as of January 24, 2014.
On September 30, 2014 the Company sold CNS Wellness Florida, LLC to the former members of CNS Wellness in exchange for the return of the 7,300,000 shares issued to the former members.
CNS Wellness Florida is accounted for as discontinued operations in the accompanying consolidated financial statements for all periods presented. Accordingly, assets and liabilities, revenues and expenses, and cash flows related to the business have been appropriately reclassified in the accompanying consolidated financial statements as discontinued operations for all periods presented.
The following table presents the components of discontinued operations in relation to the business reported in the consolidated statements of operations for the year ended September 30, 2014:
Note 15 - Deferred Tax Assets and Income Tax Provision
Deferred Tax Assets
At September 30, 2014, the Company had net operating loss (“NOL”) carry-forwards for Federal income tax purposes of $4,701,528 that may be offset against future taxable income through 2034. No tax benefit has been reported with respect to these net operating loss carry-forwards because the Company believes that the realization of the Company’s net deferred tax assets of approximately $1,598,520 was not considered more likely than not and accordingly, the potential tax benefits of the net loss carry-forwards are offset by a full valuation allowance.
Deferred tax assets consist primarily of the tax effect of NOL carry-forwards. The Company has provided a full valuation allowance on the deferred tax assets because of the uncertainty regarding the probability of its realization. The valuation allowance increased approximately $640,730 and $957,790 for the reporting period ended September 30, 2014 and 2013, respectively.
Components of deferred tax assets in the consolidated balance sheets are as follows:
Income Tax Provision in the Consolidated Statements of Operations
A reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income tax provision is as follows:
Tax years that remain subject to examination by major tax jurisdictions
The Company's corporation income tax returns are subject to audit under the statute of limitations by the Internal Revenue Service and the States of Florida and Illinois for a period of three (3) years from the date they are filed. The table below summarizes the reporting periods for which the Company's corporation income tax returns remain subject to audit under the statute of limitations by the Internal Revenue Service:
Note 16 - Concentration of Credit Risk
Credit Risk Arising from Financial Instruments
Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents.
As of September 30, 2014, substantially all of the Company’s cash and cash equivalents were held by major financial institutions and the balance at certain accounts may exceed the maximum amount insured by the Federal Deposits Insurance Corporation (“FDIC”). However, the Company has not experienced losses on these accounts and management believes that the Company is not exposed to significant risks on such accounts.
Note 17 - 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)
Nutritional Supplement Distribution: nutritional supplement business segment engages in the development of an internet online store business to market nutritional supplement solutions through the Company's website www.aminofactory.com.
(ii)
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.
(iii)
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.
(iv)
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 Company measures the segment profit or loss and segment assets for each reportable segment as follows:
a.
The basis of accounting for any transactions between reportable segments: The Company allows reportable segments to freely negotiate the terms and conditions of and carries out, on an arm's-length basis, any transactions between reportable segments;
b.
The nature of any differences between the measurements of the reportable segments' profits or losses and the public entity's consolidated income before income taxes, extraordinary items, and discontinued operations: There were no difference between the measurements of the reportable segments' profits or losses and the public entity's consolidated income (loss) as the Company does not allocate centrally incurred costs at the corporate headquarter;
c.
The nature of any differences between the measurements of the reportable segments’ assets and the public entity's consolidated assets: There were no difference between the measurements of the reportable segments’ assets and the public entity's consolidated assets as the Company does not have any jointly used assets;
d.
The nature of any changes from prior periods in the measurement methods used to determine reported segment profit or loss and the effect, if any, of those changes on the measure of segment profit or loss: There were no change from prior periods in the measurement methods used to determine reported segment profit or loss;
e.
The nature and effect of any asymmetrical allocations to reportable segments: There were no asymmetrical allocations to reportable segments as the Company does not allocate depreciation expense to a reportable segment without allocating the related depreciable assets to that reportable segment.
The detailed segment information of the Company is as follows:
Note 17 - Subsequent Events
The Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were issued to determine if they must be reported. The Management of the Company determined that there were certain reportable subsequent event(s) to be disclosed as followed:
On October 10, 2014, warrants to purchase 900,000 shares with an exercise price of $0.01 per share were exercised by a shareholder for $9,000 in cash.
On October 10, 2014, the Company issued a total of 893,333 shares of its common stock to a consulting firm for the promotional services.
On October 24, 2014, the Company entered into a Agency agreement (the "Agency Agreement") with TMA (the "Consultant”). Per the Agency Agreement, the Consultant will be authorized by the Company to act as its exclusive Agent solely for the purpose of introducing the Company to specific third party contacts with the objective of possible business opportunity associated with PSI, the Company's wholly owned subsidiary, for a period of ninety (90) days from execution. The Company agrees to pay an amount equal to six (6)% of the computed value of any transaction that occurs between the Company and the Third party. On October 27, 2014, the Company issued a one time document preparation fee in the form of 35,000 shares of the Company's common shares. On November 19, 2014, the Company issued additional 300,000 common shares for the joint venture valuation services.
During the period from October 16 to January 5, 2015, the promissory note holder converted partial of the principal note value to a total of 1,550,000 shares of the Company's common shares.