10-Q 1 f10q123114_10q.htm FORM 10-Q Form 10-Q



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_______________

 

FORM 10-Q

_______________

 

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


For the quarterly period ended December 31, 2014

 

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

 

For the transition period from ___________ to ___________

 

WELLNESS CENTER USA, INC.

 (Name of small business issuer in its charter)

 

 NEVADA

 

333-173216

 

27-2980395 

(State or other jurisdiction of incorporation or organization)

 

Commission File Number

 

(IRS Employee Identification No.)


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

(Address of Principal Executive Offices)

_______________

 

(847) 925-1885

 (Issuer Telephone number)


Not Applicable

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

_______________

 

Copies of communication to:


Ronald P.  Duplack, Esq.

Rieck and Crotty, P.C.

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

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


Securities registered under Section 12(b) of the Exchange Act:

  

  

Title of each class registered:

Name of each exchange on which registered:

None

None

  

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, par value $0.001

(Title of class)

 

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   X . No       .

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 

 Yes   X . No       .








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


Large Accelerated Filer       .

Accelerated Filer       .     


Non-Accelerated Filer       .

Smaller Reporting Company   X .

 


Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.

Yes       . No   X .


State the number of shares issued and outstanding of each of the issuer’s classes of common equity, as of December 31, 2014:  48,015,128 shares of issued common stock.

 

  



2




  

 

WELLNESS CENTER USA, INC.


FORM 10-Q

 

December 31, 2014

 

INDEX

 

 

PART I-- FINANCIAL INFORMATION

 

Item 1.

Financial Statements

4

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

72

Item 3

Quantitative and Qualitative Disclosures About Market Risk

78

Item 4.

Control and Procedures

78

 

PART II-- OTHER INFORMATION

 

Item 1

Legal Proceedings

80

Item 1A

Risk Factors

80

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

80

Item 3.

Defaults Upon Senior Securities

80

Item 4.

Mine Safety Disclosures.

80

Item 5.

Other Information

80

Item 6.

Exhibits

80

 

SIGNATURE


  



3




PART I-- FINANCIAL INFORMATION

 

 

ITEM 1. FINANCIAL STATEMENTS

 

Wellness Center USA, Inc.


December 31, 2014 and 2013


Index to the Consolidated Financial Statements


Contents

Page(s)



Consolidated Balance Sheets at December 31, 2014 (unaudited) and September 30, 2014

5


Consolidated Statements of Operations for the Three Months Ended December 31, 2014 and 2013 (unaudited)

7


Consolidated Statement of Changes in Stockholders’ Equity for the Reporting Period Ended December 31, 2014 (unaudited)

8


Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2014 and 2013 (unaudited)

10


Notes to the Consolidated Financial Statements (unaudited)

11


 



4




Wellness Center USA, Inc.

 Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

September 30, 2014

 

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 ASSETS

 

 

 

 

 

 

 Current Assets

 

 

 

 

 

 

 

 Cash

$

94,440

 

$

175,671

 

 

 Accounts receivable

 

12,863

 

 

12,863

 

 

 Inventories

 

276,479

 

 

269,990

 

 

 Current maturity of note receivable - Chairman and CEO

 

91,339

 

 

127,233

 

 

 Interest receivable on note receivable from Chairman and CEO

 

17,922

 

 

15,638

 

 

 Prepayments and other current assets

 

3,280

 

 

2,470

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total current assets

 

496,323

 

 

603,865

 

 

 

 

 

 

 

 

 

 

 

 Property and Equipment

 

 

 

 

 

 

 

 Property and equipment

 

102,366

 

 

102,366

 

 

 Accumulated depreciation

 

(61,663)

 

 

(57,702)

 

 

 

 Property and equipment, net

 

40,703

 

 

44,664

 

 

 

 

 

 

 

 

 

 

 

 Patents and Exclusive Licenses

 

 

 

 

 

 

 

 Patents and exclusive licenses and patents

 

384,803

 

 

384,803

 

 

 Accumulated amortization

 

(21,201)

 

 

(12,156)

 

 

 

 Patents and exclusive licenses, net

 

363,602

 

 

372,647

 

 

 

 

 

 

 

 

 

 

 

 Acquired Technologies

 

 

 

 

 

 

 

 Acquired technologies

 

2,095,000

 

 

2,420,000

 

 

 Accumulated amortization

 

(244,412)

 

 

(245,305)

 

 

 Accumulated impairment

 

-

 

 

(297,920)

 

 

 

 Acquired technologies, net

 

1,850,588

 

 

1,876,775

 

 

 

 

 

 

 

 

 

 

 

 Non-Compete Agreements

 

 

 

 

 

 

 

 Non-compete agreements

 

120,000

 

 

240,000

 

 

 Accumulated amortization

 

(70,000)

 

 

(129,160)

 

 

 Accumulated impairment

 

-

 

 

(53,340)

 

 

 

 Non-compete agreements, net

 

50,000

 

 

57,500

 

 

 

 

 

 

 

 

 

 

 

 Trademarks

 

 

 

 

 

 

 

 Trademarks

 

630,000

 

 

740,000

 

 

 Accumulated amortization

 

(210,000)

 

 

(207,880)

 

 

 Accumulated impairment

 

-

 

 

(89,620)

 

 

 

 Trademarks, net

 

420,000

 

 

442,500

 

 

 

 

 

 

 

 

 

 

 

 Website Development Costs

 

 

 

 

 

 

 

 Website development costs

 

22,809

 

 

22,809

 

 

 Accumulated amortization

 

(19,639)

 

 

(17,261)

 

 

 

 Website development costs, net

 

3,170

 

 

5,548

 

 

 

 

 

 

 

 

 

 

 

 Goodwill

 

 

 

 

 

 

 

 Goodwill

 

2,916,603

 

 

5,784,648

 

 

 Accumulated impairment

 

-

 

 

(2,868,045)

 

 

 

 Goodwill, net

 

2,916,603

 

 

2,916,603

 

 

 

 

 

 

 

 

 

 

 

 Other assets

 

 

 

 

 

 

 

 Note receivable - Chairman and CEO, net of current maturity

 

87,767

 

 

87,767

 

 

 Security deposits

 

1,760

 

 

1,760

 

 

 

 

 Total other assets

 

89,527

 

 

89,527

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total assets

$

6,230,516

 

$

6,409,629

 



5




 

 

 

 

 

 

 

 

 

 

 LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 Current Liabilities

 

 

 

 

 

 

 

 Accounts payable

$

85,149

 

$

72,059

 

 

 Accounts payable - related party

 

67,153

 

 

67,153

 

 

 Accrued interest

 

26,667

 

 

26,667

 

 

 Accrued payroll - officers

 

160,077

 

 

210,077

 

 

 Accrued payroll liabilities

 

68,510

 

 

75,577

 

 

 Accrued warranty

 

12,000

 

 

12,000

 

 

 Credit cards payable

 

26,336

 

 

23,426

 

 

 Derivative liabilities

 

489,356

 

 

-

 

 

 Deferred revenues

 

12,500

 

 

25,000

 

 

 Advances from related parties

 

249,190

 

 

284,679

 

 

 Customer deposits

 

3,128

 

 

3,128

 

 

 Notes payable

 

124,000

 

 

24,000

 

 

 Convertible notes payable - JMJ

 

25,663

 

 

204,166

 

 

 Accrued expenses and other current liabilities

 

82,228

 

 

53,806

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total current liabilities

 

1,431,957

 

 

1,081,738

 

 

 

 

 

 

 

 

 

 

 

 Long-term Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total long-term liabilities

 

-

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total liabilities

 

1,431,957

 

 

1,081,738

 

 

 

 

 

 

 

 

 

 

 

 Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Stockholders' Equity

 

 

 

 

 

 

 

 Common stock par value $0.001: 75,000,000 shares authorized;

 

 

 

 

 

 

 

 

 48,015,127 and 45,236,794 shares issued and outstanding, respectively

 

48,015

 

 

45,237

 

 

 Additional paid-in capital

 

13,409,820

 

 

13,518,987

 

 

 Accumulated deficit

 

(8,659,276)

 

 

(8,236,333)

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total stockholders' equity

 

4,798,559

 

 

5,327,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total liabilities and stockholders' equity

$

6,230,516

 

$

6,409,629

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the consolidated financial statements.

 



6




Wellness Center USA, Inc.

 Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months

 

For the Three Months

 

 

 

 

Ended

 

Ended

 

 

 

 

December 31, 2014

 

December 31, 2013

 

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 Revenue

 

 

 

 

 

 

 

 Management services - related party

$

85,490

 

$

-

 

 

 Sales

 

17,819

 

 

2,361

 

 

 

 

 

 

 

 

 

 

 

 

 Total revenue

 

103,309

 

 

2,361

 

 

 

 

 

 

 

 

 

 

 Cost of goods sold

 

274

 

 

1,706

 

 

 

 

 

 

 

 

 

 

 Gross margin

 

103,035

 

 

655

 

 

 

 

 

 

 

 

 

 

 Operating expenses

 

 

 

 

 

 

 

 Consulting fees

 

159,768

 

 

64,000

 

 

 Professional fees

 

54,235

 

 

12,602

 

 

 Rent expense - related party

 

3,819

 

 

6,004

 

 

 Rent expense

 

15,520

 

 

6,420

 

 

 Research and development

 

-

 

 

441

 

 

 Salaries - officers

 

158,608

 

 

84,475

 

 

 Salaries - others

 

26,678

 

 

24,808

 

 

 Selling expenses

 

-

 

 

14,525

 

 

 Depreciation and amortization

 

117,650

 

 

74,787

 

 

 General and administrative expenses

 

46,248

 

 

105,167

 

 

 

 

 

 

 

 

 

 

 

 

 Total operating expenses

 

582,526

 

 

393,229

 

 

 

 

 

 

 

 

 

 

 Loss from continuing operations

 

(479,491)

 

 

(392,574)

 

 

 

 

 

 

 

 

 

 

 Other (income) expense

 

 

 

 

 

 

 

 Change in derivative liabilities

 

(54,264)

 

 

 

 

 

 Interest income -  related party

 

(2,284)

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 Other (income) expense, net

 

(56,548)

 

 

-

 

 

 

 

 

 

 

 

 

 

 Loss from continuing operations before income tax provision

 

(422,943)

 

 

(392,574)

 

 

 

 

 

 

 

 

 

 

 Income tax provision

 

-

 

 

-

 

 

 

 

 

 

 

 

 

 

 Loss from continuing operations

 

(422,943)

 

 

(392,574)

 

 

 

 

 

 

 

 

 

 

 Discontinued operations

 

 

 

 

 

 

 

  (Loss) from operation of discontinued operations, net of tax

 

-

 

 

(146,049)

 

 

 

 

 

 

 

 

 

 

 Gain (loss)from discontinued operations

 

-

 

 

(146,049)

 

 

 

 

 

 

 

 

 

 

 Net loss

$

(422,943)

 

$

(538,623)

 

 

 

 

 

 

 

 

 

 

 Net loss per common share - basic and diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Continuing operations

$

(0.11)

 

$

(0.01)

 

 

 Discontinued operations

$

0.00

 

$

(0.00)

 

 

 

 

 

 

 

 

 

 

 

 Weighted Average Common Shares Outstanding - basic and diluted

 

46,269,700

 

 

45,128,930

 

 

 

 

 

 

 

 

 

 

 See accompanying notes to the consolidated financial statements.



7




Wellness Center USA, Inc.

Statement of Changes in Stockholders' Equity

For the Interim Period Ended December 31, 2014 and for the Fiscal Year Ended September 30, 2014

(Unaudited)

 

 

 

Common Stock

 

 

 

 

 

 

 

Total

 

 

 

Par Value $0.001

 

Additional Paid-

 

 

Accumulated

 

 

Stockholders'

 

 

 

Number of Shares

 

Amount

 

in Capital

 

Deficit

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Balance, September 30, 2013

 

45,110,670

 

$

45,111

 

$

11,340,244

 

$

(3,374,141)

 

$

8,011,214

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Common shares issued per consulting agreement  valued at $0.40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 per share during the quarter ending December 31, 2013

 

20,000

 

 

20

 

 

7,980

 

 

-

 

 

8,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Finder fees paid in connection with the private placements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 during the quarter ending September 30, 2013

 

-

 

 

-

 

 

(9,850)

 

 

-

 

 

(9,850)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Issuance of common shares and warrants for cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 at $0.30 per share in January, 2014

 

396,667

 

 

397

 

 

118,603

 

 

-

 

 

119,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Issuance of common shares and warrants for cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 at $0.35 per share in January, 2014

 

228,572

 

 

228

 

 

79,772

 

 

-

 

 

80,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Issuance of common shares for acquisition of NPC valued at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 $0.24 per share on February 28, 2014

 

5,000,000

 

 

5,000

 

 

1,195,000

 

 

-

 

 

1,200,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Issuance of options for director services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 on February 28, 2014

 

-

 

 

-

 

 

194,940

 

 

-

 

 

194,940

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Issuance of common shares and warrants for cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 at $0.45 per share on March 28, 2014

 

150,000

 

 

150

 

 

67,350

 

 

-

 

 

67,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Issuance of common shares for SCI assets acquisition and debt settlement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 valued at $0.665 per share on April 4, 2014

 

427,103

 

 

427

 

 

283,596

 

 

-

 

 

284,023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Issuance of warrants for SCI assets acquisition and debt settlement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 on April 4, 2014

 

-

 

 

-

 

 

43,082

 

 

-

 

 

43,082

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Shares returned to treasury per the separation agreement  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 with the former board of director on April 11, 2014

 

(751,250)

 

 

(751)

 

 

751

 

 

-

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Common shares issued per consulting agreement  valued at $0.40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 per share for the period from November 2013 to April 2014

 

120,000

 

 

120

 

 

47,880

 

 

-

 

 

48,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Issuance of common shares and warrants for cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 at $0.45 per share in April and May, 2014

 

57,222

 

 

57

 

 

25,693

 

 

-

 

 

25,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Issuance of common shares for SCI debt settlement valued at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 $0.665 per share in July, 2014

 

53,810

 

 

54

 

 

35,730

 

 

-

 

 

35,784

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Issuance of common shares and warrants for cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 at $0.25 per share on July 22, 2014

 

174,000

 

 

174

 

 

43,326

 

 

-

 

 

43,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Exercise of warrants with exercise price of $0.01 per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 on July 21, 2014 and August 28, 2014

 

1,550,000

 

 

1,550

 

 

13,950

 

 

-

 

 

15,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Shares returned to treasury per the settlement agreement  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 with the former board of directors on September 18, 2014

 

(7,300,000)

 

 

(7,300)

 

 

-

 

 

-

 

 

(7,300)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Issuance of options for director services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 for the quarter ended September 30, 2014

 

-

 

 

-

 

 

30,940

 

 

-

 

 

30,940

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net loss

 

-

 

 

-

 

 

-

 

 

(4,862,192)

 

 

(4,862,192)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Balance, September 30, 2014

 

45,236,794

 

 

45,237

 

 

13,518,987

 

 

(8,236,333)

 

 

5,327,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



8




 Common shares issued per consulting agreement  valued  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 at $0.13 per share on October 10, 2014

 

893,333

 

 

893

 

 

115,240

 

 

-

 

 

116,133

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Common shares issued per consulting agreement  valued at $0.10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  per share on October 27, 2014 and November 19, 2014

 

335,000

 

 

335

 

 

33,165

 

 

-

 

 

33,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Issuance of common shares for note conversion  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 at the prices ranging $0.041 to 0.071 per share during the quarter 12/31/2014

 

1,550,000

 

 

1,550

 

 

89,022

 

 

-

 

 

90,572

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Issuance of options for director services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 for the quarter ended December 31, 2014

 

-

 

 

-

 

 

50,916

 

 

-

 

 

50,916

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Reclassification of derivative liability to additional paid-in capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 associated with the notes conversion

 

-

 

 

-

 

 

41,524

 

 

-

 

 

41,524

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Reclassification of additional paid-in capital to derivative liability  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 for tainted warrants

 

-

 

 

-

 

 

(439,034)

 

 

-

 

 

(439,034)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net loss

 

-

 

 

-

 

 

-

 

 

(422,943)

 

 

(422,943)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Balance, December 31, 2014

 

48,015,127

 

$

48,015

 

$

13,409,820

 

$

(8,659,276)

 

$

4,798,559

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the consolidated financial statements.

 



9




Wellness Center USA, Inc.

Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

For the Three Months

 

For the Three Months

 

 

 

Ended

 

Ended

 

 

 

December 31, 2014

 

December 31, 2013

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

 

 Cash flows from operating activities:

 

 

 

 

 

 Net loss

$

(422,943)

 

$

(538,623)

 Adjustments to reconcile net loss to net cash used in operating activities

 

 

 

 

 

 

 Common shares issued for compensation and services

 

149,633

 

 

8,000

 

 Warrants and options issued for compensation and services

 

50,916

 

 

-

 

 Amortization of original interest discount

 

58,179

 

 

-

 

 Depreciation expense

 

3,961

 

 

9,368

 

 Amortization expense

 

67,610

 

 

74,849

 

 Change in fair value of derivative liability

 

(54,264)

 

 

-

 

 Changes in operating assets and liabilities:

 

-

 

 

-

 

 

 Accounts receivable

 

-

 

 

(28,413)

 

 

 Inventories

 

(6,489)

 

 

(44,690)

 

 

 Prepayments and other current assets

 

(810)

 

 

(39,500)

 

 

 Interest receivable on note receivable from Chairman and CEO

 

(2,284)

 

 

-

 

 

 Accounts payable

 

13,090

 

 

69,857

 

 

 Accrued interest - related party

 

-

 

 

839

 

 

 Accrued salary - officers

 

(50,000)

 

 

25,000

 

 

 Accrued payroll liabilities

 

(7,067)

 

 

-

 

 

 Credit cards payable

 

2,910

 

 

(13,384)

 

 

 Deferred revenue

 

(12,500)

 

 

-

 

 

 Deferred rent

 

-

 

 

(2,842)

 

 

 Accrued expenses and other current liabilities

 

28,422

 

 

5,038

 Net cash used in operating activities

 

(181,636)

 

 

(474,501)

 

 

 

 

 

 

 

 

 Cash flows from investing activities:

 

 

 

 

 

 Net cash provided by (used in) investing activities

 

-

 

 

-

 

 

 

 

 

 

 

 

 Cash flows from financing activities:

 

 

 

 

 

 

 Decrease in note receivable from Chairman and CEO

 

-

 

 

-

 

 Repayment of note receivable - Chairman and CEO

 

35,894

 

 

-

 

 Advances from (repayments to) related parties

 

(35,489)

 

 

-

 

 Proceeds from notes payable

 

100,000

 

 

-

 

 Repayments of long-term notes payable - officers

 

-

 

 

(5,905)

 

 Proceeds from sale of common stock and warrants (issuance cost)

 

-

 

 

(9,850)

 Net cash provided by (used in) financing activities

 

100,405

 

 

(15,755)

 

 

 

 

 

 

 

 

 Net change in cash

 

(81,231)

 

 

(490,256)

 

 

 

 

 

 

 

 

 Cash at beginning of the reporting period

 

175,671

 

 

499,246

 

 

 

 

 

 

 

 

 Cash at end of the reporting period

$

94,440

 

$

8,990

 

 

 

 

 

 

 

 

 Supplemental disclosure of cash flows information:

 

 

 

 

 

 

 Interest paid

$

-

 

$

-

 

 Income tax paid

$

-

 

$

-

 

 

 

 

 

 

 

 

 Non cash financing and investing activities:

 

 

 

 

 

 

 Reclassification of equity instrument to derivative liabilities

$

439,034

 

$

-

 

 Issuance of common stock for convertible notes conversion

$

90,572

 

$

-

 

 

 

 

 

 

 

 

See accompanying notes to the consolidated financial statements.

 



10



Wellness Center USA, Inc.

December 31, 2014 and 2013

Notes to the Consolidated Financial Statements

(Unaudited)


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.



11




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-Unaudited Interim Financial Information


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”)  for interim financial information, and with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) to Form 10-Q and Article 8 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented.  Interim results are not necessarily indicative of the results for the full year.  These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the fiscal year ended September 30, 2014 and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC on January 15, 2015.


Fiscal Year End


The Company elected September 30th as its fiscal year end date upon its formation.



12




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 derivative liabilities and 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 derivative liabilities, 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.



13




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

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, 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


Business and Business Combinations


Pursuant to ASC Section 805-10-20 a business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants.


Pursuant to Regulation S-X 11-01(d) the term business should be evaluated in light of the facts and circumstances involved and whether there is sufficient continuity of the acquired entity’s operations prior to and after the transactions. A presumption exists that a separate entity, a subsidiary, or a division is a business. However, a lesser component of an entity may also constitute a business. Among the facts and circumstances which should be considered in evaluating whether an acquisition of a lesser component of an entity constitutes a business are the following: (1) Whether the nature of the revenue-producing activity of the component will remain generally the same as before the transaction; or (2) Whether any of the following attributes remain with the component after the transaction: (i) Physical facilities, (ii) Employee base, (iii) Market distribution system, (iv) Sales force, (v) Customer base, (vi) Operating rights, (vii) Production techniques, or (viii) Trade names.



14




The Company applies Topic 805 “Business Combinations” of the FASB Accounting Standards Codification 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.  


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.


Goodwill, Gain from Bargain Purchase and Contingent Consideration


Pursuant to ASC Paragraphs 805-30-25-1 through 805-30-25-3 the acquirer shall recognize goodwill as of the acquisition date , measured as the excess of (a) over (b): a. the aggregate of (1) the acquisition-date fair value of the consideration transferred, (2) the fair value of any non-controlling interest in the acquiree, and (3) the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree in a business combination achieved in stages; and (b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.


Occasionally, an acquirer will make a bargain purchase, which is a business combination in which the amount in paragraph 805-30-30-1(b) exceeds the aggregate of the amounts specified in (a) in that paragraph. If that excess remains after applying the requirements in paragraph 805-30-25-4, the acquirer shall recognize the resulting gain in earnings on the acquisition date. The gain shall be attributed to the acquirer. A bargain purchase might happen in a business combination that is a forced sale in which the seller is acting under compulsion.



15




Pursuant to ASC Paragraphs 805-30-25-5 through 805-30-25-7 the consideration the acquirer transfers in exchange for the acquiree includes any asset or liability resulting from a contingent consideration arrangement. The acquirer shall recognize the acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange for the acquiree and classify an obligation to pay contingent consideration as a liability or as equity in accordance with Subtopics 480-10 and 815-40 or other applicable generally accepted accounting principles (GAAP). Subtopic 480-10 provides guidance on whether to classify as a liability a contingent consideration arrangement that is, in substance, a put option written by the acquirer on the market price of the acquirer’s shares issued in the business combination. The acquirer shall classify as an asset a right to the return of previously transferred consideration if specified conditions are met.


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.


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.


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.



16




The Company’s convertible notes payable and loans payable approximate the fair value of such instruments based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangements at December 31, 2014 and September 30, 2014.


The Company’s Level 3 financial liabilities consist of the derivative warrants for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation and the derivative liability on the conversion feature of the convertible notes payable.  The Company valued the automatic conditional conversion, re-pricing/down-round, change of control; default and follow-on offering provisions using a lattice model, with the assistance of a third party valuation specialist, for which management understands the methodologies.  These models incorporate transaction details such as Company stock price, contractual terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior as of the date of issuance and each balance sheet date.


Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis


Level 3 Financial Liabilities – Derivative Warrant Liabilities and Derivative Liability on Conversion Feature


The Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative warrant liability and derivative liability on the conversion feature at every reporting period and recognizes gains or losses in the consolidated statements of operations that are attributable to the change in the fair value of the derivative liabilities.


The following table presents the derivative financial instruments, measured and recorded at fair value on the Company’s consolidated balance sheets on a recurring basis, and their level within the fair value hierarchy as of December 31, 2014:

 

 

 

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

Derivative liability -Embedded conversion

 

$

 

 

 

$

-

 

 

$

-

 

 

$

126,471

Derivative liabilities- Tainted Warrants

 

 

 

 

 

 

-

 

 

 

-

 

 

 

362,885

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

489,356

 

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.



17




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 December 31, 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 December 31, 2014 or 2013.



18




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 December 31, 2014 or 2013.


There was no lower of cost or market adjustments for the reporting period ended December 31, 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:


 

 

 

 

 

 

Estimated Useful Life (Years)

 

Auto

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

Computer equipment

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

Furniture and fixture

 

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

 

 

Leasehold improvement

 

 

 

 

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

Medical and office equipment

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

Software

 

 

 

 

 

 

 

3

 


(*) 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.



19




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:


 

 

 

 

 

 

Estimated Useful Life (Years)

 

Exclusive license agreements (*)

 

 

 

 

 

 

 

18

 

 

 

 

 

 

 

 

 

 

 

Acquired technologies

 

 

 

 

 

 

 

20

 

 

 

 

 

 

 

 

 

 

 

Non-compete agreements (**)

 

 

 

 

 

 

 

3-4

 

 

 

 

 

 

 

 

 

 

 

Patents

 

 

 

 

 

 

 

15

 

 

 

 

 

 

 

 

 

 

 

Trademarks (***)

 

 

 

 

 

 

 

7

 


(*) 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.



20




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 of the Company (“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); 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.



21




Derivative Instruments and Hedging Activities


The Company accounts for derivative instruments and hedging activities in accordance with paragraph 815-10-05-4 of the FASB Accounting Standards Codification (“Paragraph 815-10-05-4”). Paragraph 815-10-05-4 requires companies to recognize all derivative instruments as either assets or liabilities in the balance sheet at fair value.  The accounting for changes in the fair value of a derivative instrument depends upon: (i) whether the derivative has been designated and qualifies as part of a hedging relationship, and (ii) the type of hedging relationship.  For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument based upon the exposure being hedged as either a fair value hedge, cash flow hedge or hedge of a net investment in a foreign operation.


Derivative Liability


The Company evaluates its convertible debt, options, warrants or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 815-10-05-4 and Section 815-40-25 of the FASB Accounting Standards Codification.  The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability.  In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations and comprehensive income (loss) as other income or expense.  Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then that the related fair value is reclassified to equity.


In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.


The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.  Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date.  Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.


The Company adopted Section 815-40-15 of the FASB Accounting Standards Codification (“Section 815-40-15”) to determine whether an instrument (or an embedded feature) is indexed to the Company’s own stock.  Section 815-40-15 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions.   The adoption of Section 815-40-15 has affected the accounting for (i) certain freestanding warrants that contain exercise price adjustment features and (ii) convertible bonds issued by foreign subsidiaries with a strike price denominated in a foreign currency.


The Company marks to market the fair value of the embedded derivative warrants at each balance sheet date and records the change in the fair value of the embedded derivative warrants as other income or expense in the consolidated statements of operations and comprehensive income (loss).


The Company utilizes the Lattice model that values the liability of the derivative warrants based on a probability weighted discounted cash flow model with the assistance of the third party valuation firm.  The reason the Company picks the Lattice model is that in many cases there may be multiple embedded features or the features of the bifurcated derivatives may be so complex that a Black-Scholes valuation does not consider all of the terms of the instrument.  Therefore, the fair value may not be appropriately captured by simple models.  In other words, simple models such as Black-Scholes may not be appropriate in many situations given complex features and terms of conversion option (e.g., combined embedded derivatives).  The Lattice model is based on future projections of the various potential outcomes. The features that were analyzed and incorporated into the model included the exercise and full reset features.  Based on these features, there are two primary events that can occur; the Holder exercises the Warrants or the Warrants are held to expiration. The Lattice model analyzed the underlying economic factors that influenced which of these events would occur, when they were likely to occur, and the specific terms that would be in effect at the time (i.e. stock price, exercise price, volatility, etc.).  Projections were then made on the underlying factors which led to potential scenarios.  Probabilities were assigned to each scenario based on management projections.  This led to a cash flow projection and a probability associated with that cash flow.  A discounted weighted average cash flow over the various scenarios was completed to determine the value of the derivative warrants.



22




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.



23




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.




24




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.



25




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.



26




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.



27




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:


 

 

Contingent shares issuance arrangement, stock options or warrants

 

 

 

 

 

 

 

 

 

 

 

 

For the Reporting Period Ended

December 31,

 2014

 

 

For the Reporting Period Ended

December 31, 2013

 

 

 

 

 

 

 

 

 

 

Convertible Notes Payable Shares and Related Warrant Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants issuable, contingent upon conversion of convertible note payable of $58,000, issued on August 17, 2012 with an exercise price of $0.45 per share. The Warrants were issued in connection with the convertible note conversion on September 27, 2013

 

 

193,334

 

 

 

193,334

 

 

 

 

 

 

 

 

 

 

Warrants issuable, contingent upon conversion of convertible note payable of $50,000, issued on October 11, 2012 with an exercise price of $0.45 per share. The Warrants were issued in connection with the convertible note conversion on September 27, 2013

 

 

166,666

 

 

 

166,666

 

 

 

 

 

 

 

 

 

 

Warrants issuable, contingent upon conversion of convertible note payable of $8,000, issued on February 8, 2013 with an exercise price of $0.45 per share. The Warrants were  issued in connection with the convertible note conversion on September 27, 2013

 

 

26,667

 

 

 

26,667

 

 

 

 

 

 

 

 

 

 

Warrants issuable, contingent upon conversion of convertible note payable of $20,000, issued on June 28, 2013 with an exercise price of $0.45 per share. The Warrants were issued in connection with the convertible note conversion on September 27, 2013

 

 

66,667

 

 

 

66,667

 

 

 

 

 

 

 

 

 

 

On April 16 and June 23, 2014, the Company issued a promissory note total in the principal amount of $222,222 with a 10% Original Issuance Discount ("OID") and 12% one-time interest after 90 days if no repayment. The note is due two (2) years from the date of issuance which become convertible after 180 days from the issuance date with the conversion price at 65% of the two lowest trade prices for the 25 trade day period before the conversion date . The note turned convertible on October 16, 2014 and December 22, 2014. The principal of $90,572 were converted to 1,550,000 shares during the quarter ending December 31, 2014.

 

 

3,193,630

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Sub-total: convertible notes payable shares and related warrant shares

 

 

3,646,964

 

 

 

453,334

 

 

 

 

 

 

 

 

 

 



28




Stock Option Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options issued in June, 2010 to the founder of the Company, upon formation, with an exercise price of $0.01 per share expiring five (5) years from the date of issuance

 

 

1,600,000

 

 

 

1,600,000

 

 

 

 

 

 

 

 

 

 

Stock options issued on November 30, 2010 to the members of the board of directors of the Company with an exercise price of $0.01 per share expiring five (5) years from the date of issuance

 

 

200,000

 

 

 

200,000

 

 

 

 

 

 

 

 

 

 

Stock options issued on March 13, 2012  to a consultant with an exercise price of $0.44 per share expiring five (5) years from the date of issuance

 

 

50,000

 

 

 

50,000

 

 

 

 

 

 

 

 

 

 

Stock options issued on August 24, 2012 for conversion of PSI stock options originally issued on December 20, 2010 with an exercise price of $1.00 per share expiring ten (10) years from the date of original issuance upon acquisition of PSI

 

 

750,000

 

 

 

750,000

 

 

 

 

 

 

 

 

 

 

Stock options issued on August 24, 2012 for conversion of PSI stock options originally issued on February 22, 2012 with an exercise price of $2.00 per share expiring ten (10) years from the date of original issuance upon acquisition of PSI

 

 

650,000

 

 

 

650,000

 

 

 

 

 

 

 

 

 

 

Stock options issued on September 6, 2013 to the advisory board member of the Company with an exercise price of $0.75 per share expiring five (5) years from the date of issuance

 

 

10,000

 

 

 

10,000

 

 

 

 

 

 

 

 

 

 

Stock options issued on February 28, 2014  to the two officers of the Company with an exercise price of $0.40 per share expiring five (5) years from the date of issuance

 

 

1,800,000

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Stock options issued on July 1, 2014  to the officer of the Company with an exercise price of $0.40 per share expiring five (5) years from the date of issuance

 

 

250,000

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options issued on September 30, 2014  to the two officers of the Company with an exercise price of $0.125 per share expiring five (5) years from the date of issuance

 

 

265,000

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Stock options issued on December 31, 2014  to the two officers of the Company with an exercise price of $0.11 per share expiring five (5) years from the date of issuance

 

 

265,000

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Sub-total: Stock option shares

 

 

5,840,000

 

 

 

3,260,000

 

 

 

 

 

 

 

 

 

 

Warrant Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants issued on November 10, 2010 to investors in connection with the Company’s November 10, 2010 equity financing with an exercise price of $0.01 per share expiring five (5) years from the date of issuance

 

 

1,600,000

 

 

 

1,600,000

 

 

 

 

 

 

 

 

 

 

Remaining unexercised warrants originally issued on November 30, 2010 to investors with an exercise price of $0.01 per share expiring five (5) years from the date of issuance

 

 

884,334

 

 

 

2,434,334

 

 

 

 

 

 

 

 

 

 

Warrants issued on November 30, 2010 for services with an exercise price of $0.01 per share expiring five (5) years from the date of issuance

 

 

375,000

 

 

 

375,000

 

 

 

 

 

 

 

 

 

 

Warrants issued on March 8, 2012 to an investor with an exercise price of $0.50 per share expiring five (5) years from the date of issuance

 

 

190,000

 

 

 

190,000

 

 

 

 

 

 

 

 

 

 

Warrants issued on March 15, 2012 to an investor with an exercise price of $0.75 per share expiring five (5) years from the date of issuance

 

 

75,000

 

 

 

75,000

 



29




 

 

 

 

 

 

 

 

 

Warrants issued on April 19, 2012 to an investor with an exercise price of $1.65 per share expiring five (5) years from the date of issuance

 

 

14,545

 

 

 

14,545

 

 

 

 

 

 

 

 

 

 

Warrants issued on May 9, 2012 to an investor with an exercise price of $2.16 per share expiring five (5) years from the date of issuance

 

 

9,091

 

 

 

9,091

 

 

 

 

 

 

 

 

 

 

Warrants issued on May 14, 2012 to investors with an exercise price of $2.25 per share expiring five (5) years from the date of issuance

 

 

18,182

 

 

 

18,182

 

 

 

 

 

 

 

 

 

 

Warrants issued between May 21 and 25, 2012 to investors with an exercise price of $2.31 per share expiring five (5) years from the date of issuance

 

 

112,955

 

 

 

112,955

 

 

 

 

 

 

 

 

 

 

Remaining unexercised warrants originally issued on September 25, 2012 to investors with an exercise price of $0.45 per share expiring five (5) years from the date of issuance

 

 

236,666

 

 

 

236,666

 

 

 

 

 

 

 

 

 

 

Warrants issued on December 19, 2012 to investors with an exercise price of $0.45 per share expiring five (5) years from the date of issuance

 

 

520,999

 

 

 

520,999

 

 

 

 

 

 

 

 

 

 

Warrants issued on February 27, 2013 and March 17, 2013 for services with an exercise price of $0.30 per share expiring five (5) years from the date of issuance

 

 

700,000

 

 

 

700,000

 

 

 

 

 

 

 

 

 

 

Warrants issued on March 18, 2013 to investors with an exercise price of $0.45 per share expiring five (5) years from the date of issuance

 

 

3,096,603

 

 

 

3,096,603

 

 

 

 

 

 

 

 

 

 

Warrants issued on April 18, 2013 to investors with an exercise price of $0.45 per share expiring five (5) years from the date of issuance

 

 

601,668

 

 

 

601,668

 

 

 

 

 

 

 

 

 

 

Warrants issued on May 9, 2013 to investors with an exercise price of $1.00 per share expiring five (5) years from the date of issuance

 

 

40,000

 

 

 

40,000

 

 

 

 

 

 

 

 

 

 

Warrants issued on August 15, 2013 to investors with an exercise price of $0.75 per share expiring five (5) years from the date of issuance

 

 

4,121,250

 

 

 

4,121,250


 

 

 

 

 

 

 

 

 

Warrants issued on September 29, 2013 to an investor with an exercise price of $0.45 per share expiring five (5) years from the date of issuance

 

 

250,000

 

 

 

250,000

 

 

 

 

 

 

 

 

 

 

Warrants issued on January 13, 2014  to investors with an exercise price of $0.40 per share expiring five (5) years from the date of issuance

 

 

793,333

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Warrants issued on January 13, 2014  to investors with an exercise price of $0.45 per share expiring five (5) years from the date of issuance

 

 

228,572

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Warrants issued on March 28, 2014  to investors with an exercise price of $0.65 per share expiring five (5) years from the date of issuance

 

 

150,000

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Warrants issued on April 4, 2014 to the stockholders of SMI Holdings, Inc. with an exercise price of $0.665 per share expiring five (5) years from the date of issuance in connection with Asset Purchase Agreement.

 

 

131,266

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Warrants issued on April 30, 2014 to investors with an exercise price of $0.65 per share expiring five (5) years from the date of issuance.

 

 

57,222

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Warrants issued on July 22, 2014 to the investor with an exercise price of $0.30 per share expiring five (5) years from the date of issuance.

 

 

348,000

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Sub-total: Warrant shares

 

 

14,554,686

 

 

 

14,396,293

 

 

 

 

 

 

 

 

 

 



30




Total contingent shares issuance arrangement, stock options or warrants

 

 

24,041,650

 

 

 

18,109,627

 

 

 

 

 

 

 

 

There were approximate 6,571,998 and 7,709,960 potentially outstanding dilutive common shares for the reporting period ended December 31, 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.



31




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 be issued). The term probable is used consistently with its use in Topic 450, Contingencies.



32




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 December 31, 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.



33




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.



34




The specific control factors considered to determine which entity was the accounting acquirer are as follows:


(i) The ownership interest of each party after the acquisition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WCUI's common shares issued and outstanding prior to SMI assets acquisition

 

 

50,909,909

 

 

 

99.2

%

 

 

 

 

 

 

 

 

 

WCUI's common shares issued to the stockholders of SMI for the acquisition of certain assets and settlement of certain debt of SMI upon acquisition of certain SMI assets and settlement of certain debt

 

 

427,103

 

 

 

0.8

%

 

 

 

 

 

 

 

 

 

 

 

 

51,337,012

 

 

 

100.0

%

 

 

 

 

 

 

 

 

 

(ii) The members of the board of directors from both companies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The members of the board of directors from WCUI prior to SMI assets acquisition

 

 

3

 

 

 

100.0

%

 

 

 

 

 

 

 

 

 

The members of the board of directors from SMI upon acquisition of certain SMI assets and settlement of certain debt

 

 

-

 

 

 

0.0

%

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

100.0

%

 

 

 

 

 

 

 

 

 

(iii) Senior management from both companies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior management from WCUI prior to SMI assets acquisition

 

 

2

 

 

 

100.0

%

 

 

 

 

 

 

 

 

 

Senior management from SMI upon acquisition of certain SMI assets and settlement of certain debt

 

 

-

 

 

 

-

%

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

100.0

%

 

 

 

 

 

 

 

 

 


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.



35




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:


 

 

 

Book Value

 

 

Fair Value  Adjustment

 

 

Fair Market Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

$

2,969

 

 

$

-

 

 

$

2,969

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventories

 

 

 

87,122

 

 

 

 

 

 

 

87,122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepayments and other current assets

 

 

 

32,497

 

 

 

(30,663)

 

 

 

1,834

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment

 

 

 

3,020

 

 

 

 

 

 

 

3,020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents

 

 

 

379,803

 

 

 

 

 

 

 

379,803

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain from bargain purchase

 

 

 

 

 

 

 

(111,859)

 

 

 

(111,859)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

505,411

 

 

 

(142,522)

 

 

 

362,889

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-controlling interest

 

 

 

(-)

 

 

 

-

 

 

 

(-)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase price

 

 

$

505,411

 

 

$

(142,522

)

 

$

362,889

 


Note 5 – Inventories


Inventories consisted of the following:


 

 

December 31,

 2014

 

 

September 30, 2014

 

Purchased parts for assembly - PSI

 

$

125,987

 

 

$

125,987

 

 

 

 

 

 

 

 

 

 

Finished goods - PSI

 

 

57,131

*

 

 

57,131

*

 

 

 

 

 

 

 

 

 

Finished goods - StealthCo

 

 

93,361

 

 

 

86,872

 

 

 

 

 

 

 

 

 

 

 

 

$

276,479

 

 

$

269,990

 

 

 

 

 

 

 

 

 

 

*

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 December 31, 2014 or September 30, 2014.



36




Slow-Moving or Obsolescence Markdowns


The Company recorded no inventory obsolescence adjustments for the reporting period ended December 31, 2014 or 2013.


Note 6 – Property and Equipment


Property and equipment, stated at cost, less accumulated depreciation consisted of the following:


 

Estimated Useful Life (Years)

 

December 31, 2014

 

 

September 30, 2014

 

Auto

3

 

$

15,000

 

 

$

15,000

 

 

 

 

 

 

 

 

 

 

 

Computer equipment

5

 

 

5,526

 

 

 

5,526

 

 

 

 

 

 

 

 

 

 

 

Furniture and fixture

7

 

 

24,966

 

 

 

24,966

 

 

 

 

 

 

 

 

 

 

 

Leasehold improvement

5

 

 

15,170

 

 

 

15,170

 

 

 

 

 

 

 

 

 

 

 

Medical and office equipment

5

 

 

18,889

 

 

 

18,889

 

 

 

 

 

 

 

 

 

 

 

Software

3

 

 

22,815

 

 

 

22,815

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

102,366

 

 

 

102,366

 

 

 

 

 

 

 

 

 

 

 

Less accumulated depreciation

 

 

 

(61,663)

 

 

 

(57,702)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

40,703

 

 

$

44,664

 


(i)

Depreciation Expense


Depreciation expense was $3,961 and $9,368 for the reporting period ended December 31, 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.



37




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 $63 and $62 for the reporting period ended December 31, 2014 and 2013, respectively.


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.



38




(i)

Amortization Expense


Amortization expense was $8,982 for the reporting period ended December 31, 2014.


Summary of Patents and Exclusive Licenses


The patents and exclusive licenses were as follows:


 

Estimated Useful Life (Years)

 

December 31, 2014

 

 

September 30, 2014

 

PSI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exclusive license

20

 

$

5,000

 

 

$

5,000

 

 

 

 

 

 

 

 

 

 

 

Accumulated amortization

 

 

 

(1,001)

 

 

 

(938)

 

 

 

 

 

 

 

 

 

 

 

Accumulated impairment

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,999

 

 

 

4,062

 

 

 

 

 

 

 

 

 

 

 

Patents

15

 

$

379,803

 

 

$

379,803

 

 

 

 

 

 

 

 

 

 

 

Accumulated amortization

 

 

 

(20,200)

 

 

 

(11,218)

 

 

 

 

 

 

 

 

 

 

 

Accumulated impairment

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

359,603

 

 

 

368,585

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents and exclusive license

 

 

 

384,803

 

 

 

384,803

 

 

 

 

 

 

 

 

 

 

 

Accumulated amortization

 

 

 

(21,201)

 

 

 

(12,156)

 

 

 

 

 

 

 

 

 

 

 

Accumulated impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

363,602

 

 

$

372,647

 




39




Acquired Technologies

 

Acquired technologies, stated at cost, less accumulated amortization consisted of the following:


 

Estimated Useful Life (Years)

 

December 31, 2014

 

 

September 30, 2014

 

CNS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquired technologies

20

 

$

-

 

 

$

325,000

 

 

 

 

 

 

 

 

 

 

 

Accumulated amortization

 

 

 

-

 

 

 

(27,080)

 

 

 

 

 

 

 

 

 

 

 

Accumulated impairment

 

 

 

-

 

 

 

(297,920)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

PSI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquired technologies

20

 

 

2,095,000

 

 

 

2,095,000

 

 

 

 

 

 

 

 

 

 

 

Accumulated amortization

 

 

 

(244,412)

 

 

 

(218,225)

 

 

 

 

 

 

 

 

 

 

 

Accumulated impairment

 

 

 

(-)

 

 

 

(-)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,850,588

 

 

 

1,876,775

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquired technologies

 

 

 

2,095,000

 

 

 

2,420,000

 

 

 

 

 

 

 

 

 

 

 

Accumulated amortization

 

 

 

(244,412)

 

 

 

(245,305)

 

 

 

 

 

 

 

 

 

 

 

Accumulated impairment

 

 

 

-

 

 

 

(297,920)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,850,588

 

 

$

1,876,775

 


Amortization Expense


Amortization expense was $893 and $30,249 for the reporting period ended December 31, 2014 and 2013, respectively.



40




Non-compete Agreements

 

Non-compete agreements, stated at cost, less accumulated amortization consisted of the following:


 

Estimated Useful Life (Years)

 

December 31, 2014

 

 

September 30, 2014

 

CNS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Compete agreement

3

 

$

-

 

 

$

120,000

 

 

 

 

 

 

 

 

 

 

 

Accumulated amortization

 

 

 

-

 

 

 

(66,660)

 

 

 

 

 

 

 

 

 

 

 

Accumulated impairment

 

 

 

-

 

 

 

(53,340)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

PSI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Compete agreement

4

 

 

120,000

 

 

 

120,000

 

 

 

 

 

 

 

 

 

 

 

Accumulated amortization

 

 

 

(70,000)

 

 

 

(62,500)

 

 

 

 

 

 

 

 

 

 

 

Accumulated impairment

 

 

 

(-)

 

 

 

(-)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50,000

 

 

 

57,500

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Compete agreements

 

 

 

120,000

 

 

 

240,000

 

 

 

 

 

 

 

 

 

 

 

Accumulated amortization

 

 

 

(70,000)

 

 

 

(129,160)

 

 

 

 

 

 

 

 

 

 

 

Accumulated impairment

 

 

 

-

 

 

 

(53,340)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

50,000

 

 

$

57,500

 


Amortization Expense


Amortization expense was $7,500 and $17,499 for the reporting period ended December 31, 2014 and 2013, respectively.



41




Trademarks


Trademarks, stated at cost, less accumulated amortization consisted of the following:


 

Estimated Useful Life (Years)

 

December 31, 2014

 

 

September 30, 2014

 

CNS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademark

7

 

$

-

 

 

$

110,000

 

 

 

 

 

 

 

 

 

 

 

Accumulated amortization

 

 

 

-

 

 

 

(20,380)

 

 

 

 

 

 

 

 

 

 

 

Accumulated impairment

 

 

 

-

 

 

 

(89,620)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

PSI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademark - Psoria-Light

7

 

 

420,000

 

 

 

420,000

 

 

 

 

 

 

 

 

 

 

 

Accumulated amortization

 

 

 

(132,500)

 

 

 

(117,500)

 

 

 

 

 

 

 

 

 

 

 

Accumulated impairment

 

 

 

(-)

 

 

 

(-)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

287,500

 

 

 

302,500

 

 

 

 

 

 

 

 

 

 

 

Trademark - Psoria-Shield

7

 

 

210,000

 

 

 

210,000

 

 

 

 

 

 

 

 

 

 

 

Accumulated amortization

 

 

 

(77,500)

 

 

 

(70,000)

 

 

 

 

 

 

 

 

 

 

 

Accumulated impairment

 

 

 

(-)

 

 

 

(-)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

132,500

 

 

 

140,000

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

 

 

630,000

 

 

 

740,000

 

 

 

 

 

 

 

 

 

 

 

Accumulated amortization

 

 

 

(210,000)

 

 

 

(207,880)

 

 

 

 

 

 

 

 

 

 

 

Accumulated impairment

 

 

 

-

 

 

 

(89,620)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

420,000

 

 

$

442,500

 


Amortization Expense


Amortization expense was $22,500 and $25,557 for the reporting period ended December 31, 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 at September 30, 2014.



42




Note 8 – Goodwill


Goodwill, stated at cost, less accumulated impairment, if any, consisted of the following:


 

 

 

December 31, 2014

 

 

September 30, 2014

 

Acquisition of CNS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

$

-

 

 

$

2,868,045

 

 

 

 

 

 

 

 

 

 

 

Accumulated impairment

 

 

 

-

 

 

 

(2,868,045)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

Acquisition of NPC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

$

1,200,000

 

 

$

1,200,000

 

 

 

 

 

 

 

 

 

 

 

Accumulated impairment

 

 

 

(-)

 

 

 

(-)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,200,000

 

 

 

1,200,000

 

 

 

 

 

 

 

 

 

 

 

Acquisition of PSI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

1,716,603

 

 

 

1,716,603

 

 

 

 

 

 

 

 

 

 

 

Accumulated impairment

 

 

 

(-)

 

 

 

(-)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,716,603

 

 

 

1,716,603

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquired technologies

 

 

 

2,916,603

 

 

 

5,784,648

 

 

 

 

 

 

 

 

 

 

 

Accumulated impairment

 

 

 

-

 

 

 

(2,868,045)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,916,603

 

 

$

2,916,603

 


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:


 

Estimated Useful Life (Years)

 

December 31, 2014

 

 

September 30, 2014

 

Website development costs

3

 

$

22,809

 

 

$

22,809

 

 

 

 

 

 

 

 

 

 

 

Less accumulated amortization

 

 

 

(19,639)

 

 

 

(17,261)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,170

 

 

$

5,548

 




43




(i)

Amortization Expense


Amortization expense was $2,378 and $1,482 for the reporting period ended December 31, 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 December 31, 2014.


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.



44




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.


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.


The notes payable are as follows:


 

 

December 31,

 2014

 

 

September 30, 2014

 

On April 16, 2014 the Company issued a note in the principal amount of $166,667 with a 10% Original Issuance Discount ("OID") and 12% one-time interest if not being fully repaid on or before 90 days from the payment date. The note is due two year from the date of issuance, convertible after 180 days from the payment date as of October 16, 2014 at the lesser of $0.70 or 65% of the two lowest trade prices for the 25 trade day period before the conversion date.  On July 15, 2014 the Company accrued the one-time interest charge of $20,000 on the note. The principal of $90,572 were converted to 1,550,000 shares during the quarter ending December 31, 2014

 

$

76,095

 

 

$

166,667

 

 

 

 

 

 

 

 

 

 

On June 23, 2014 the Company issued a note in the principal amount of $55,556 with a 10% Original Issuance Discount ("OID") and 12% one-time interest if not being fully repaid on or before 90 days from the payment date. The note is due two years from the date of issuance, convertible after 180 days from the payment date as December 22, 2014 at the lesser of $0.70 or 65% of the two lowest trade price for the 25 trade day period before the conversion date. September 22, 2014 the Company accrued the one-time interest charge of $6,667.

 

 

55,556

 

 

 

55,556

 

 

 

 

 

 

 

 

 

 

Face amount

 

 

131,651

 

 

 

222,223

 

 

 

 

 

 

 

 

 

 

Discount representing the original issue discount and the derivative liability on conversion features

 

 

(139,316)

 

 

 

(22,223)

 

 

 

 

 

 

 

 

 

 

Accumulated amortization of discount of notes payable

 

 

33,328

 

 

 

4,166

 

 

 

 

 

 

 

 

 

 

Remaining discount

 

 

(105,988)

 

 

 

(18,057)

 

 

 

 

 

 

 

 

 

 

Convertible notes payable, net

 

$

25,663

 

 

$

204,166

 

 

 

 

 

 

 

 

 

 




45




Note 11 – Related Party Transactions


Related Parties


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 StealthCo 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 ("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


 

 

December 31,

 2014

 

 

September 30, 2014

 

On September 30, 2013, Mr. Andrew Kandalepas, Chairman, President and CEO of the Company (“Maker”), issued a note to pay to the order of Wellness Center USA, Inc. ("Lender"), the principal sum of Two Hundred Fifty Thousand Dollars ($250,000), together with interest at 7.0% per annum, in six quarterly payments of principal and accrued interest, beginning on April 1, 2014 and continuing on the first day of each calendar quarter thereafter, with all principal and interest to be paid in full on or before July 1, 2015  (the "Maturity Date"). After the Maturity Date, and in addition to the interest described above which is due on or prior to the Maturity Date, Maker shall pay interest on the balance of principal remaining unpaid during any such period at an annual rate equal to ten percent (10%) (the "Default Rate"). The interest accruing under this paragraph shall be immediately due and payable by Maker to, and shall be additional indebtedness evidenced by, this Note.

 

$

250,000

 

 

$

250,000

 

 

 

 

 

 

 

 

 

 

Repayments from inception to date

 

 

(70,894)

 

 

 

(35,000)

 

 

 

 

 

 

 

 

 

 

Remaining balance

 

 

179,106

 

 

 

215,000

 

 

 

 

 

 

 

 

 

 

Current maturity of note receivable - Chairman, President and CEO

 

 

(91,339)

 

 

 

(127,233)

 

 

 

 

 

 

 

 

 

 

Note receivable - Chairman, President and CEO, net of current maturity

 

$

87,767

 

 

$

87,767

 




46




Note 12 – Commitments and Contingencies


Employment Agreements - NPC


Employment Agreement – Jay Jos