UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

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 FORM 10-Q

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☑ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2014

 

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934

For the transition period from:

 

Commission File Number 000-54730

  

AIRWARE LABS CORP.

(Exact name of registrant as specified in its charter)

 

Delaware		98-0665018
(State of incorporation)		(I.R.S. Employer Identification No.)

 

7377 E Doubletree Ranch Rd., Suite 260

Scottsdale, AZ 85258

(Address of principal executive offices)

 

(480) 463-4246

(Registrant’s telephone number)

 

 

Indicate by check mark whether the registrant (1) has 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   ☐ 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   ☐ No (Not required)

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer ☐                     Accelerated Filer ☐

 

Non-Accelerated Filer ☐                        Smaller Reporting Company ☑

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes   ☑ No

 

As of February 15, 2015, there were 65,542,120 shares of the registrant’s $0.0001 par value common stock issued and outstanding.

 

AIRWARE LABS CORP.

TABLE OF CONTENTS

				Page
PART I.		FINANCIAL INFORMATION
ITEM 1.		FINANCIAL STATEMENTS			3
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			12
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			14
ITEM 4.		CONTROLS AND PROCEDURES			14
PART II.		OTHER INFORMATION
ITEM 1.		LEGAL PROCEEDINGS			15
ITEM 1A.		RISK FACTORS			15
ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			16
ITEM 3.		DEFAULTS UPON SENIOR SECURITIES			16
ITEM 4.		MINE SAFETY DISCLOSURES			16
ITEM 5.		OTHER INFORMATION			16
ITEM 6.		EXHIBITS			16

 

Special Note Regarding Forward-Looking Statements

 

Information included in this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). This information may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Airware Labs Corp. (the “Company”), to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that these projections included in these forward-looking statements will come to pass. Actual results of the Company could differ materially from those expressed or implied by the forward-looking statements as a result of various factors. Except as required by applicable laws, the Company has no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

 

*Please note that throughout this Quarterly Report, and unless otherwise noted, the words "we," "our," "us," the "Company," "AIRW," or “Airware” refers to Airware Labs Corp.

PART I - FINANCIAL INFORMATION

 

 

ITEM 1.

CONDENSED FINANCIAL STATEMENTS

 

INDEX	F-1
Unaudited Condensed Consolidated Balance Sheet as of December 31, 2014 and Audited Consolidated Balance Sheet as of September 30, 2014	F-2
Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2014 and 2013	F-3
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2014 and 2013	F-4
Notes to Condensed Consolidated Financial Statements (Unaudited)	F-5

 

 

 

AIRWARE LABS CORP. AND SUBSIDIARY
(FORMERLY CROWN DYNAMICS CORP.)
CONDENSED CONSOLIDATED BALANCE SHEETS
			As of				As of
			December 31,				September 30,
			2014				2014
			(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	77,715			$	42,582
Accounts receivable			86,362				3,137
Inventory			68,602				71,614
Deposits			10,000				10,000
Prepaid expenses and other current assets			73,439				66,205
Total current assets			316,118				193,538
Other Assets:
Property and equipment, net			29,734				20,039
Intangible assets, net			281,524				292,402
Deposits			2,387				2,387
Investment in Breathe Active, LLC			290				290
Total Assets		$	630,053			$	508,656
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable		$	1,675,247			$	1,639,529
Accrued interest - related parties			35,354				32,076
Accrued interest			1,344				1,244
Accrued expenses			77,475				72,172
Convertible notes payable			15,886				27,678
Convertible notes payable to related parties - current portion, net of discount			1,715,924				1,324,659
Total current liabilities			3,521,230				3,097,358
Accrued interest to related parties			138				106
Notes payable to former officer			47,500				47,500
Total liabilities			3,568,868				3,144,964
Commitments and Contingencies
Stockholders' Deficit:
Common stock, par value $.0001 per share, 200,000,000 and 200,000,000 shares authorized; 64,268,482 and 62,256,379 shares issued and outstanding at December 31, 2014 and September 30, 2014, respectively			6,427				6,226
Additional paid-in capital			30,072,805				29,452,379
Accumulated deficit			(33,018,047	)			(32,094,913	)
Total stockholders' deficit			(2,938,815	)			(2,636,308	)
Total Liabilities and Stockholders' Deficit		$	630,053			$	508,656

 

The accompanying notes are an integral part of these financial statements.

 

AIRWARE LABS CORP. AND SUBSIDIARY
(FORMERLY CROWN DYNAMICS CORP.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
		Three Months Ended
		December 31,				December 31,
		2014				2013
Revenues, net		$	93,284			$	10,706
Cost of products sold			56,757				4,545
Gross profit			36,527				6,161
Operating expenses
General and administrative			211,433				266,785
Sales and marketing			60,984				14,694
Total expenses			272,417				281,479
Loss from operations			(235,890	)			(275,318	)
Other income (expense)
Interest income			—				289
Forgiveness of debt			—				20
Interest expense			(687,244	)			(186,835	)
Valuation (loss) - common stock warrants			—				(707,400	)
Total other income (expense)			(687,244	)			(893,926	)
Loss before income taxes			(923,134	)			(1,169,244	)
Income tax expense			—				—
Net loss		$	(923,134	)		$	(1,169,244	)
Basic and diluted net loss per common share		$	(0.01	)		$	(0.03	)
Basic and diluted weighted average common
shares outstanding			63,407,496				37,647,160

  

The accompanying notes are an integral part of these financial statements.

AIRWARE LABS CORP. AND SUBSIDIARY
(FORMERLY CROWN DYNAMICS CORP.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
		Three Months Ended
		December 31,				December 31,
		2014				2013
Operating Activities:
Net loss		$	(923,134	)		$	(1,169,244	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			16,182				15,269
Common stock issued for services			62,000				—
Options and warrants issued for services			16,435				15,905
Interest expense from amortization of debt discount			391,264				132,807
Stock issued for interest expense			292,192				42,048
Forgiveness of debt			—				(20	)
Valuation (gain)/expense - common stock warrants			—				707,400
Changes in operating assets and liabilities:
Accounts receivable			(83,225	)			5,736
Inventory			3,012				(3,221	)
Prepaid expenses			(7,234	)			2,479
Deposits			—				(39,360	)
Accounts payable			35,719				23,275
Accrued interest			3,411				4,998
Accrued expenses			5,303				52,223
Net Cash Used in Operating Activities			(188,075	)			(209,705	)
Investing Activities:
Purchases of property and equipment			(15,000	)			—
Net Cash Used in Investing Activities			(15,000	)			—
Financing Activities:
Proceeds from convertible notes payable			250,000				902,000
Repayment of notes payable			(11,792	)			(11,308	)
Options re-purchased			—				(2,500	)
Stock re-purchased			—				(601,762	)
Net Cash Provided by Financing Activities			238,208				286,430
Net Increase in Cash			35,133				76,725
Cash - Beginning of Period			42,582				1,400
Cash - End of Period		$	77,715			$	78,125
Supplemental disclosure of cash flow information:
Interest paid in cash		$	208			$	692
Non-cash investing and financing activities:
Stock issued for convertible notes			—				—
Debt discount on note payable, related party			—				—
Warrants issued to related party for convertible note modification			—				—

 

 

The accompanying notes are an integral part of these financial statements.

 

AIRWARE LABS CORP. AND SUBSIDIARY

(FORMERLY CROWN DYNAMICS CORP.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

1.	Summary of Significant Accounting Policies and Use of Estimates

 

Basis of Presentation and Organization

 

Airware Labs Corp. (“Airware Labs” or the “Company”), formerly Crown Dynamics Corp., is a Delaware corporation. The Company was incorporated under the laws of the State of Delaware on June 15, 2010. On October 26, 2012, the Articles of Incorporation were amended to reflect a name change to Airware Labs Corp. On November 13, 2012, the Board approved a change in fiscal year end from December 31 to September 30.

 

On March 20, 2012, through an equity exchange agreement, the Company acquired all of the issued and outstanding stock of Airware Holdings, Inc., a Nevada corporation (“Airware”), in exchange for shares of the Company’s newly-issued common stock. Airware Holdings, Inc. was formed in February 2010 and is a non-prescription medical products company. The principal business purpose of the Company is to develop, manufacture and distribute breathing solutions that address major respiratory challenges impacting human health.

 

Accounting Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) 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 of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates. Significant estimates of the Company include accounting for depreciation and amortization, recoverability of intangible assets, deferred income taxes, accruals and contingencies, the imputed interest rate of the note payable to related party and the fair value of common stock, and the estimated fair value of stock options and warrants.

 

Unaudited Interim Financial Statements

 

The interim consolidated financial statements of the Company as of December 31, 2014 and 2013, and for the periods then ended, are unaudited. However, in the opinion of management, the interim financial statements include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the Company’s financial position as of December 31, 2014 and the results of its operations and its cash flows for the periods ended December 31, 2014 and 2013. These results are not necessarily indicative of the results expected for the fiscal year ended September 30, 2015. The accompanying financial statements and notes thereto do not reflect all disclosures required under accounting principles generally accepted in the United States (U.S. “GAAP”).

 

Net Loss per Share

 

Basic earnings per share does not include dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. Dilutive securities are not included in the weighted average number of shares when inclusion would be anti-dilutive. Due to the net losses for the periods ended December 31, 2014 and 2013, basic and diluted loss per common share were the same, as the effect of potentially dilutive securities would have been anti-dilutive.

 

As of December 31, 2014, there were total shares of 33,491,889 issuable upon conversion of notes payable, exercise of warrants and options that were not included in the earnings per share calculation as they were anti-dilutive.

 

2.	Going Concern

 

The Company has incurred losses since inception and requires additional funds for future operating activities. The Company’s selling activity has not yet reached a level of revenue sufficient to fund its operating activities. These factors create an uncertainty as to how the Company will fund its operations and maintain sufficient cash flow to operate as a going concern.

 

In response to these financial difficulties, management is continuing to pursue financing from various sources, including private placements from investors and institutions. Management believes these efforts will contribute toward funding the Company’s activities until sufficient revenue can be earned from future operations. In addition, the Company is seeking additional distribution partners in both domestic and foreign markets. Management believes these combined efforts, if successful, will be sufficient to meet its working capital needs and its currently anticipated expenditure levels for the next year.

 

The Company’s ability to meet its cash requirements in the next year is dependent upon obtaining this financing and achieving improved sales levels. If this is not achieved, the Company may be unable to obtain sufficient cash flow to fund its operations and obligations, and therefore, may be unable to continue as a going concern. The accompanying financial statements have been prepared on a going concern basis, and accordingly, do not include any adjustments relating to the recoverability and classification of recorded asset amounts; nor do they include adjustments to the amounts and classification of liabilities that might be necessary should the Company be unable to continue operations or be required to sell its assets.

 

3.	Convertible Notes Payable

 

Convertible notes payable consist of the following:

 

8.00% notes payable, due August 22, 2012, convertible to common stock at $.50 per share, interest payments are due at maturity, unsecured		$	5,000
6.50% note payable, due November 26, 2011, convertible to common stock at $2 per share, interest payments are due annually, unsecured. Terms amended in March 2013 to interest at 4.25%, with $4,000 monthly payments of principal and interest through March 2015			10,886
			15,886

 

4.	Notes Payable to Former Officer

 

Notes payable to former officer consists of the following:

 

0.27% note payable, due August 1, 2016, interest due at maturity, unsecured

$

47,500

 

On December 5, 2013, the Company entered into a revised promissory note with former officer David Dolezal calling for four equal payments to begin on November 1, 2015 and ending August 1, 2016. Interest was reduced from 2.0% to 0.27%.

 

5.	Convertible Notes Payable to Related Parties

 

Convertible notes payable to related parties consist of the following:

 

12% note payable to significant shareholder, net of unamortized debt discount of $1,262,076, due September 30, 2015, convertible to common stock at $.10 per share, interest payments are due monthly.  Debt is secured by substantially all of the assets of the Company		$	1,695,924
8.00 % note payable to advisory board member, due August 26, 2012, convertible to common stock at $.50 per share, interest payments are due at maturity, unsecured			20,000
			1,715,924

 

On August 21, 2013, the Company entered into a ninth allonge to a convertible secured bridge note with Stockbridge Enterprises, L.P. (“Stockbridge”) which provided for up to $3,206,000 principal and a maturity date of September 30, 2015. As of December 31, 2014, the Company has borrowed $2,958,000 against this line of credit.

 

6.	Related Party Transactions

 

As detailed in Notes Payable to Former Officer Footnote 4, the Company has a note payable to its former President and Executive Chairman, David Dolezal.

 

As discussed in Convertible Notes Payable to Related Parties Footnote 5, the Company has a convertible secured bridge note with Stockbridge. During the three months ended December 31, 2014, the Company borrowed $250,000 against this note.

 

7.	Commitments and Contingencies

 

The Company has agreed to indemnify its officers and directors for certain events or occurrences that may arise as a result of the officers or director serving in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited.

 

The Company enters into indemnification provisions under its agreements with other companies in its ordinary course of business, typically with business partners, customers, landlords, lenders and lessors. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities or, in some cases, as a result of the indemnified party’s activities under the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited.

 

The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2014.

 

On December 22, 2011, the Company entered into a distribution agreement that provides for the issuance of common stock warrants, with an expiration date of 3 years, for the purchase of the Company’s common stock in an amount equal to 15% of the total products purchased by the distributor from the Company at the invoice price against the previous year’s purchases of paid invoices. The warrant price will be equal to the closing price of Airware Labs Corp.’s stock price at the anniversary date of the agreement.

 

On December 27, 2011, the Company was named as a defendant in a lawsuit alleging a default on two notes payable totaling $75,000 plus accrued interest. Ultimately, a judgment for $92,001 was entered against the Company as a result of this lawsuit. Per a later settlement agreement, the Company has been making monthly payments of $4,000 against this judgment with interest due on the remaining balance of 4.25% per annum. As discussed in Convertible Notes Payable Footnote 3, the notes and accrued interest are reflected in the Company’s Balance Sheet as of December 31, 2014.

 

The Company is in default on a convertible note payable totaling $5,000 and a convertible note payable to a related party totaling $20,000. The Company has attempted communication with the note holders to request extensions or conversion.

 

On April 8, 2013, the Company entered into an exclusive agency agreement with National United Trading and Investment FZ LLC. This is a performance-based agreement to develop new markets in the United Arab Emirates and other Middle Eastern markets of relevance. There has been no expense recognized through December 31, 2014 as a result of this agreement.

 

On July 16, 2013, the Company entered into a Severance Agreement with Jeffrey Rassas, the Company’s Chief Executive Officer pursuant to which Mr. Rassas will be entitled to the following severance benefits: (i) the Company shall pay to Mr. Rassas his base salary for a period of 12 months following termination without cause; (ii) Mr. Rassas shall be paid any earned and unpaid bonus due; and, (iii) and all unvested stock-based compensation held by Mr. Rassas shall vest as of the date of termination.

 

On January 6, 2014, the Company entered into a license agreement with Eastar Industries, Co., pursuant to which the Company granted Eastar an exclusive license to sell its products in China for a term of five years in exchange for a royalty equal to 18% of gross profits generated by the sales of products in China. Additionally, the Company and Eastar agree to establish a joint venture company in Hong Kong of Shanghai which will be assigned Eastar’s rights under the agreement and of which 18% of the joint venture will be owned by the Company.

 

On April 23, 2014, the Company entered into a product development agreement with Dan Pool of Designer Products. This agreement was modified on June 16, 2014. As compensation, the Company will pay $5,000 monthly, as well as issue up to two million stock options as the Company’s stock price hits certain benchmarks. Additionally, the Company will pay a monthly royalty of 5% of net sales of any products created by Dan Pool as inventor. There has been no expense recognized through December 31, 2014 as a result of the royalty portion of this agreement.

 

On August 28, 2014, the Company was named as a Defendant in a lawsuit by a former officer alleging wrongful termination. The former officer claims he is owed compensation following his termination from the Company, and seeks to recover a cash award of approximately $200,000 as well as common stock of the Company. The Company does not believe the claims have merit and is vigorously defending the action.

 

On October 13, 2014, the Company entered into a consulting agreement with Mr. Adam Herschman. Mr. Herschman has been engaged to provide marketing, advertising, and social media-related services. He has been compensated by the issuance of 250,000 shares of stock.

 

The Company sells the majority of its products through major distributors. The Company warrants to the distributors that the product will be free from defects in material and workmanship. The Company has determined its product warranty to be immaterial at December 31, 2014. The likelihood that the Company’s estimate of the accrued product warranty claims will materially change in the near term is considered remote.

 

8.	Stockholders’ Deficit

 

Common Stock

 

During the three months ended December 31, 2014, the Company issued 1,689,853 shares of stock in payment of interest on the Stockbridge convertible note.

 

On November 20, 2014, the Company issued 322,250 shares of stock for the payment of consulting services. 72,250 shares were valued using the average closing price ($0.166) for the previous quarter. 250,000 shares were valued at the closing stock price on the date of agreement ($0.20).

 

Warrants

 

The balance of warrants outstanding for purchase of the Company’s common stock as of December 31, 2014 is as follows:

 

			Common Shares Issuable Upon Exercise of Warrants				Exercise Price of Warrants				Date Issued				Expiration Date
Issued for financing expense			20,000			$	0.25				3	/08/2012			3	/07/2017
Issued under a consultant settlement agreement			40,000			$	0.50				4	/30/2012			4	/29/2015
Issued per distribution agreement			125,464			$	0.75				12	/22/2012			12	/21/2015
Issued under a private placement memorandum			140,000			$	0.40				6	/25/2013			6	/25/2015
Issued under a private placement memorandum			120,000			$	0.40				6	/26/2013			6	/26/2015
Issued per distribution agreement			172,028			$	0.14				12	/22/2013			12	/22/2016
Issued under a private placement memorandum			25,000			$	0.40				7	/2/2014			6	/1/2016
Issued under a private placement memorandum			50,000			$	0.60				7	/2/2014			6	/1/2016
Issued under a private placement memorandum			25,000			$	0.80				7	/2/2014			6	/1/2016
Balance of Warrants at December 31, 2014			717,492

 Stock Options

 

The Company had the following options outstanding at December 31, 2014:

 

			Common Shares Issuable Upon Exercise of Options				Exercise Price of Options				Date Issued				Expiration Date
Options granted to former officer & two former senior advisory board members			775,000			$	0.50				4	/20/2011			4	/19/2021
Options granted to former employee and three consultants			700,000			$	0.50				7	/19/2011			7	/18/2016
Options granted under a consultant agreement settlement			52,844			$	0.25				4	/30/2012			4	/29/2022
Options granted to Board member			150,000			$	0.30				1	/25/2013			1	/24/2023
Options granted to employee and two consultants			1,550,000			$	0.30				1	/25/2013			1	/24/2023
Options granted to medical advisory board member			250,000			$	0.26				5	/20/2013			5	/19/2016
Options granted to consultant			250.000			$	0.28				9	/5/2013			9	/4/2016
Options issued for investment in Breathe Active, LLC			500,000			$	0.25				9	/28/2013			12	/31/2014
Options issued for investment in Breathe Active, LLC			500,000			$	0.50				9	/28/2013			12	/31/2014
Options re-purchased by Company			(200,000	)
Options granted to Board member			150,000			$	0.11				10	/4/2013			10	/3/2023
Options granted to Officers			433,333			$	0.11				10	/4/2013			10	/3/2023
Options granted to Board member			150,000			$	0.25				9	/5/2014			9	/4/2024
Options granted to Officers and consultants			633,333			$	0.25				9	/5/2014			9	/4/2024
Balance of Options at December 31, 2014			5,894,510

 

During the three months ended December 31, 2014, $16,435 was expensed for the pro-rata vesting of stock-based compensation. As of December 31, 2014, the balance of unrecognized compensation cost related to non-vested stock-based compensation to be expensed in future periods was $84,839.

 

9.	Significant Customer

 

For the three months ended December 31, 2014, 87% of the Company’s revenues were from one customer. Accounts receivable for this customer as of December 31, 2014 totaled $80,992.

 

10.	Subsequent Events

 

On January 28, 2015, the Company issued 1,191,587 shares of restricted common stock as payment for interest on loans to the Company for December 2014 and January 2015, at a cost basis of $.05 per share.

 

On January 28, 2015, the Company issued 82,051 shares of restricted common stock to one holder as compensation for services rendered to the Company from October 1, 2014 to December 31, 2014, at a cost basis of $0.15 per share.

 

 

 

End of Notes to Financial Statements

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following Management's Discussion and Analysis should be read in conjunction with Airware Labs Corp. financial statements and the related notes thereto. The Management's Discussion and Analysis contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future-tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this Report on Form 10-Q. The Company’s actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. The Company does not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Report on Form 10-Q.

 

The following discussion should be read in conjunction with our unaudited consolidated financial statements and related notes and other financial data included elsewhere in this report. See also the notes to our consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended September 30, 2014.

 

Results of Operations

 

Total revenue for the three months ended December 31, 2014 was $93,284, as compared to $10,706 for the three months ended December 31, 2013. Operating expenses in the quarter ended December 31, 2014 amounted to $272,417 as compared to $281,479 for the quarter ended December 31, 2013. The decrease in expenses is the result of a reduction in legal fees and consulting expenses.

 

The net loss for the quarter ended December 31, 2014 was $923,134 as compared to $1,169,244 for the quarter ended December 31, 2013. This is due to a significant increase in interest expense offset by a decrease in the valuation loss of common stock warrants.

 

Liquidity and Capital Resources

 

Our balance sheet as at December 31, 2014 reflects $77,715 in cash and cash equivalents as compared to $42,582 as at September 30, 2014. We intend to raise the balance of our cash requirements for the next 12 months from private placements or a registered public offering (either self-underwritten or through a broker-dealer). Additionally, we have the Stockbridge secured bridge note to draw from, which as of February 15, 2015 has an available balance of $248,000. If we are unsuccessful in raising enough money through future capital-raising efforts, we may review other financing possibilities such as bank loans. At this time, our Company does not have a commitment from any broker/dealer to provide additional financing. There is no assurance that any additional financing will be available or if available, on terms that will be acceptable.

 

Cash Flow from Operating Activities

 

During the three months ended December 31, 2014, the Company’s operating activities used $188,075 in cash as compared to $209,705 used by operating activities for the three months ended December 31, 2013. The decrease in cash used for operating activities is primarily due to payments towards accounts payable.

 

Cash Flow from Investing Activities

 

During the three-month period ended December 31, 2014 and 2013, the Company used $15,000 and $0, respectively, in cash for investing activities. The increase in cash used for investing activities is primarily due to there not having been any purchases of fixed assets in the three months ended December 31, 2013.

 

Cash Flow from Financing Activities

 

During the three months ended December 31, 2014, the Company received $238,208 in cash from financing activities. This consisted of $238,208 in net financing from notes payable. This compares with $286,430 provided during the three months ended December 31, 2013 which consisted of $890,692 in net financing from notes payable less $604,262 in payments for the re-purchase of common stock and options.

 

Going Concern

 

We have not attained profitable operations and are dependent upon obtaining financing to pursue any extensive acquisitions and activities. For these reasons, our auditors stated in their report on our audited financial statements that they have substantial doubt that we will be able to continue as a going concern without further financing.

 

Future Financings

 

We will continue to rely on equity sales of our common shares in order to continue to fund our business operations. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any additional sales of the equity securities or arrange for debt or other financing to fund our operations and other activities.

 

Off-Balance Sheet Arrangements

 

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

 

Critical Accounting Policies

 

Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

 

We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in the notes to our financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

 

Recently Issued Accounting Pronouncements

 

The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

ITEM 4.

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management carried out an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act"). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were effective as of December 31, 2014.

 

Changes in Internal Control over Financial Reporting

 

Our management has also evaluated our internal control over financial reporting, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of our last evaluation.

 

The Company is not required by current SEC rules to include, and does not include, an auditor's attestation report. The Company's registered public accounting firm has not attested to Management's reports on the Company's internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

From time to time, the Company may become subject to various legal proceedings that are incidental to the ordinary conduct of its business. Although the Company cannot accurately predict the amount of any liability that may ultimately arise with respect to any of these matters, it makes provision for potential liabilities when it deems them probable and reasonably estimable. These provisions are based on current information and legal advice and may be adjusted from time to time according to developments.

 

Other than those certain events as reported in our Annual Report on Form 10-K for the year ended September 30, 2014, filed with the Commission on January 9, 2015, we know of no material, existing or pending legal proceedings against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any director, officer or any affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

 

ITEM 1A.

RISK FACTORS

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

1.

Quarterly Issuances:

On October 10, 2014, the Company issued 541,600 shares of restricted common stock as payment for interest on loans to the Company for September 2014, at a cost basis of $0.05 per share.

On November 12, 2014, the Company issued 250,000 restricted shares of common stock to one holder pursuant to a Consulting Agreement dated October 13, 2014, at a cost basis of $0.20 per share.

On November 12, 2014, the Company issued 576,653 shares of restricted common stock as payment for interest on loans to the Company for October 2014, at a cost basis of $0.05 per share.

On November 12, 2014, the Company issued 72,250 restricted shares of common stock to one holder as compensation for services rendered to the Corporation from July 1, 2014 to September 30, 2014, at a cost basis of $0.166 per share.

On December 4, 2014, the Company issued 571,600 shares of restricted common stock as payment for interest on loans to the Company for November 2014, at a cost basis of $0.05 per share. 

 

2.

Subsequent Issuances:

 

On January 28, 2015 the Company issued 599,987 restricted shares of common stock as payment for interest on loans to the Company for December 2014, at a cost basis of $0.05 per share.

 

On January 28, 2015 the Company issued 591,600 restricted shares of common stock as payment for interest on loans to the Company for January 2015, at a cost basis of $0.05 per share.

 

On January 28, 2015 the Company issued 82,051 restricted shares of common stock as payment for services rendered to the Corporation form October 31, 2014 to December 31, 2014, at a cost basis of $0.15 per share.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

N/A.

 

ITEM 5.

OTHER INFORMATION

 

None.

 

ITEM 6.

EXHIBITS

 

 

Exhibit
Number	Description of Exhibit
3.01a	Articles of Incorporation		Filed with the SEC on May 12, 2011 as part of our Registration Statement on Form S-1/A.
3.01b	Certificate of Amendment to Articles of Incorporation dated October 26, 2012		Filed with the SEC on November 13, 2012 as part of our Current Report on Form 8-K
3.02	Bylaws		Filed with the SEC on May 12, 2011 as part of our Registration Statement on Form S-1/A.
10.01	Patent Sale Agreement		Filed with the SEC on May 12, 2011 as part of our Registration Statement on Form S-1/A.
10.02	License Agreement between Crown Dynamics Corp. and Zorah LLC		Filed with the SEC on January 20, 2012 as part of our Current Report on Form 8-K.
10.03	Share Exchange Agreement between Crown Dynamics Corp. and Airware Dated March 20, 2012		Filed with the SEC on March 26, 2012 as part of our current report on Form 8-K.
10.04	Severance Agreement between Airware Labs Corp and Jeffrey Rassas, effective July 16, 2013		Filed with the SEC on July 19, 2013 as part of our Current Report on Form 8-K.
10.05	Share Re-Purchase Agreement between Airware Labs Corp. and DCI, LLC, Technoflex, LLC, and Viadox, LLC, dated December 5, 2013.		Filed with the SEC on December 24, 2013 as part of our Current Report on Form 8-K.
31.01	Certification of Principal Executive Officer Pursuant to Rule 13a-14		Filed herewith.
31.02	Certification of Principal Financial Officer Pursuant to Rule 13a-14		Filed herewith.
32.01	CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act		Filed herewith.
32.02	CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act		Filed herewith.
99.1	Crown Dynamics Corp. Subscription Agreement		Filed with the SEC on May 12, 2011 as part of our Registration Statement on Form S-1/A.
101.INS*	XBRL Instance Document		Filed herewith.
101.SCH*	XBRL Taxonomy Extension Schema Document		Filed herewith.
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document		Filed herewith.
101.LAB*	XBRL Taxonomy Extension Labels Linkbase Document		Filed herewith.
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document		Filed herewith.
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document		Filed herewith.

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

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	AIRWARE LABS CORP.
Date: February 20, 2015	By:	/s/  Jeffrey Rassas
	Name:	Jeffrey Rassas
	Title:	Chief Executive Officer and Director
Date: February 20, 2015	By:	/s/  Jessica Smith
	Name:	Jessica Smith
	Title:	Chief Accounting and Financial Officer

 

 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

Date: February 20, 2015	By:	/s/  Jeffrey Rassas
	Name:	Jeffrey Rassas
	Title:	Chief Executive Officer and Director
Date: February 20, 2015	By:	/s/  Jessica Smith
	Name:	Jessica Smith
	Title:	Chief Accounting and Financial Officer

Date: February 20, 2015	By:	/s/  Ronald L. Miller
	Name:	Ronald L. Miller, Jr.
	Title:	Director

 

 

 

 

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