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EX-32 - EXHIBIT 32 - UV FLU TECHNOLOGIES INCv413752_ex32.htm
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EX-31.1 - EXHIBIT 31.1 - UV FLU TECHNOLOGIES INCv413752_ex31-1.htm

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

 

For the fiscal year ended September 30, 2014

Commission File Number: 000-53306

UV FLU TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Nevada   98-0496885
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification Number)
250 Parkway Dr. Suite 150
Lincolnshire, Illinois 60069
(Address of principal executive offices) (Zip Code)

 

  (847) 831-2428  
  (Registrant’s telephone number, including area code)  

 

Securities registered pursuant to Section 12(b) of the Act:

None   None
(Title of each class)   (Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

¨ Yes   x No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes   x No

 

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 twelve 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. x 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 x   No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K, is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K.      x Yes   ¨ 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.  See the definitions of “large accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer¨ Accelerated filer¨ Non-accelerated filer*¨ Smaller reporting company x
*(Do not check if a 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   x No.

 

The aggregate market value of the common stock held by non-affiliates as of March 31, 2014 (the last trading day of the second quarter) was $2,689,681 based on the last sale price of common stock sold.

 

As of June 18, 2015 the last practicable date, we have 84,500,979 shares of common stock issued and outstanding at a par value of $0.001.

 

DOCUMENTS INCORPORATED BY REFERENCE: Exhibits incorporated by reference are referred to under Part IV.

 

 
 

 

TABLE OF CONTENTS

 

      Page
       
PART I      
Item 1. Business   4
Item 1A. Risk Factors   11
Item 1B. Unresolved Staff Comments   17
Item 2. Properties   17
Item 3. Legal Proceedings   17
Item 4. Mine Safety Disclosures   17
       
PART II      
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases of Equity Securities   18
Item 6. Selected Financial Data   18
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations   19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk   25
Item 8. Financial Statements and Supplementary Data   25
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure   25
Item 9A. Controls and Procedures   26
Item 9B. Other Information   27
       
PART III      
Item 10. Directors, Executive Officers and Corporate Governance   27
Item 11. Executive Compensation   30
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   32
Item 13. Certain Relationships and Related Transactions, and Director Independence   33
Item 14. Principal Accounting Fees and Services   34
       
PART IV      
Item 15. Exhibits, Financial Statement Schedules   35
  Index to Financial Statements   F-1 to F-22
  Signatures    
  Exhibits    

 

 
 

 

Statement Regarding Forward-Looking Statements

 

The statements contained in this report on Form 10-K that are not purely historical are forward-looking statements within the meaning of applicable securities laws. Forward-looking statements include statements regarding our “expectations,” “anticipation,” “intentions,” “beliefs,” or “strategies” regarding the future, whether or not those words are used. Forward-looking statements also include statements regarding revenue, margins, expenses, and earnings analysis for fiscal 2014, and thereafter; anticipated levels of future revenues and earnings from the operations of UV Flu Technologies, Inc. (the “Company,” “we,” “us,” or “our”); and projected costs and expenses related to our operations, liquidity, capital resources, availability of future equity capital on commercially reasonable terms. All forward-looking statements included in this report are based on information available to us as of the filing date of this report, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from the forward-looking statements. Among the factors that could cause actual results to differ materially are the factors discussed in Item 1A. Risk Factors.

 

 
 

 

PART I

ITEM 1.BUSINESS

 

Background

 

UV Flu Technologies, Inc. (“we”, “us”, “our,” or the “Company”) was organized under the laws of the State of Nevada on April 4, 2006 under the name “Northwest Chariots, Inc.” We were engaged in the business of renting and selling electrically powered human transporters, like electric bicycles, chariots, and quads. Following our fiscal year ended September 30, 2009, we decided to change our product mix to air purification products and to focus on the research, development, manufacturing, and sales of air purification systems and products.

 

In furtherance of our business objectives, on November 12, 2009, we effected a 32-for-1 forward stock split of all our issued and outstanding shares of common stock, and we merged with our wholly-owned subsidiary, UV Flu Technologies, Inc., for the purposes of effecting a name change to “UV Flu Technologies, Inc.”

 

Effective November 15, 2009, we acquired AmAirpure Inc.’s air purification technology, product, inventory, and certain equipment pursuant to an Asset Purchase Agreement with AmAirpure, Inc. We issued 15,000,000 shares of our common stock to shareholders of AmAirpure in connection with the asset acquisition. Additionally, on November 25, 2009, we entered into a Distribution Agreement with Puravair Distributors LLC (“Puravair”) where we appointed Puravair as our exclusive master distributor for our Viratech UV-400 product and our other products for the professional, medical, and commercial markets in the U.S. and Canada. On September 30, 2010, we terminated our Distribution Agreement with Puravair and began adding new distributors, which totaled five as of year- end, 2010. Today the Company has a total of 10 Distributors, including Grainger Industrial Supply, with almost 2000 reps throughout the United States, and Ormed Systems, one of the most renowned medical distributors in India.

 

The latest production runs of our Viratech UV-400 product incorporate our patented UV bacteria killing technology, which has been cleared by the FDA for use as a medical device. In June 2010, we expanded our market reach by introducing the latest generation of our Viratech UV-400 product into the residential and hospitality markets.

 

On October 28, 2010, we entered into a binding letter of intent with The Red Oak Trust (“Red Oak”) (the “LOI”) in connection with our proposed acquisition of one hundred percent (100%) of the issued and outstanding units of RxAir Industries, LLC, a Nevada limited liability company (“RxAir”), which is wholly owned by Red Oak (the “Acquisition”). At the closing of the Acquisition, Rx Air became a wholly-owned subsidiary of the Company. The acquisition closed January 24, 2011.

 

The Company’s sales, although below 2013 levels, are expected to continue to increase for the fiscal year beginning October 1, 2014, as retail, international, and medical distributors have established their distribution channels, and our factory capacity has been expanded.

 

Our Solution

 

Around the world, there is a growing awareness of the increasingly poor air quality, particularly with the recent outbreak of several respiratory pathogens. The public has long been aware of the dangers associated with outdoor air pollution, but never before has there been such growing public concern about the quality of indoor air as well. Today’s lifestyles, coupled with modern building construction practices have created significant challenges in maintaining healthy indoor air. Poor indoor air quality has been proven scientifically to cause increased asthma and allergy related symptoms, as well as contribute to the spread of disease. These factors have created a large and growing need for products which will improve indoor air quality in the workplace and at home.

 

We fill the need for improved air purification systems in the workplace and at home with proprietary technology utilizing high-energy ultraviolet radiation (UV) inside a “killing chamber” which destroys airborne bacteria, viruses and allergens. The product also reduces odors, and the concentrations of Volatile Organic Compounds (VOC’S). We plan to develop and market products, which will improve indoor air quality effectively, efficiently, economically and do so in an environmentally friendly way.

 

Our product safely kills over 99% of airborne bacteria and viruses proven through extensive independent laboratory testing.

 

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Market Overview

 

The market for air purification equipment has been gaining momentum as a result of rising concerns over indoor air quality and increasing health consciousness among consumers. Products within this group that until recently had been viewed as a luxury are now found in an increasing number of homes and commercial workspaces. As a result, the North American air purification equipment market is expected to expand significantly.

 

The U.S. indoor air quality market generated $7.7 billion in 2008, with the equipment segment accounting for $3.6 billion. Continuing media attention given to the health effects of toxic mold, the outbreak of infectious diseases such as swine flu, and the increase in chronic respiratory diseases such as asthma have resulted in new interest in, and attention to, indoor air quality. Building owners and operators are expected to purchase growing quantities of indoor air quality-related equipment in the hope of reducing or eliminating these contaminants from their buildings.

 

Employers have incentive to keep workers healthy. In 2008, 425 million sick days were taken by employees, costing an estimated $60 billion in lost productivity. “Presenteeism,” a new term coined for employees working while unhealthy, is even worse for employers and the healthcare system, costing approximately $160 billion annually in lost productivity. (Kalorama Information, “The Market for Wellness Programs”, September 2009).

 

Increased media attention and growing public concern over pandemics, antibiotic resistant superbugs, asthma, allergies, tuberculosis, Sick Building Syndrome, and toxic mold are spurring governments, employers, and homeowners to take action to safeguard their health. Demand for products that combat the spread of airborne illness is rising exponentially, as starkly highlighted by public reaction to the outbreak of H1N1 and measles. The current problems related to the rollout of a new national healthcare system, we believe, will create a huge level of awareness on the “Prevention” of sickness, rather than just the treatment.

 

This heightened awareness has spread to the growing $7.7 billion indoor air quality market, increasing demand for products that improve air quality and remove airborne pathogens in commercial buildings, hospitals, schools and homes. Poor indoor air quality is scientifically proven to cause the spread of infectious disease and increase asthma and allergy symptoms. The Environmental Protection Agency reports the air inside structures, where people now spend approximately 90% of their time, can have contaminated air levels 10 to 100 times worse than EPA guidelines. Studies have shown that indoor air pollution can have direct health links to respiratory issues, pneumonia, sleep disorders, allergies, asthma, diabetes, and even cardiovascular issues.

 

The air cleaner market is very large with multiple levels. It encompasses an extremely wide range of products, designed to improve the quality of indoor air. In order to deal with the increasingly complex issue of indoor air quality, commercial enterprises must often purchase and use multiple solutions in their effort to provide a safe indoor environment. Including the products designed to freshen the air, surface sprays, portable air cleaners, filters for HVAC systems, other “specialty” solutions for the removal of smoke and airborne microorganisms, the total market for air cleaning products tops an estimated $6 billion per year.

 

As summarized below, the commercial market (estimated over $5 billion) for air purification products can be broken into three different target segments: (1) Medical; (2) Hospitality; and (3) Office. A listing of selected market opportunities within each segment can be found below. As awareness of poor indoor air quality and its impact on worker productivity grows, demand for products, which go beyond masking and filtration will continue to grow.

 

Commercial Market

 

Medical   Hospitality   Business
Hospitals   Hotels   Commercial
Nursing Homes   Motels   Small Office
Medical Offices   Inns   Home Office
Dentists   Restaurants   Day Care
Clinics        

 

According to IMR Research, the consumer market is estimated to be in the millions of units and over $1 billion in sales. This market has been growing at an annual rate of 17% since 1992. Products utilizing HEPA or HEPA-type filters dominate the market, representing over two-thirds of unit sales.

 

About 80% of the unit volume sells at prices below $200. These products are typically sold through major mass merchants including home center outlets, specialty catalogs and on the Internet.

 

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While representing slightly less than 35% of the unit sales, products retailing over $200 represent more than 50% of the dollar volume. This includes high-end HEPA air cleaners, electrostatic devices, and, previously, ozone generators. In addition to traditional retail outlets handling upper end products, they can also be found in specialty catalogs and sold on a direct-to-consumer basis. With the recent disappearance of a company that held a large market share in this sector of the market, a significant and growing market exists for premium price air cleaners.

 

Consumer and Sleep Market

 

Products utilizing filters (standard and HEPA) dominate the consumer market. Electrostatic products are starting to appear in a portable form. Recent Clinical studies have shown that the biggest environmental factor affecting sleep related problems is Indoor Air Pollution. The Viratech UV-400 treats all forms of Indoor Air Pollution, and customers have raved about the device’s ability to significantly improve their quality of sleep. As further studies have shown that sleep disorders may be the “Smoking Gun” of health problems, significantly raising the risk of cancer, stroke, diabetes depression and obesity, our units ability to improve the quality and duration of sleep should give the Company distinct marketing advantages in gaining market share in the $25 billion market for sleep-related products. To this end, the Company has already begun distributing the Viratech UV-400 to 20 furniture stores, and recently signed an additional furniture coalition of an additional 400 stores.

 

Scientific Overview

 

We develop highly innovative germicidal air purification technology that disinfects indoor air by deactivating allergens and killing airborne pathogens including bacteria, and viruses. Our flagship product, the ViraTech UV-400, utilizes high-intensity germicidal ultraviolet radiation (UV-C) inside a killing chamber that goes beyond filtering to trap and destroy harmful microbes. Extensive independent testing by EPA and FDA certified laboratories confirms the proprietary system captures and kills airborne bacteria, including Bacillus subtilis, Pseudomonas aeruginosa, and Staphylococcus aureus, at rates exceeding 99.2% on a first-pass basis. We recently concluded independent EPA/FDA certified laboratory tests, showing the rates of inactivation of a MS-2 virus surrogate were almost identical to our results on the inactivation of bacteria.

 

We combine our air purification technology (see diagram below), a sophisticated electronic ballast system with an electronic control module in a product which is totally effective yet user-friendly. The technology uses Ultraviolet C (UVC) in a proprietary, replaceable cartridge which provides 12 months of continuous operation, 24 hours a day, seven days a week. Inside the cartridge, pathogens and bacteria and, in fact, anything with a DNA is killed or neutralized. A gross particulate screen removes large particulates from the air stream.

 

During the actual air purification process, air is pulled into the base of the unit by a 210 cfm fan. All the contaminated air is directed into the bottom of the replaceable metal cartridge. Inside the cartridge, the air flows through the first of two sets of inline baffles. The baffles serve to create turbulence and slow the flow of air to create greater dwell time of contaminants inside the cartridge. Inside the cartridge chamber, contaminants are subjected to the high intensity of the three germicidal UV lamps which inactivates greater than 99% of the airborne indoor bacteria. As the purified air leaves the cartridge, a carbon treated gross particulate screen captures large particulates.

 

The inside of the cartridge is coated with a layer of the photocatalyst Titanium Dioxide (TiO2). Combined with the UV light source and moisture in the air, the hydroxyl radicals produced by the TiO2 accelerate the breakdown of the molecular bonds of odors and Volatile Organic Compounds (VOCs) and are converted into harmless water vapor and carbon dioxide. The result of this reaction is a reduction in the concentration of odors and Volatile Organic Compounds.

 

Independent testing and consulting has been conducted to substantiate the efficacy and safety of the UV 400 unit. Inactivation tests on bacteria, viruses, and odor and VOCs reduction testing were completed at EPA and FDA certified Northeast Laboratories in Berlin, CT. ETL certification utilizing Standard for Electric Fans UL 507 was conducted at Intertek Testing Services in Cortland, NY.

 

6
 

  

 

 

Electronic controls insure that our product is completely effective during the life of the cartridge, allows performance monitoring of all major electrical components, simplifies operation and endows the units with appropriate safety features. An indicator light provides information regarding the state of the cartridge and indicates when a replacement is necessary.

 

Product

 

The ViraTech UV-400 and RxAir

 

The ViraTech UV-400 and the RxAir will be the lead products we produce and distribute. For the U.S. market, all portable models operate on 110/120 volt current and do not require any special wiring. In each product family, there is a design provision for 220/240 volt operation, which allows for adaptation to international standards or use in heavy-duty commercial applications. Each unit is designed to run continuously and will have a minimum active life of 5 years. Cartridge replacement is signaled when as the 8800 lamp hour mark approaches a green light on the front of the unit turns red, and when the useful life is hit, the unit shuts down until the cartridge is replaced. This ensures that the unit maintains adequate germicidal UV strength. Recommended replacement frequency assumes 24 hour per day, seven days a week usage. Because the units run with less resistance than traditional HEPA air filters, the fan is smaller, which results in a quieter product. Depending on room size, each unit will recycle air in a room at the rate of 5 to 10 times per hour.

 

New Products

 

The company is presently involved with the next generation of products which will utilize some new technologies. New products will use a variation of the current UV killing chamber technology as well. Thus, the unit will “Kill and Trap.” The new lineup will be designed to be sold at various price points and will have independent EPA/FDA certified lab results to support every claim. The unit will have an aesthetically pleasing design, which will make it desirable for various markets. The Company has already been in contact with noted Allergy Specialists that are interested to get prototypes. The product will be sold through market driven distribution channels.

 

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RX Air Product Line

 

On January 24, 2011, UV Flu Technology bought all of the inventory, assets, patents and trademarks of Rx Air, a 15 year old company based in Dallas, Texas, which manufactures a line of some of the world’s best HEPA based air purifiers. The Company’s product lines include:

 

RX-3000: The Rx-3000 is a hospital-grade HEPA air filter, which is used in almost 500 hospitals worldwide. It employs a patented 5-stage HEPA filtration design, germicidal UV irradiation system, with easy portability. It was co-designed with Bio-engineers from the Baylor Medical System, and is FDA cleared as a Class II Medical Device. It can cover spaces up to 1500 sq. ft, and can capture 99.999% of all airborne contaminants. The Company makes all its HEPA filters, which are among the finest in the world, and has Negative-Pressure attachments for hospitals that require Negative-Pressure.

 

CR-3000: Construction Grade version of the RX-3000

 

RX-4000 Prototype, metal cabinet wall-mounted commercial version of the RX-3000

 

RX-4500: Large commercial version of the RX-3000, which can cover hospital and casino spaces up to 10,000 sq. ft.

 

RX-6500: Bio-terrorism version of the above unit.

 

RX Air Plus: Unique system which combines 2 FDA cleared medical devices, the RX-3000, and two Viratech UV-400’s, to form the world’s most cost-effective air filtration system. Covers spaces up to 2,000 sq. ft. and removes 99.999% of all airborne contaminants, while killing 99.3% of all organic airborne contaminants, such as bacteria.

 

Customers

 

We currently have units in operation in a number of hotels around the United States. Our units are also in numerous hair and nail salons, pet kennels, test labs, and over 450 hospitals worldwide, including the Baylor Healthcare System, Kaiser Permanente, the George Washington University Hospital, Providence Medical Center, and the University Medical Center. The Company’s products are in a number of restaurants, casinos, and military installations, as well.

 

Competition

 

Awareness of the effects of poor indoor air quality continues to grow and will push customers to look for more efficacious products. We believe that companies currently supplying air purification products to commercial accounts will be looking for additional products to sell and new sources of on-going revenue. Our ViraTech UV-400 product represents a significant opportunity to distributors for first sales as well as the on-going replacement cartridge sales volume into a growing installed user base.

 

Our products compete broadly with other current companies offering air purification products, including companies that offer UV air purification. Honeywell is one of the best-known brand names in the commercial segment of the market. In the consumer market segment, we compete with Honeywell, IQ Air, Blue Air and Airocide brands, all of which compete at the middle and upper-middle price points with HEPA-based products. We believe we are one of the few companies that publish laboratory reports of our products performance capabilities.

 

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Research and Development

 

Our research and development activities are focused principally on the development of new products that serve the air purification market and on significant upgrades to our existing products. We have also developed a metal, wall mounted commercial version of the RX-3000, called the RX-4000, for International and Commercial markets, where floor space is at a premium.

 

Manufacturing

 

Our manufacturing strategy is to utilize high quality, low cost contract manufacturers to provide the routine production of our products. We have recently changed our contract manufacturer in China. The manufacturer produces medical grade products for numerous well known international companies. They have begun production on the current product and have unlimited resources and capacity. They have also taken an equity position in UV Flu Technologies Inc.

 

Quality Control

 

Our quality strategy emphasizes rigorous internal and independent laboratory testing to maintain the highest levels of quality control for our products. To insure that the proper style and feature set were identified, a number of potential design combinations were developed. These initial designs were presented to consumers in special triad focus group session and played a major role in selection of the final design. These groups also helped to identify the message, which will be used when we begin our public relations and consumer advertising programs.

 

In order to eliminate any potential product liability issues, extensive testing is ongoing. This testing confirms that all products meet worldwide electrical and safety standards. Separately, each electrical component to be used will be certified by its manufacturer as meeting ETL and/or UL standards.

 

Our quality system has been created to be harmonized with national and international standards and is focused to ensure it is appropriate for the specific devices we manufacture. Our corporate quality policies govern the methods used for the design, manufacture, packaging, labeling, storage, installation, and servicing of all finished devices. These requirements are intended to ensure that finished devices will be safe and effective and otherwise in compliance with the Federal Food, Drug, and Cosmetic Act and other governmental agencies.

 

In order to validate the efficacy of our technology, we conducted numerous tests at independent, FDA certified laboratories between 1996 and 2007. We will continue to conduct similar tests in the future.

 

Independent EPA and FDA certified laboratory testing (results below) confirms the system captures and kills airborne bacteria, including Bacillus subtilis, Pseudomonas aeruginosa, and Staphylococcus aureus. The Company recently announced that additional testing was performed at the same certified test facility showing rates of inactivation for a MS-2 virus surrogate comparable to the results shown with bacteria.

 

NorthEast Laboratories Test Results on the ViraTech UV-400 Unit

 

Microbe  

Population

Before

 

Population

After

 

Inactivation

%

 

Average

%

 

k

cm2/μW

-s

 

Effective

Dose μW-

s/cm2

Bacillus subtilis   420   <1   99.76   99.71   0.001686   3583
    300   <1   99.67           3383
Pseudomonas   8370   29   99.65   99.72   0.002375   2385
Aeruginosa   140,000   300   99.79           2588
Klebsiella pneumoniae   19,000   79   99.58   99.10   0.000548   10005
    20,360   280   98.62           7822
Staphylococcus aureus   600   7   98.83   99.30   0.003475   1281
    16,000   36   99.78           1754
Effective Mean UV Dose                       4100
UVGI Rating Value (URV)                       15

 

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Note: Results for Bacillus represent a minimum.

Source: Northeast Laboratories, Inc. 129 Mill Street Berlin, CT 06037

 

Regulation

 

Our products are subject to regulation by numerous government agencies. To varying degrees, each of these agencies requires us to comply with laws and regulations governing the development, testing, manufacturing, labeling, marketing, distribution, installation and servicing of our research, investigational, and commercially-distributed medical devices. These international, national, state, and local agencies set the legal requirements for ensuring our products are safe and effective. Virtually every activity associated with the manufacture and sale of our products are scrutinized on a defined basis and failure to implement and maintain a quality management system could subject us to civil and criminal penalties.

 

Our ViraTech UV-400 product was cleared by the FDA as a Class II medical device in November 2008. FDA clearance to sell our product as a Class II medical device provides invaluable credibility in the marketplace. By granting a listing, the FDA indicates it has reviewed all aspects of a product, including efficacy of the technology, independent test results and product safety to insure that the product complies with our claims. Few air purification products are listed by the FDA, and it is extremely important that we expend the resources necessary to maintain this listing as a Class II medical device with the FDA. The Company has recently concluded independent lab tests, which show the rates of inactivation on a MS-2 virus surrogate were comparable to the results shown with bacteria.

 

Class II devices have a lower potential safety risk to the patient, user, or caregiver, a full premarket analysis are not required for a Class II device. A premarket notification, known as a 510(k) submission, is required to demonstrate that the device is as safe and effective as a substantially equivalent medical device that has been legally marketed in the U.S. Once the FDA has notified us that the product file has been cleared, the medical device may be marketed and distributed in the U.S.

 

Environmental Laws

 

We do not manufacture the products that we sell and are therefore not subject to environmental laws that regulate the manufacture of products. The plants that manufacture our products may be subject to environmental regulations and will have to comply with such regulations in order to deliver marketable products to us. We may be required to comply with national and international environmental regulations related to shipping, storage and disposal of our products, and our quality management system will ensure that we are in compliance with all relevant environmental laws.

 

Patents and Proprietary Rights

 

We own the rights to U.S. Patent No. 6,939,397 with 43 claims covering innovative removable cartridge, housing, UV chamber, UV radiation source, and baffle technology. We also, through our RX Air subsidiary, own the rights to U.S. Patent No. 3,837,700, which covers air cleaning units containing an air filter, UV lights, and a photocatalytic filter. We also own a number of trademarks.

 

While a patent has been issued, we realize that (a) we will benefit from patents issued only if we are able to market our products in sufficient quantities of which there is no assurance; (b) substitutes for these patented items, if not already in existence, may be developed; (c) the granting of a patent is not a determination of the validity of a patent, such validity can be attacked in litigation or we or owner of the patent may be forced to institute legal proceedings to enforce validity; and (d) the costs of such litigation, if any, could be substantial and could adversely affect us.

 

Backlog

 

We currently have no backlog of orders.

 

Employees

 

As of September 30, 2014, we had 1 full-time employee, although we engage contractors as necessary and each of our officers and directors devotes a portion of his and her time to the affairs of our Company.

 

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Where you can find more information

 

We are required to file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other information with the Securities and Exchange Commission (the “SEC”). The public can obtain copies of these materials by visiting the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549, by calling the SEC at 1-800-SEC-0330, or by accessing the SEC’s website at http://www.sec.gov. In addition, as soon as reasonably practicable after these materials are filed with or furnished to the SEC, we will make copies available to the public free of charge through our website, http://www.uvflutech.com. The information on our website is not incorporated into, and is not part of, this annual report.

 

ITEM 1A.RISK FACTORS

 

With the exception of historical facts stated herein, the matters discussed in this report on Form 10-K are “forward looking” statements that involve risks and uncertainties that could cause actual results to differ materially from projected results. Such “forward looking” statements include, but are not necessarily limited to statements regarding anticipated levels of future revenues and earnings from the operations of the Company, projected costs and expenses related to our operations, liquidity, capital resources, and availability of future equity capital on commercially reasonable terms. Factors that could cause actual results to differ materially are discussed below. We disclaim any intent or obligation to publicly update these “forward looking” statements, whether as a result of new information, future events, or otherwise.

 

An investment in our common stock is subject to risks inherent to our business. The material risks and uncertainties that management believes affect us are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. This report is qualified in its entirety by these risk factors.

 

If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly, and you could lose all or part of your investment.

 

Our limited operating history may not serve as an adequate basis to judge our future prospects and results of operations.

 

We have a limited operating history. As such, our historical operating results may not provide a meaningful basis for evaluating our business, financial performance and prospects. Accordingly, you should not rely on our results of operations for any prior periods as an indication of our future performance. Our operations will be subject to all the risks inherent in the establishment of a developing enterprise and the uncertainties arising from the absence of a significant operating history. If our business plan is not successful, and we are not able to operate profitably, investors may lose some or all of their investment in our company.

 

We cannot accurately predict future revenues or profitability in the emerging market for air purifiers.

 

The market for ultra violet indoor air purifiers is rapidly evolving. As is typical for a rapidly evolving industry, demand and market acceptance for recently introduced products are subject to a high level of uncertainty. Moreover, since the market for our products is evolving, it is difficult to predict the future growth rate, if any, and size of this market.

 

Because of our lack of an operating history and the emerging nature of the markets in which we compete, we are is unable to accurately forecast our revenues or our profitability. The market for our products and the long-term acceptance of our products are uncertain, and our ability to attract and retain qualified personnel with industry expertise, particularly sales and marketing personnel, is uncertain. To the extent we are unsuccessful in increasing revenues, we may be required to appropriately adjust spending to compensate for any unexpected revenue shortfall, or to reduce our operating expenses, causing us to forego potential revenue generating activities, either of which could have a material adverse effect on our business, results of operations and financial condition.

 

11
 

 

We have incurred losses in prior periods and may incur losses in the future.

 

We incurred net losses of $993,371 for our fiscal year ended September 30, 2014. As of September 30, 2014, we had an accumulated deficit of $4,305,797. We have not achieved profitability in any period, and we expect to continue to incur net losses for the foreseeable future. Should we continue to incur net losses in future periods, we may not be able to increase the number of employees or our investment in capital equipment, sales and marketing programs and research and development in accordance with present plans. Continuation of net losses may also require us to secure additional financing sooner than expected. Such financing may not be available in sufficient amounts, or on terms acceptable to us and may dilute existing shareholders.

 

We will require additional capital in the future in order to maintain and expand our operations. Failure to obtain required capital would adversely affect our business.

 

Until such time as we become profitable, we will be required to obtain additional financing or capital investments in order to maintain and expand our operations and take advantage of future business opportunities. Obtaining additional financing will be subject to, among other factors, market conditions, industry trends, investor sentiment and investor acceptance of our business plan and management. These factors may make the timing, amount, terms and conditions of additional financing unattractive or unavailable to us. There are no assurances that we will be able to raise cash from equity or debt financing efforts or that, even if raised, such cash would be sufficient to satisfy our anticipated capital requirements. Further, there is no assurance concerning the terms on which such capital might be available. Failure to obtain financing sufficient to meet our anticipated capital requirements could have a material adverse effect on our business, operating results and financial condition.

 

If our products do not achieve greater market acceptance, or if alternative brands are developed and gain market traction, our business would be adversely affected.

 

Our success is dependent upon the successful development and marketing of our products. Our future success depends on increased market acceptance of our air purifier product lines. The air purification community may not embrace our product line. Acceptance of our products will depend on several factors, including cost, product effectiveness, convenience, strategic partnerships and reliability. We also cannot be sure that our business model will gain wide acceptance among retailers or the air purifier community. If the market fails to continue to develop, or develops more slowly than we expect, our business, results of operations and financial condition will be adversely affected. Moreover, if new air purifier brands are developed, our prospective products and current technologies could become less competitive or obsolete. Any of these factors could have a material and adverse impact on our growth and profitability.

 

The markets in which we operate are very competitive, and many of our competitors and potential competitors are larger, more established and better capitalized than we are.

 

Although air purification technology is a rapidly emerging technology, the market for these products is highly competitive and we expect that competition will continue to intensify. Our products compete broadly with other current companies offering air purification technology, including companies that offer UV air purification technology, such as 3M Corporation and Sears. These products compete directly with the products offered by us.

 

Many competitors have longer operating histories, larger customer bases, and greater financial, research and development, technical, marketing and sales, and personnel resources than we have. Given their capital resources, the larger companies with whom we compete or may compete in the future, are in a better position to substantially increase their manufacturing capacity, research and development efforts or to withstand any significant reduction in orders by customers in our markets. Such larger companies typically have broader and more diverse product lines and market focus and thus are not as susceptible to downturns in a particular market. In addition, some of our competitors have been in operation much longer than we have been and therefore may have more longstanding and established relationships with current and potential customers.

 

Because we are small and do not have much capital, we must limit our activities. Our relative lack of capital and resources will adversely affect our ability to compete with large entities that market air purifier products. We compete against other air purifier manufacturers and retailers, some of which sell their products globally, and some of these providers have considerably greater resources and abilities than we have. These competitors may have greater marketing and sales capacity, established sales and distribution networks, significant goodwill and global name recognition. Furthermore, it may become necessary for us to reduce our prices in response to competition. A reduction in prices of our products could adversely affect our revenues and profitability.

 

In addition, other entities not currently offering products similar to us may enter the market. Any delays in the general market acceptance of our products may harm our competitive position. Any such delay would allow our competitors additional time to improve their service or product offerings, and provide time for new competitors to develop. Increased competition may result in pricing pressures, reduced operating margins and loss of market share, which could have an adverse effect on our business, operating results and financial condition.

 

12
 

 

Inability of our officers and directors to manage the growth of the business may limit our success.

 

We expect to grow as we execute or business strategy. Rapid growth would place a significant strain on our management and operational resources. In addition, we expect the demands on our infrastructure and technical support resources to grow along with our customer base, and if we are successful in implementing our marketing strategy, it could experience difficulties responding to demand for our products and technical support in a timely manner and in accordance with market expectations. These demands may require the addition of new management personnel or the development of additional expertise by existing management personnel. There can be no assurance that our networks, procedures or controls will be adequate to support our operations or that management will be able to keep pace with such growth. Failure to manage growth effectively could have a material adverse effect on our business, operating results and financial condition.

 

As we expand, management will be faced with new challenges due to increases in operating expenses and risks related to expansion.

 

As our business grows and expands, we will spend substantial financial and other resources on developing and introducing new products and expanding our sales and marketing organization, strategic relationships and operating infrastructure. If our business and revenues grow, we expect that our cost of revenues, sales and marketing expenses, general and administrative expenses, operations and customer support expenses will increase.

 

If we fail to integrate our recent acquisitions with our operations, our business could suffer.

 

We recently acquired air purification technology and products from AmAirpure, Inc., and in the future we may acquire more air purification technologies, businesses or assets. The integration of acquired businesses, technologies or assets requires significant effort and entails risks. We may find it difficult to integrate operations of acquired businesses as personnel may leave and licensees, distributors or suppliers may terminate their arrangements or demand amended terms to these arrangements. Additionally, our management may have their attention diverted while trying to integrate businesses or assets that may be acquired. If we are not able to successfully integrate any businesses or assets that we acquire, we may not realize the anticipated benefits of these acquisitions.

 

Our success depends on our ability to capitalize on our strategic relationships and partnerships with suppliers, distributors, purchasers and users of our products.

 

We will rely on strategic relationships with third parties to expand our distribution channels and to undertake joint product development and marketing efforts. Our ability to increase sales depends on marketing our products through new and existing strategic relationships. We intend to partner with established existing suppliers and distributors in order to reach target markets such as the medical, healthcare, hospitality, food service and lodging markets. The termination of one or more of our strategic relationships may have a material adverse effect on our business, operating results and financial condition.

 

Our intellectual property may not protect our products, and/or our products may infringe on the intellectual property rights of third parties.

 

We regard our trademarks, trade secrets and similar intellectual property as critical to our success and attempt to protect such property with registered and common law trademarks and copyrights, restrictions on disclosure and other actions to forestall infringement. Despite precautions implemented by us, unauthorized third parties may copy certain portions of our products or reverse engineer or obtain and use information regarded by us as proprietary. We have secured one patent in the United States, have filed an application for an additional patent, and may seek additional patents in the future. We do not know if a patent will issue on the patent application or whether any future patent applications will be issued with the scope of the claims sought by us, or whether any patents received by us will be challenged or invalidated. In addition, many other organizations are engaged in research and product development efforts that may overlap with our products. Such organizations may currently have, or may obtain in the future, legally blocking proprietary rights, including patent rights, in one or more products or methods under development or consideration by us. These rights may prevent us from commercializing products, or may require us to obtain a license from the organizations to use the technology. We may not be able to obtain any such licenses that may be required on reasonable financial terms, if at all, and cannot be sure that the patents underlying any such licenses will be valid or enforceable. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States. Our means of protecting our proprietary rights in the United States or abroad may not be adequate and competitors may independently develop similar technology and products. Third parties may infringe or misappropriate our copyright, trademarks and similar proprietary rights. In addition, other parties may assert infringement claims against us. We cannot be certain that our products do not infringe issued patents that may relate to our products. We may be subject to legal proceedings and claims from time to time in the ordinary course of business, including claims of alleged infringement of the trademarks and other intellectual property rights of third parties. Intellectual property litigation is expensive and time consuming and may divert management’s attention away from running our business which may have a material adverse effect on our business, operating results and financial condition.

 

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The value of our technology may be vulnerable to the discovery of unknown technological defects.

 

Our products depend on complex technology. Complex technology often contains defects, particularly when first introduced or when new versions are released. Although we conduct extensive testing, there is a possibility that technology defects may not be detected until after the product has been released. Although we have not experienced any material technology defects to date, it is possible that despite testing, defects may occur in the products. The defects may result in damage to our reputation or increase costs, cause us to lose revenue or delay market acceptance or divert our development resources, any of which may have a material adverse effect on our business, operating results and financial condition.

 

Government and private insurance plans may not adequately reimburse patients for our products, which could result in reductions in sales or selling prices for our products.

 

Our ability to sell our products will depend in some part on the extent to which reimbursement for the cost of our products will be available from government health administration authorities, private health insurers and other organizations. In November 2008, the U.S. Food and Drug Administration (“FDA”) cleared our ViraTech UV-400 product as a Class II medical device, and we believe that certain purchasers of our product may generally qualify for reimbursement of some of the costs of purchasing our product, subject to the terms and conditions of their insurance plan or Medicare or Medicaid. Third party payers such as insurance companies are increasingly challenging the prices charged for medical products and can, without notice, deny coverage for treatments that may include the use of our products. Therefore, even if a product is cleared for marketing, we cannot be assured that reimbursement will be allowed for the product, that the reimbursement amount will be adequate or, that the reimbursement amount, even if initially adequate, will not subsequently be reduced. Additionally, future legislation or regulations concerning the healthcare industry or third party or governmental coverage and reimbursement, particularly legislation or regulation limiting consumers’ reimbursement rights, may harm our business.

 

As we develop new products, those products will generally not qualify for reimbursement, if at all, until they are cleared for marketing and until they are approved for reimbursement under policies of insurance, Medicare and Medicaid. We do not file claims and bill governmental programs or other third party payers directly for reimbursement for our products. However, we are still subject to laws and regulations relating to governmental reimbursement programs, particularly Medicaid and Medicare.

 

Failure to comply with anti-kickback and fraud regulations could result in substantial penalties and changes in our business operations.

 

The federal Anti-Kickback Law prohibits persons from knowingly and willfully soliciting, receiving, offering or providing remuneration, directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending or arranging for a good or service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. The U.S. government has interpreted this law broadly to apply to the marketing and sales activities of manufacturers and distributors like us. Many states and other governments have adopted laws similar to the federal Anti-Kickback Law. We are also subject to other federal and state fraud laws applicable to payment from any third party payer. These laws prohibit persons from knowingly and willfully filing false claims or executing a scheme to defraud any healthcare benefit program, including private third party payers. These laws may apply to manufacturers and distributors who provide information on coverage, coding, and reimbursement of their products to persons who do bill third party payers. Any violation of these laws and regulations could result in civil and criminal penalties (including fines), increased legal expenses and exclusions from governmental reimbursement programs, all of which could have a material adverse effect upon our business, financial conditions and results of operations.

 

Complying with Food and Drug Administration, or FDA, and other regulations is an expensive and time-consuming process, and any failure to comply could have a materially adverse effect   on our business, financial condition, or results of operations.

 

Based on the intended use of some of our products, our products can be subject to significant federal government regulation. Those regulations could restrict the sale and/or marketing of some of our products. The manufacture, packaging, labeling, advertising, promotion, distribution, and sale of our anti-microbial products are subject to regulation by federal and state governmental agencies in the United States and other countries, including the FDA and the U.S. Federal Trade Commission (“FTC”). We note that failure to comply with FDA regulations can result in adverse governmental enforcement action including civil and criminal action, injunctions, recalls, seizures and fines. Any action of this type by the FDA may materially adversely affect our ability to market our products.

 

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Likewise, failure to comply with FTC rules and standards could result in significant fines, injunctions, cease and desist orders, advertising limitations, and a variety of other enforcement sanctions available to the FTC. FTC would take action if it deemed advertising to be false or misleading. In particular, representations made about our products must be backed by ”competent and reliable scientific evidence” sufficient to support the claims made for the product. FTC would deem the failure of such an advertisement or labeling to be backed by that kind of evidence false FTC and the dissemination of it to be deemed an unfair or deceptive practice. Any enforcement action by the FTC could materially adversely affect our ability to market our products.

 

We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect additional governmental regulations or administrative orders, when and if promulgated, would have on our business. They could include, however, requirements for the redesign of our products, the recall or discontinuance of certain products, additional record keeping and reporting, expanded documentation of the scientific support or performance of certain products, and/or changes in labels and advertising. Any of these requirements could have a material adverse effect on the company.

 

Product sales, introductions or modifications may be delayed or canceled as a result of FDA regulations or similar foreign regulations, which could cause our sales and profits to decline.

 

Before we can market or sell a new medical device in the United States, we must obtain FDA clearance, which can be a lengthy and time-consuming process and thus very costly. We will have to receive clearance from the FDA to market our products in the United States under Section 510(k) of the Federal Food, Drug, and Cosmetic Act or our products must be found to be exempt from the Section 510(k) clearance process.

 

Any new product introduction or existing product modification could be subjected to a lengthier, more rigorous FDA examination process. For example, in certain cases we may need to conduct clinical trials of a new product before submitting a 510(k) notice. Additionally, we may be required to obtain premarket approvals for our products. The requirements of these more rigorous processes could delay product introductions and increase the costs associated with FDA compliance. Marketing and sale of our products outside the United States are also subject to regulatory clearances and approvals, and if we fail to obtain these regulatory approvals, our sales could suffer.

 

We cannot assure you that any new products we develop will receive required regulatory approvals from U.S. or foreign regulatory agencies.

 

We are subject to substantial regulation related to quality standards applicable to our manufacturing and quality processes. Our failure to comply with these standards could have an adverse effect on our business, financial condition, or results of operations.

 

The FDA regulates the approval, manufacturing, and sales and marketing of our products in the U.S. Although we outsource the manufacture of our products and do not currently manufacture any products currently, our manufacturers may be required to register with the FDA and may be subject to periodic inspection by the FDA for compliance with the FDA’s Quality System Regulation (“QSR”) requirements, which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation procedures. In addition, the federal Medical Device Reporting regulations require our manufacturers to provide information to the FDA whenever there is evidence that reasonably suggests that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by the FDA. Failure to comply with current governmental regulations and quality assurance guidelines could lead to temporary manufacturing shutdowns, product recalls or related field actions, product shortages or delays in product manufacturing. Efficacy or safety concerns, an increase in trends of adverse events in the marketplace, and/or manufacturing quality issues with respect to our products could lead to product recalls or related field actions, withdrawals, and/or declining sales.

 

Our profitability and success is subject to risks associated with potential general economic downturn.

 

Recently, the general health of the U.S. economy has been relatively weakened substantially, a consequence of which has been declining spending by individuals and companies. To the extent the general economic health of the U.S. continues to decline, or to the extent individuals or companies fear such a decline will continue, such individuals and companies may continue to reduce expenditures such as those for the products offered by us because such products may be considered dispensable items in a recession. A continued decline could delay decisions among certain of our customers to purchase our products or could delay decisions by prospective customers to make initial evaluations of our products. Such delays may have a material adverse effect on our business, operating results and financial condition.

 

15
 

 

A limited public trading market exists for our common stock, which makes it more difficult for our stockholders to sell their common stock in the public markets.

 

Although our common stock is quoted on the OTC Link operated by OTC Markets Group, Inc., on the OTCPink exchange, under the symbol “UVFT,” there is currently no active public trading market for our common stock. No assurance can be given that an active market will develop or that a stockholder will ever be able to liquidate our shares of common stock without considerable delay, if at all. Many brokerage firms may not be willing to effect transactions in our securities. Furthermore, our future stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, lack of available credit, interest rates or international currency fluctuations may adversely affect the future market price and liquidity of our common stock.

 

Our common stock may be subject to the penny stock rules which may make it more difficult to sell our common stock.

 

Because our common stock is not listed on any national securities exchange, trading in our common stock is also subject to the regulations regarding trading in “penny stocks,” which are those securities trading for less than $5.00 per share. The following is a list of the general restrictions on the sale of penny stocks:

 

·Before the sale of penny stock by a broker-dealer to a new purchaser, the broker-dealer must determine whether the purchaser is suitable to invest in penny stocks. To make that determination, a broker-dealer must obtain, from a prospective investor, information regarding the purchaser’s financial condition and investment experience and objectives. Subsequently, the broker-dealer must deliver to the purchaser a written statement setting forth the basis of the suitability finding and obtain the purchaser’s signature on such statement.

 

·A broker-dealer must obtain from the purchaser an agreement to purchase the securities. This agreement must be obtained for every purchase until the purchaser becomes an “established customer.” A broker-dealer may not affect a purchase of a penny stock less than two business days after a broker-dealer sends such agreement to the purchaser.

 

·The Securities Exchange Act of 1934, or the Exchange Act, requires that before effecting any transaction in any penny stock, a broker-dealer must provide the purchaser with a “risk disclosure document” that contains, among other things, a description of the penny stock market and how it functions and the risks associated with such investment. These disclosure rules are applicable to both purchases and sales by investors.

 

·A dealer that sells penny stock must send to the purchaser, within ten days after the end of each calendar month, a written account statement including prescribed information relating to the security.

 

These requirements can severely limit the liquidity of securities in the secondary market because few brokers or dealers are likely to be willing to undertake these compliance activities. As a result of our common stock not being listed on a national securities exchange and the rules and restrictions regarding penny stock transactions, an investor’s ability to sell to a third party and our ability to raise additional capital may be limited. We make no guarantee that our market-makers will continue to make a market in our common stock, or that any market for our common stock will continue.

 

We cannot guarantee that investors will be paid any dividends.

 

We have never declared or paid dividends on our common stock. We intend to retain earnings, if any, to support the development of our business and therefore do not anticipate paying cash dividends for the foreseeable future. Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including current financial condition, operating results and current and anticipated cash needs.

 

Nevada law and our articles of incorporation authorize us to issue shares of stock, which shares may cause substantial dilution to our existing shareholders and/or have rights and preferences greater than our common stock.

 

Pursuant to our Articles of Incorporation, we have, as of the date of this Report, 150,000,000 shares of common stock authorized. As of the date of this Report, we have 84,500,979shares of common stock issued and outstanding. As a result, our Board of Directors has the ability to issue a large number of additional shares of common stock without shareholder approval, which if issued could cause substantial dilution to our then shareholders.

 

16
 

 

We are subject to new corporate governance and internal control reporting requirements, and our costs related to compliance with, or our failure to comply with existing and future requirements, could adversely affect our business.

 

We face corporate governance requirements under the Sarbanes-Oxley Act of 2002, as well as new rules and regulations subsequently adopted by the SEC and the Public Company Accounting Oversight Board. These laws, rules and regulations continue to evolve and may become increasingly stringent in the future. We are required to include management’s report on internal controls as part of our annual report pursuant to Section 404 of the Sarbanes-Oxley Act. We strive to continuously evaluate and improve our control structure to help ensure that we comply with Section 404 of the Sarbanes-Oxley Act. The financial cost of compliance with these laws, rules and regulations is expected to remain substantial. We cannot assure you that we will be able to fully comply with these laws, rules and regulations that address corporate governance, internal control reporting and similar matters. Failure to comply with these laws, rules and regulations could materially adversely affect our reputation, financial condition and the value of our securities.

 

If we are unable to successfully recruit qualified and experienced employees and personnel, we may not be able to execute our business plan.

 

Our ability to increase revenues will depend in large part on our ability to successfully recruit, train and retain sales marketing personnel. There can be no assurance that we will be able to find, attract and retain existing employees or that we will be able to find, attract and retain qualified personnel on acceptable terms. Competition for additional qualified personnel is intense and we may not be able to hire or retain personnel with relevant experience. Any delays or difficulties encountered by us in hiring or retaining qualified personnel may adversely affect our business, operating results and financial condition.

 

We are dependent on our key employees.

 

Our success depends to a significant extent upon the continued service of our senior management and key executives, including Michael S. Ross, our President, CEO and Chief Financial Officer. Our success depends on the skills, experience and performance of senior management and other key personnel, many of whom have also worked together for only a short period of time. We do not have long-term employment agreements with any member of senior management or other key personnel. Our success also depends on our ability to recruit, train or retain qualified personnel. The loss of the services of any of the key members of senior management, other key personnel, or our inability to recruit, train or retain senior management or key personnel may have a material adverse effect on our business, operating results and financial condition.

 

ITEM 1B.UNRESOLVED STAFF COMMENTS.

 

None.

 

ITEM 2.PROPERTIES.

 

We currently maintain our registered offices at 250 Parkway Dr. Suite 150 Lincolnshire, IL 60069 and our RX Air Manufacturing facility is located at 3323 Garden Brook Dive, Farmers Branch, TX 75234.

 

ITEM 3.LEGAL PROCEEDINGS.

 

None.

 

ITEM 4.MINE SAFETY DISCLOSURES.

 

Not applicable.

 

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PART II

 

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Market Information

 

Since inception, there has been a limited trading market for our common stock. Our common stock is quoted on OTC Link operated by OTC Markets Group, Inc., on the OTCPink exchange, under the symbol “UVFT”, (“OTCPink”) exchange under the symbol UVFT. Our common stock has been listed on the OTCPink or its predecessor, OTCBB, since November 12, 2009. Prior to that time, there was no public market for our common stock. The table below lists the high and low closing prices per share of our common stock since our stock was first traded, as quoted on OTCPink.

 

Fiscal 2013  High   Low 
First Quarter  $0.07   $0.03 
Second Quarter  $0.06   $0.03 
Third Quarter  $0.09   $0.03 
Fourth Quarter  $0.06   $0.03 

 

Fiscal 2014  High   Low 
First Quarter  $0.05   $0.02 
Second Quarter  $0.07   $0.02 
Third Quarter  $0.05   $0.02 
Fourth Quarter  $0.04   $0.02 

 

Trading in our common stock has been sporadic and the quotations set forth above are not necessarily indicative of actual market conditions. All prices reflect inter-dealer prices without retail mark-up, mark-down, or commission and may not necessarily reflect actual transactions.

 

Stockholders

 

As of June 18, 2015, we had 84,500,979 shares of common stock outstanding held by an estimate of 1,200 stock holders.

 

Dividends

 

We have not paid dividends to date and do not anticipate paying any dividends in the foreseeable future. Our Board of Directors intends to follow a policy of retaining earnings, if any, to finance our growth. The declaration and payment of dividends in the future will be determined by our Board of Directors in light of conditions then existing, including our earnings, financial condition, capital requirements and other factors.

 

Securities Authorized For Issuance under Equity Compensation Plans

 

There are no securities authorized for issuance under any equity compensation plans during the fiscal year ended September 30, 2014.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchases

 

There were no issuer purchases of our equity securities during the fiscal year ended September 30, 2014.

 

ITEM 6.SELECTED FINANCIAL DATA

 

As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this item.

 

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ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Report. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward-looking statements are based upon estimates, forecasts, and assumptions that are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by us, or on our behalf. We disclaim any obligation to update forward-looking statements.

 

The discussion and financial statements contained herein are for our fiscal years ended September 30, 2014 and 2013. The following discussion regarding our financial statements should be read in conjunction with our financial statements included herewith.

 

Financial Condition as of September 30, 2014

 

We reported total current assets of $183,186 at September 30, 2014, consisting of cash, inventories and prepaid expenses and other current assets. Total current liabilities reported of $914,304 consisted of $385,321 in accounts payable and accrued expenses, derivative liabilities of $213,843 and $315,140 in current debt obligations. We had a working capital deficit of $731,118 at September 30, 2014.

 

Net loss increased from $946,660 for the year ended September 30, 2013 to $993,371 for the year ended September 30, 2014.

 

We are focused in the air purification industry, and evaluating opportunities for expansion within that industry through acquisition or other strategic relationships.

 

Plan of Operation

 

Background

 

We were organized under the laws of the State of Nevada on April 4, 2006 under the name “Northwest Chariots, Inc.” and were engaged in the business of renting and selling electrically powered human transporters, like electric bicycles, chariots and quads. Subsequent to our fiscal year ended September 30, 2009, we decided to change our product mix to air purification products and to focus on the research, development, manufacturing and sales of air purification systems and products.

 

In furtherance of our business objectives, on November 12, 2009, we affected a 32-for-1 forward stock split of all our issued and outstanding shares of common stock, and we merged with our wholly-owned subsidiary, UV Flu Technologies, Inc., for the purposes of effecting a name change to “UV Flu Technologies, Inc.”

 

Effective November 15, 2009, we acquired AmAirapure Inc.’s air purification technology, product, inventory, and certain equipment pursuant to an Asset Purchase Agreement with AmAirapure, Inc. We issued 15,000,000 shares of our common stock to shareholders of AmAirapure in connection with the asset acquisition. Additionally, on November 25, 2009, we entered into a Distribution Agreement with Puravair Distributors LLC (“Puravair”) where we appointed Puravair as our exclusive master distributor for our Viratech UV-400 product and our other products for the professional, medical, and commercial markets in the U.S. and Canada. On September 30, 2010, we terminated our Distribution Agreement with Puravair and began adding new distributors, which totaled five as of year-end.

 

The latest production runs of our Viratech UV-400 product incorporate our patented UV bacteria killing technology, which has been cleared by the FDA for use as a medical device. In June 2010, we expanded our market reach by introducing the latest generation of our Viratech UV-400 product into the residential and hospitality markets.

 

On October 28, 2010, we entered into a binding letter of intent with The Red Oak Trust (“Red Oak”) (the “LOI”) in connection with our proposed acquisition of one hundred percent (100%) of the issued and outstanding units of RxAir Industries, LLC, a Nevada limited liability company (“RxAir”), which is wholly owned by Red Oak (the “Acquisition”). At the closing of the Acquisition, Rx Air became a wholly-owned subsidiary of the Company. The acquisition was consummated January 24, 2011.

 

We currently have limited revenues from operations. In order to meet our business objectives, we will need to raise additional funds through equity or debt financing. There can be no assurance that we will be successful in raising additional funds and, if unsuccessful, our plans for expanding operations and business activities may have to be curtailed. Any attempt to raise funds, through debt or equity financing, would likely result in dilution to existing shareholders.

 

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Cash and Cash Equivalents

 

As of September 30, 2014, we had cash of $4,748. As such, we anticipate that we will have to raise additional capital through equity financings to fund our operations and execute our business plan during the next 6 to 12 months.

 

Critical Accounting Policies

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management of our Company 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.

 

Our management routinely makes judgments and estimates about the effects of matters that are inherently uncertain. As the number of variables and assumptions affecting the probable future resolution of the uncertainties increase, these judgments become even more subjective and complex. Our significant accounting policies are discussed in Note 3 to our consolidated financial statements for the fiscal year ended September 30, 2014 included in the Form 10-K. We have identified the following accounting policies, described below, as the most important to an understanding of our current financial condition and results of operations.

 

This summary of significant accounting policies is presented to assist in understanding our consolidated financial statements. Our consolidated financial statements and notes are representations of our management who is responsible for their integrity and objectivity. These accounting policies conform to GAAP and have been consistently applied in the preparation of the consolidated financial statements. The consolidated financial statements are stated in United States of America dollars.

 

Basis of Presentation

 

This summary of significant accounting policies is presented to assist in understanding our consolidated financial statements. Our consolidated financial statements and notes are representations of our management who is responsible for their integrity and objectivity. These accounting policies conform to GAAP and have been consistently applied in the preparation of the consolidated financial statements.

 

The Company has evaluated subsequent events through filing date of this Form 10-K, and have determined that no subsequent events have occurred that would require recognition in the financial statements or disclosure in the notes thereto other than as discussed in the accompanying notes.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with 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 consolidated financial statements, and the reported amounts of net sales and expenses during the reporting period. By their nature, these estimates and assumptions are subject to an inherent degree of uncertainty. Significant estimates made by management include, among others, provisions for uncollectible receivables and sales returns, warranty liabilities, valuation of inventories, fair value of financial instruments, and recoverability of long-lived assets, stock-based transactions and realization of deferred tax assets. The Company bases its estimates on historical experience, knowledge of current conditions and the Company’s belief of what could occur in the future considering available information. The Company reviews its estimates on an on-going basis. The actual results experienced by the Company may differ materially and adversely from its estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

 

Fair Value of Financial Instruments

 

The carrying value of our financial instruments consist of cash, accounts receivable, accounts payable and accrued expenses, derivative liabilities and debt instruments as of September 30, 2014 and 2013. See Note 11 for discussion regarding the classification of our financial instruments.

 

Cash and Cash Equivalents

 

Cash is comprised of cash on hand and demand deposits. Cash equivalents include short-term highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. The Company has no cash equivalents as of September 30, 2014 or 2013.

 

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Credit Risks

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At September 30, 2014 and 2013, the Company had no funds in excess of the FDIC insured limits.

 

Sales Concentrations

 

For the year ended September 30, 2014, 48% of our sales were with two customers. 39 % of our sales for the year ended September 30, 2013 have been accounted for by a special sales agreement the Company had with Groupon. Of the remaining sales, 10 % have been accounted for by our largest customer.

 

Inventories

 

Inventories are stated at the lower of cost or market, with cost being determined using the first-in first-out method all of which are classified as finished goods.

 

Property and Equipment

 

Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. The estimated useful lives for significant property and equipment categories are as follows:

 

Equipment 5 years
Furniture 7 years

 

The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors. Based on this assessment there were no impairments needed as of September 30, 2014 or 2013.

 

Impairment of Long- Lived Assets

 

The Company evaluates the recoverability of the carrying value of long-lived assets held and used by the Company for impairment on at least an annual basis or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future net cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. If the carrying value is determined not to be recoverable from future operating cash flows, the asset is deemed impaired and an impairment loss is recognized to the extent the carrying value exceeds the estimated fair value of the asset. The fair value of the asset or asset group is based on market value when available, or when unavailable, on discounted expected cash flows. The Company’s management believes there is no impairment of long-lived assets as of September 30, 2014 and 2013. There can be no assurance, however, that market conditions will not change or demand for the Company’s products will continue, which could result in future impairment of long-lived assets.

 

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Derivative Liabilities

 

The Company evaluates stock options, stock warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity. The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date.

 

Certain of the Company’s stock options, stock warrants and convertible debt are accounted for as derivative liabilities due to the insufficient authorized shares to settle outstanding contracts. The Company estimates the fair value of these stock options, stock warrants and convertible debt using the Black-Scholes-Merton option pricing model (“Black-Scholes”).

 

Stock-Based Compensation

 

The Company grants options to purchase the Company’s common stock to employees, directors and consultants under stock option plans. The benefits provided under these plans are stock-based payments that the Company accounts for using the fair value method.

 

The fair value of each option award is estimated on the date of grant using Black-Scholes that uses assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, expected stock price volatility, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. Expected volatilities are based on the historical volatility of the Company’s common stock and other factors. The expected terms of options granted are based on analyses of historical employee termination rates and option exercises. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant. Since the Company does not expect to pay dividends on common stock in the foreseeable future, it estimated the dividend yield to be 0%.

 

Stock-based compensation expense recognized during a period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest and is amortized under the straight-line attribution method. As share-based compensation expense recognized in the accompanying statements of operations for the years ended September 30, 2014 and 2013 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The fair value method requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates forfeitures based on historical experience. Changes to the estimated forfeiture rate are accounted for as a cumulative effect of change in the period the change occurred.

 

Since the Company has a net operating loss carry-forward as of September 30, 2014, no excess tax benefits for tax deductions related to share-based awards were recognized from stock options exercised in the year ended September 30, 2014 that would have resulted in a reclassification from cash flows from operating activities to cash flows from financing activities.

 

Revenue Recognition

 

It is our policy that revenues will be recognized in accordance with ASC Topic 605. Revenues are recognized only when the Company has transferred to the customer the significant risk and rewards of ownership of the goods, title to the products transfers, the amount is fixed and determinable, evidence of an agreement exists, there is reasonable assurance of collection of the sales proceeds, the Company has no future obligations, and the customer bears the risk of loss. This occurs at the time of shipment (FOB shipping point) of the products from the Company’s warehouse and an invoice is prepared. There are no rights of return and exchange is allowed only on defective products. Recognition of revenue is not affected as the right of exchange results in new units being shipped to the customer once defective units have been received by the company and verified as defective.

 

Advertising

 

Advertising costs are expensed as incurred in accordance with ASC subtopic 720-35. Advertising costs for the years ended September 30, 2014 and 2013 were $14,299 and $9,395, respectively. These costs were included in general and administrative costs.

 

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Income Taxes

 

The Company accounts for income taxes and the related accounts under the liability method. Deferred tax assets and liabilities are determined based on the differences between the consolidated financial statement carrying amounts and the income tax bases of assets and liabilities. A valuation allowance is applied against any net deferred tax asset if, based on available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Therefore, the Company has recorded a full valuation allowance against the net deferred tax assets.

 

The Company recognizes any uncertain income tax positions on income tax returns at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. There is no unrecognized tax benefits included in the consolidated balance sheet that would, if recognized, affect the effective tax rate.

 

The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had $0 accrued for interest and penalties on each of the Company’s consolidated balance sheets at September 30, 2014 and 2013.

 

The Company is subject to taxation in the U.S. and various state jurisdictions. The Company’s tax years for 2011 and forward for federal and 2010 and forward for state purposes are subject to examination by the U.S. and Illinois tax authorities due to the carry-forward of unutilized net operating losses. The Company does not foresee material changes to its gross uncertain income tax position liability within the next twelve months.

 

Basic and Diluted Loss Per Share

 

Basic net loss per share is calculated by dividing net loss by the weighted-average common shares outstanding during the year. Diluted net loss per share is calculated by dividing the net loss by the weighted-average shares and dilutive potential common shares outstanding during the year. Dilutive potential shares consist of dilutive shares issuable upon the exercise of outstanding stock options, warrants and convertible debt computed using the treasury stock method. In periods of losses, basic and diluted loss per share are the same, as the effect of stock options, warrants and convertible debt on loss per share is anti-dilutive.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes the revenue recognition requirements in FASB Topic 605, "Revenue Recognition". The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. On April 1, 2015, the FASB proposed deferring the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date. The FASB also proposed permitting early adoption of the standard, but not before the original effective date for reporting periods beginning after December 15, 2016. The Company has not selected a transition method and management has not yet selected a transition method and is currently assessing the impact the adoption of ASU 2014-09 will have on our consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements-Going Concern”. Currently, there is no guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this ASU are effective for the reporting periods beginning after December 15, 2016 and early application is permitted. Management is currently assessing the impact the adoption of ASU 2014-15 will have on our consolidated financial statements.

 

Results of Operations

 

The following is Management’s discussion and analysis of certain significant factors which have affected our financial condition and results of operations during the periods included in the accompanying consolidated financial statements.

 

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Results of Operations for the Year Ended September 30, 2014 as Compared to the Year Ended September 30, 2013

 

Sales and Rental Revenue

 

During the fiscal year ended September 30, 2014, we recognized net revenue of $113,743 as compared to $213,797 for the year ended September 30, 2013. The decrease is primarily related to the decrease in sales from our new product line, reflecting a lower market penetration of our product in the residential market.

 

Net Income (Loss)

 

During the fiscal year ended September 30, 2014, our net loss was $993,371as compared to $946,660 for the year ended September 30, 2013. The increase in net loss is due to an increase in our total expenses of $1,023,421 for the year ended September 30, 2014 as compared to $1,008,508 for the year ended September 30, 2013.

 

General and Administrative Expenses

 

During the fiscal year ended September 30, 2014, we incurred total expenses of $1,023,421 as compared to $1,008,508 for the year ended September 30, 2013. The increase is primarily related to expenses for marketing, office and administration, professional fees, consulting and investor relation costs due to an increase in business activity associated with development of the new product line. The expenses are as follows:

 

   September 30, 2014   September 30, 2013 
         
Depreciation  $4,085   $1,464 
Marketing   22,000    3,622 
Office and administration   691,779    334,613 
Professional fees   111,853    295,362 
Consulting   193,704    373,447 
Total  $1,023,421   $1,008,508 

 

Depreciation and amortization expense was $4,085 for the year ended September 30, 2014 and $1,464 for the year ended September 30, 2013.

 

Marketing expenses increased from $3,622 to $22,000, as many of the marketing materials were developed in the current year. Professional fees declined as many of the costs were absorbed by the consultants themselves.

 

Liquidity and Capital Resources

 

As of September 30, 2014, we had cash of $4,748 and working capital deficit of $(731,118). During the year ended September 30, 2014, we funded our operations from receipts of sales revenues, proceeds from stock sales, and proceeds from debt. In order to survive, we are dependent on increasing our sales volume. Additionally, we plan to continue to raise additional equity capital, and believe that this will provide sufficient working capital to fund our operations for at least the next 12 months. Changes in our operating plans, increased expenses, additional acquisitions, or other events may cause us to seek additional equity or debt financing in the future.

 

For the year ended September 30, 2014, we used $427,575 in cash flows to fund operating activities as compared to $299,420 for the year ended September 30, 2013.

 

For the year ended September 30, 2014, cash flows used in investing activities was $382.

 

For the year ended September 30, 2014, cash flows provided from financing activities was $424,848 from proceeds from debt obligations and sale of shares of common stock as compared to $287,404 for the year ended September 30, 2013.

 

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We anticipate that our cash flow will improve as our product shipments ramp up in our second quarter of 2015. Any additional funding will be equity, or order based, in order to fund the ramp up of existing production, along with the tooling for our new model.

 

Off-Balance Sheet Arrangements

 

We presently do not have any off-balance sheet arrangements.

 

Capital Expenditures

 

We spent $382 for the purchase of equipment for the fiscal year ended September 30, 2014 and $68 in the fiscal year ended September 30, 2013.

 

Contractual Obligations

 

The following table outlines payments due under our significant contractual obligations over the periods shown, exclusive of interest:

 

   Payments Due by 
   Period 
Contract Obligations      Less than           More than 
At September 30, 2014  Total   1 Year   1-3 years   3-5 years   5 years 
Total Debt  $315,140   $315,140   $   $   $ 
Lease Obligations  $16,380   $16,380   $         

 

The above table outlines our obligations as of September 30, 2014 and does not reflect any changes in our obligations that have occurred after that date. 

 

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this item.

 

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Reference is made to the financial statements, the report of our independent registered public accounting firm, and the notes thereto commencing at page F-1 of this report, which financial statements, report, and notes are incorporated herein by reference.

 

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

(a) On December 2, 2014, the Board of Directors of the Company dismissed Samyn & Martin, LLC (“SM”) as the Company’s independent registered public accounting firm, to be replaced by a new firm.

 

SM’s reports on the Company’s financial statements for the two years ended September 30, 2013 and 2012 did not contain any adverse opinion or disclaimer of opinion, except to indicate there was substantial doubt about the Company’s ability to continue as a going concern.

 

During the Company’s fiscal years ended September 30, 2013 or 2012, and through December 2, 2014, there were no disagreements between the Company or SM on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which, if not resolved to the satisfaction of SM, would have caused SM to make reference to the matter in their report. None of the “reportable events” described in Item 304(a)(1)(v) of Regulation S-K of the SEC’s rules and regulations have occurred during the fiscal years ended September 30, 2013 and 2012 or through December 2, 2014.

 

(b) Contemporaneous with the dismissal of SM, on December 2, 2014, the Board of Directors of the Company engaged the firm of KMJ Corbin & Company LLP (“KMJ”) as the Company’s new independent registered public accounting firm. For the fiscal years ended September 30, 2013 and 2012 and as of the date hereof, the Company (or someone on its behalf) has not consulted with KMJ regarding either:

 

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(i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s financial statements, and neither a written report was provided to the Company’s or oral advice was provided that KMJ concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; nor

 

(ii) any matter that was either the subject of a disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K, or a reportable event, as that term is defined in Item 304(a)(1)(v) of Regulation S-K.

 

ITEM 9A.CONTROLS AND PROCEDURES

 

We carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer along with our Principal Financial Officer, of the effectiveness of the design of the our disclosure controls and procedures (as defined by Exchange Act Rule 13a-15(e) and 15d-15(e)) as of the end of our fiscal year pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our Principal Executive Officer along with our Principal Financial Officer concluded that our disclosure controls and procedures are not effective at September 30, 2014 in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in the framework in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement or our annual or interim financial statements will not be prevented or detected on a timely basis. Management has concluded that our internal controls over financial reporting were not effective as of September 30, 2014 due to the following:

 

1.We do not have written documentation of our internal control policies and procedures. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and had concluded that the control deficiency that resulted represented a material weakness.

 

2.We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

3.We had not effectively implemented comprehensive entity-level internal controls.

 

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4.We did not have a sufficient complement of personnel with appropriate training and experience in accounting principles generally accepted in the United States of America, or GAAP, including the preparation of the income tax provision.

 

5.We did not implement financial controls that were properly designed to meet the control objectives or address all risks of the processes or the applicable assertions of the significant accounts.

 

6.Due to material weaknesses identified at our entity level controls we did not test whether our financial activity level controls or our information technology general controls were operating sufficiently to identify a deficiency, or combination of deficiencies, that may result in a reasonable possibility that a material misstatement of the consolidated financial statements would not be prevented or detected on a timely basis.

 

Remediation of Material Weaknesses

 

While management believes that the Company’s consolidated financial statements previously filed in the Company’s SEC reports have been properly recorded and disclosed in accordance with GAAP, based on the control deficiencies identified above, we have designed and plan to implement, or in some cases have already implemented, the specific remediation initiatives described below:

 

·We have engaged additional expertise to assist us with our financial reporting and accounting processes;

 

·We consolidated our accounting books and records to provide for a single process for preparing our financial reports; and

 

·We have entered into a relationship with a new warehousing company which provides for enhanced and efficient reporting on sales and inventory.

 

We do not expect to have fully remediated these material weaknesses until management has tested those internal controls and found them to have been remediated. We expect to complete this process during our annual testing for fiscal 2015.

 

Management has reviewed the consolidated financial statements and underlying information included herein in detail and believes the procedures performed are adequate to fairly present our financial position, results of operations and cash flows for the periods presented in all material respects.

 

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to such attestation pursuant to rules of the Securities and Exchange Commission that permits us to provide only management’s report in this Annual Report.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

ITEM 9B.OTHER INFORMATION.

 

There were no items requiring reporting on Form 8-K that were not reported on Form 8-K during the fourth quarter of the year covered by this Form 10-K.

 

PART III

 

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

 

Directors and Executive Officers

 

The following table sets forth the names and ages of our current directors and executive officers, the principal offices and positions held by each person:

 

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Person   Age   Position
         
Michael S. Ross   62   President, Treasurer, Chief Executive Officer, Chief Financial Officer, and Director
         
Glenn Bushee   59   Director
         
Thomas J. Mahowald   59   Director
         
Jeremy Noonan   47   Director
         
Jerrold B. Leikin   60  

Director

 

Our Board of Directors believes that its members encompass a range of talent, skill, and experience sufficient to provide sound and prudent guidance with respect to our operations and interests. The information below with respect to our directors includes each director’s experience, qualifications, attributes, and skills that led our Board of Directions to the conclusion that he should serve as a director.

 

Michael S. Ross, President, Chief Executive Officer, Chief Financial Officer, and Director. On October 22, 2013, our Board of Directors appointed Mr. Michael S. Ross as President, Chief Financial Officer, Treasurer and member of the Board of Directors. Prior to this appointment, Mr. Ross served as Vice President of Sales for DPG, from 2012 through October 2013, where he directed a team of manufacturing representatives throughout the United States, who are responsible for all US and its territories, as well as the Caribbean, Central and South America. Mr. Ross also managed the distribution of retail product for Canada. From 2007 through 2011, Mr. Ross was National Sales Manager in Electronic Retail for Wagan Tech, which developed and offered automotive aftermarket products. Prior to that, from 2002 through 2007, Mr. Ross was President and Owner of Windy City Development Inc., a real estate development company specializing in apartment buildings in Chicago. Mr. Ross was also Director of Sales and Marketing Retail Division, for KIMCO Corporation, and for Bartlett Manufacturing Co., Inc., and held sales and business development positions for Swift Gift, Ltd., Sanyo Fisher Corporation, and Panasonic Co. Mr. Ross was selected for his expertise in retail sales.

 

Glenn Bushee, Director. On April 2013, our Board of Directors appointed Glenn Bushee to the Board of Directors of UV Flu Technologies. Mr. Bushee currently is President and CEO of Brite-Strike Technologies, a publicly traded manufacturer of tactical flashlights and related lighting products. He has served in senior management positions in a variety of companies, including Sunbeam, Shop-Vac, and McCullough Chain saws. Mr. Bushee was educated at the University of Massachusetts at Amherst, with a BS in Business Administration received in 1978.

 

Thomas J. Mahowald, Director. On December 31, 2010, our Board of Directors appointed Mr. Thomas J. Mahowald as a member of the Board of Directors. Mr. Mahowald is currently a Vice President of Sales for Navigant Consulting. From 2009 to September, 2011, Mr. Mahowald served as the Vice President, Sales & Marketing of Pike Research Group, a global leader in Cleantech market research. From 2004 to 2008, Mr. Mahowald served as Principal of Encompass Technology Partners, a business development firm specializing in strategic planning and sales strategy, product branding and positioning, merchandising, and global sales channel development, including e-commerce. From 1996 to 2004, Mr. Mahowald served as Vice President of Sales, Major Accounts for International Data Corporation, a global provider of market intelligence, advisory services, and events for the information technology, telecommunications, and consumer technology markets. Prior to 1996, Mr. Mahowald served as Vice President, Sales for Studio Solutions, Inc. from 1991 to 1996; Director of International Marketing for Precision Visuals, Inc. from 1983 to 1991; and International Sales Manager for the Satellite Communication Division of Harris Corporation form 1981 to 1983. Mr. Mahowald received his M.B.A in International Management from the Thunderbird School of Global Management in 1981 and his B.S. in Finance and Accounting from the University of Colorado at Boulder in 1977.

 

Jerrold B. Leikin, MD., Director. On October 22, 2013 our Board of Directors appointed Dr. Jerrold B. Leikin as a member of the Board of Directors. Dr. Leikin is a medical doctor who runs one of the only dedicated comprehensive clinical toxicology programs in the country, located in Illinois. He is on staff at all local institutions and does bedside evaluations of all clinical toxicology issues throughout the corporation. He has an outpatient practice for individuals and companies evaluation at Glenbrook, Illinois hospital through the OMEGA occupational health center. Dr. Leikin has written the standard textbooks for toxicology used throughout the country and internationally, is the editor of multiple bioterrorism and toxicology textbooks and had published hundreds of peer-reviewed publications. He is also the senior editor for the monthly primary care journal, Disease-A-Month. He has consulted for his expertise locally, nationally and internationally for a variety of toxicologic and bioterrorism related events. As one of the initial medical directors of the Illinois Poison Center, Dr. Leikin teaches residents and fellows focusing on a myriad of toxicologic issues brought up through the poison center each day. Dr. Leikin also serves multiple other states as a consultant for other issues requiring his expertise. Dr. Leikin was chosen to serve as a director for his expertise in the medical field.

 

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Jeremy Noonan, Director. On October 22, 2013 our Board of Directors appointed Mr. Jeremy Noonan as a member of the Board of Directors. Mr. Noonan is a Service Solutions Consultant with Cisco Systems since 2013, and has been a solutions executive, program manager, and engagement manager and has held other sales position for Cisco Systems since 1999. Mr. Noonan is a graduate of the United States Naval Academy, with Bachelor of Science in Mathematics in 1988. Mr. Noonan also served as a Navy pilot. Mr. Noonan’s was chosen to serve as a director due to his longstanding expertise in sales.

 

Significant Employees

 

As of September 30, 2014, we had 1 full-time employee, although we engage contractors as necessary and each of our officers and directors devotes a portion of his and her time to the affairs of our Company.

 

Certain Relationships

 

There are no arrangements, understandings, or family relationships pursuant to which our executive officers or directors were selected. There are no related party transactions between us and our executive officers or directors.

 

Nominations to the Board of Directors

 

Our directors take a critical role in guiding our strategic direction and oversee the management of the Company. Board of Director candidates are considered based upon various criteria, such as their broad-based business and professional skills and experiences, a global business and social perspective, concern for the long-term interests of the stockholders, diversity, and personal integrity and judgment. Accordingly, we seek to attract and retain highly qualified directors.

 

In carrying out its responsibilities, the Board of Directors will consider candidates suggested by stockholders. If a stockholder wishes to formally place a candidate's name in nomination, however, he or she must do so in accordance with the provisions of the Company's Bylaws.

 

Committees of the Board of Directors

 

Audit Committee

 

Our Board of Directors  has not  established  a separate  audit committee within the meaning of Section  3(a)(58)(A) of the Securities  Exchange Act of 1934,  as amended  (the  ”Exchange  Act”). Instead, the entire Board of Directors acts as the audit committee within the meaning of Section 3(a)(58)(B) of the Exchange Act. We are seeking candidates for outside directors to serve on a separate audit committee when we establish one. Due to our small size and limited operations and resources, it has been difficult to recruit outside directors.

 

Audit Committee Financial Expert

 

We currently do not have an audit committee financial expert or an independent audit committee expert on our Board of Directors.

 

Other Committees

 

Our Board of Directors has not established separately-designated standing nominating or compensation committees due to our financial conditions, small size, and limited operations and resources.

 

Code of Ethical Conduct

 

We have adopted a Code of Ethical Conduct applicable to all employees including our principal executive officer and principal financial officer, which is available on our website at http://www.uvflutech.com.

 

29
 

 

Compliance with Section 16(a) of the Securities Exchange Act of 1934

 

Section 16(a) of the Securities and Exchange Act of 1934, as amended, requires any person who is a director or executive officer or who beneficially holds more than ten percent (10%) of any class of our securities which have been registered with the Securities and Exchange Commission, to file reports of initial ownership and changes in ownership with the Securities and Exchange Commission. These persons are also required under the regulations of the Securities and Exchange Commission to furnish us with copies of all Section 16(a) reports they file.

 

To our knowledge, based solely on our review of the copies of the Section 16(a) reports furnished to us and a review of our shareholders of record for the fiscal year ended September 30, 2014, we believe that each person who, at any time during such fiscal year was a director, officer, or beneficial owner of more than 10% of our common stock, complied with all Section 16(a) filing requirements during such fiscal year.

 

ITEM 11.EXECUTIVE COMPENSATION

 

General Philosophy

 

Our Board of Directors is responsible for establishing and administering the Company’s executive and director compensation.

 

Executive Compensation

 

The Board of Directors approved compensation to Mr. Michael S. Ross, who was approved as President of UV Flu on October 22, 2013, in the amount of $104,000 annually. The annual fee paid to Mr. Ross is for time in performing administrative, management, business development and sales functions. This fee was part of the agreement for which Mr. Ross accepted his role as new President, Treasurer, Chief Executive Officer, Chief Financial Officer and Director. In addition to his salary compensation, Mr. Ross will receive stock for a value of $46,000 annually.

 

Compensation Summary

 

Summary Compensation Table

 

                       Non             
                       Equity             
                       Incentive   Non-qualified         
                       Plan   Deferred   All Other     
               Stock   Option   Compensa   Compensation   Compensa     
     Salary   Bonus   Awards   Awards   tion   Earnings   tion   Total 
Name and Principal  Year   ($)   ($)   ($)   ($)   ($)   ($)   ($)   ($) 
Position (a)  (b)   (c)   (d)   (e)(2)   (f)   (g)   (h)   (i)   (j) 
Michael S. Ross, President, Treasurer, Chief Executive Officer, Chief Financial Officer, and Director                                             
    2014*  $104,000   $0   $23,000   $70,000   $0   $0   $0   $197,000 
    2013   $0   $0   $0   $0   $0   $0   $0   $0 
                                           $0 
                                              
John J. Lennon   2013   $69,000   $0   $39,000   $0   $0   $0   $0   $108,000 
    2012   $51,000   $0   $12,500   $0   $0   $0   $0   $63,500 
    2011   $78,000   $0   $139,000   $0   $0   $0   $0   $217,000 
    2010   $78,000   $0   $0   $0   $0   $0   $0   $78,000 
    2012   $0   $0   $10,000   $0   $0   $0   $0   $10,000 
    2011   $0   $0   $17,000   $0   $0   $0   $0   $17,000 
                                              
Tom Mahowald   2013   $0   $0   $13,200   $0   $0   $0   $0   $13,200 
    2012   $0   $0   $0   $0   $0   $0   $0   $0 
    2011   $0   $0   $7,000   $0   $0   $0   $0   $7,000 
    2012   $0   $0   $7,500   $0   $0   $0   $0   $7,500 
    2011   $0   $0   $13,000   $0   $0   $0   $0   $13,000 
                                              
Glen Bushee   2013   $0   $0   $4,500   $0   $0   $0   $0   $4,500 
                                              
Jerrold Leikin   2013   $0   $0   $0   $0   $0   $0   $0   $0 

 

30
 

 

·Actual salary taken by Michael Ross in 2014 was $76,000

 

Compensation of Directors

 

We have no standard arrangement to compensate directors for their services in their capacity as directors. Directors are not paid for meetings attended. We do reimburse directors for reasonable expenses incurred during the course of their performance. There has been no compensation awarded to, earned by, or paid to any of our named directors during the last fiscal year.

 

Outstanding Equity Awards at Fiscal 2014 Year-End

 

None of our named executive officers had any outstanding equity awards as of the fiscal year ended September 30, 2014.

 

Option Exercises and Vested Stock in Fiscal 2014

 

None of our named executive officers exercised stock options or had any restricted stock during the fiscal year ended September 30, 2014.

 

Employment and Other Agreements

 

There are no employment agreements with any officers or directors other than the monetary payment to them as more fully described elsewhere in this Form 10-K.

 

Pension and Retirement Plans

 

We do not offer any annuity, pension, or retirement benefits to be paid to any of our officers, directors, or employees in the event of retirement. There are also no compensatory plans or arrangements with respect to any individual named above which results or will result from the resignation, retirement, or any other termination of employment with our company, or from a change in the control of our Company.

 

31
 

 

Risk Management Considerations

 

We believe that our compensation policies and practices for our employees, including our executive officers, do not create risks that are reasonably likely to have a material adverse effect on our Company.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

Security Ownership Of Certain Beneficial Owners And Management

 

The following table sets forth, as of  February 15, 2015, the number and percentage of outstanding shares of our common stock owned by (i) each person known to us to beneficially own more than 5% of our outstanding common stock, (ii) each director, (iii) each named executive officer, and (iv) all executive officers and directors as a group. Share ownership is deemed to include all shares that may be acquired through the exercise or conversion of any other security immediately or within the next 60 days. Such shares that may be so acquired are also deemed outstanding for purposes of calculating the percentage of ownership for that individual or any group of which that individual is a member. Unless otherwise indicated, the stockholders listed possess sole voting and investment power with respect to the shares shown.

 

Name and Address of Beneficial Owner  
(1)
  Amount and Nature of  
Beneficial Ownership (2)
   Percent of Class  
of Common Stock
 
         
Directors and Executive Officers          
Michael S. Ross
1624 Park Avenue West
Highland Park, Illinois 60035
   2,975,406    3.52%
           
Thomas J. Mahowald
1624 Park Avenue West
Highland Park, Illinois 60035
   1,801,155    2.13%
           
Glenn Bushee
1624 Park Avenue West
Highland Park, Illinois 60035
   1,137,405    1.35%
           
Dr. Jerrold Leikin
1624 Park Avenue West
Highland Park, Illinois 60035
   893,655    1.06%
           
Jeremy Noonan
1624 Park Avenue West
Highland Park, Illinois 60035
   893,655    1.06%
           
All directors and executive officers as a group (5 persons)   7,701,276    9.11%

 

(1)Unless otherwise noted, the security ownership disclosed in this table is of record and beneficial. Unless provided for otherwise, the address for each of the beneficial owners named below is the Company’s business address.

 

(2)Under Rule 13d-3 under the Exchange Act, shares not outstanding but subject to options, warrants, rights, conversion privileges pursuant to which such shares may be acquired in the next 60 days are deemed to be outstanding for the purpose of computing the percentage of outstanding shares owned by the persons having such rights, but are not deemed outstanding for the purpose of computing the percentage for such other persons.

 

We do not know of any other shareholder who has more than 5 percent of the issued shares.

 

32
 

  

There are no voting trusts or similar arrangements known to us whereby voting power is held by another party not named herein. We know of no trusts, proxies, power of attorney, pooling arrangements, direct or indirect, or any other contract arrangement or device with the purpose or effect of divesting such person or persons of beneficial ownership of our common shares or preventing the vesting of such beneficial ownership.

 

Changes in Control

 

Other than as disclosed elsewhere in this Form 10-K, there are no existing arrangements that may result in a change in control of the Company.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

We do not have any equity compensation plans.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

Related Party Transactions

 

During the year ended September 30, 2014, the Company paid Chamberlain approximately $ 14,000 in compensation for consulting work. Chamberlain received cash receipts for $10,500 for the sales of UV Flu product and $23,000 was paid to Chamberlain Capital Partners for consulting expenses related to UV Flu.

 

Review, Approval or Ratification of Transactions with Related Persons

 

Although we adopted a Code of Ethical Conduct on December 10, 2009, we still rely on our board to review related party transactions on an ongoing basis to prevent conflicts of interest. Our board reviews a transaction in light of the affiliations of the director, officer or employee and the affiliations of such person’s immediate family. Transactions are presented to our board for approval before they are entered into or, if this is not possible, for ratification after the transaction has occurred. If our board finds that a conflict of interest exists, then it will determine the appropriate remedial action, if any. Our board approves or ratifies a transaction if it determines that the transaction is consistent with the best interests of the Company. For the above transaction, the board approved and ratified the transaction, finding it in the best interest of the Company.

 

Director Independence

 

During fiscal 2014, our Board of Directors has determined, after considering all the relevant facts and circumstances, Mr. Thomas J. Mahowald, Mr. Glenn Bushee, Jerrold Leiken and Jeremy Noonan are independent directors because they have no relationship with us that would interfere with their exercise of independent judgment. Mr. Ross is not an independent director of our company because of his past or current position as an executive officer of our company. There are no family relationships among any of our directors or officers. We evaluate independence by the standards for director independence established by applicable laws, rules, and listing standards including, without limitation, the standards for independent directors established by The New York Stock Exchange, Inc., The NASDAQ National Market, and the Securities and Exchange Commission.

 

Subject to some exceptions, these standards generally provide that a director will not be independent if (a) the director is, or in the past three years has been, an employee of ours; (b) a member of the director’s immediate family is, or in the past three years has been, an executive officer of ours; (c) the director or a member of the director’s immediate family has received more than $120,000 per year in direct compensation from us other than for service as a director (or for a family member, as a non-executive employee); (d) the director or a member of the director’s immediate family is, or in the past three years has been, employed in a professional capacity by our independent public accountants, or has worked for such firm in any capacity on our audit; (e) the director or a member of the director’s immediate family is, or in the past three years has been, employed as an executive officer of a company where one of our executive officers serves on the compensation committee; or (f) the director or a member of the director’s immediate family is an executive officer of a company that makes payments to, or receives payments from, us in an amount which, in any twelve-month period during the past three years, exceeds the greater of $1,000,000 or two percent of that other company’s consolidated gross revenues.

 

33
 

  

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

 

On December 2, 2014, the Board of Directors dismissed Samyn & Martin (“SM”) as our independent registered public accounting firm and appointed KMJ Corbin & Company LLP (“KMJ”) as our independent registered public accounting firm for the year ended September 30, 2014.

 

KMJ has audited our financial statements for the year ended September 30, 2014.

 

The following is a summary of the fees billed to the Company by KMJ and SM for professional services rendered for the years ended September 30, 2014 and 2013. These fees are for work performed in the years indicated and, in some instances, we have estimated the fees for services rendered but not yet billed.

 

   KMJ   SM 
   2014   2014   2013 
Audit Fees:               
Consists of fees billed for professional services rendered for the audit of the Company’s annual financial statements and the review of the interim financial statements included in the Company’s Quarterly Reports (together, the “Financial Statements” ) and for services normally provided in connection with statutory and regulatory filings or engagements  $20,000   $21,075   $30,250 
Other Fees:               
Audit-Related Fees               
Consists of fees billed for assurance and related services reasonably related to the performance of the annual audit or review of the Financial Statements (defined above)            
Tax Fees               
Consists of fees billed for tax compliance, tax advice and tax planning            
All Other Fees               
Consists of fees billed for other products and services not described above            
Total All Fees  $20,000   $21,075   $30,250 

 

The Board of Directors approves all audit and audit-related fees. The Board of Directors is required to pre-approve all non-audit services to be performed by the auditor. The percentage of hours expended on the principal accountant's engagement to audit the Company's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees was 0%.

 

34
 

  

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

 

Exhibits

The following exhibits are included as part of this report by reference:

 

3.1(a) Articles of Incorporation, as amended (1)
   
3.2 Bylaws of the Company (2)
   
10.1 Asset Purchase Agreement dated December 16, 2009 (3)
   
10.2 Letter of Intent by and between The Red Oak Trust and UV Flu Technologies, Inc., dated October 28, 2010 (4)
   
14.1 Code of Ethics (5)
   
16.1 Letter regarding change of Independent Registered Public Accounting Firm dated December 4, 2014 (6)
   
31.1 Rule 13(a) — 14(a)/15(d) — 14(a) Certification (Principal Executive Officer)
   
31.2 Rule 13(a) — 14(a)/15(d) — 14(a) Certification (Principal Financial Officer)
   
32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

  

101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definitions Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

 

(1) Incorporated herein by reference to Exhibit 3.1 on Form SB-2 filed on January 30, 2007, Form 8-K on November 12, 2009 and to Exhibit 3.1 on Form 8-K filed on October 13, 2014.

(2) Incorporated herein by reference to Exhibit 3.2 on Form SB-2, on January 30, 2007.

(3) Incorporated herein by reference to Exhibit 10.1 on Form 8-K on December 18, 2009. 

(4) Incorporated herein by reference to Exhibit 14.1 filed on Form 8-K on October 29, 2010.

(5) Incorporated herein by reference to Exhibit 14.1 filed on Form 10-K on December 29, 2009.

(6) Incorporated herein by reference to Exhibit 16.1 previously filed on Registrant’s Current Report on Form 8-K on December 8, 2014.

 

35
 

  

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  UV FLU TECHNOLOGIES, INC.  
       
Date: June 25, 2015 By: /s/ Michael S. Ross  
    Michael S. Ross  
    Chief Executive Officer, Chief Financial Officer,  
    President, and Director  

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Date: June 25, 2015 By: /s/ Michael S. Ross  
    Michael S. Ross  
    Chief Executive Officer, Chief Financial Officer,  
    President, and Director  
       
Date: June 25, 2015 By: /s/ Glenn Bushee  
    Glenn Bushee  
    Secretary and Director  
       
Date: June 25, 2015 By: /s/ Thomas J. Mahowald  
    Thomas J. Mahowald  
    Director  
       
Date: June 25, 2015 By: /s/ Jerrold Leiken  
     Jerrold Leiken  
    Director  
       
Date: June 25, 2015 By: /s/ Jeremy Noonan  
    Jeremy Noonan  
    Director  

 

36
 

 

UV FLU TECHNOLOGIES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND 2013

 

    Page
     
Reports of Independent Registered Public Accounting Firms   F-2 - F-3
     
Financial Statements:    
     
Consolidated Balance Sheets at September 30, 2014 and 2013   F-4
       
Consolidated Statements of Operations for the years ended September 30, 2014 and 2013   F-5
     
Consolidated Statements of Stockholders’ Deficit for the years ended September 30, 2014 and  2013   F-6
     
Consolidated Statements of Cash Flows for the years ended September 30, 2014 and 2013   F-7
     
Notes to Consolidated Financial Statements   F-8

 

F-1
 

  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of
UV Flu Technologies, Inc.

 

We have audited the accompanying consolidated balance sheet of UV Flu Technologies, Inc. (the “Company”) as of September 30, 2014, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit on its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of UV Flu Technologies, Inc. as of September 30, 2014, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has had recurring losses from operations, has negative operating cash flows during the year ended September 30, 2014 and has an accumulated deficit of $4,305,797 as of September 30, 2014. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management's plans in regard to these factors are also described in Note 2. The consolidated financial statements do not include any adjustments to reflect possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the outcome of this uncertainty.

 

/s/ KMJ Corbin & Company LLP

Costa Mesa, California
June 25, 2015

 

F-2
 

 

To the Board of Directors and Stockholders

UV Flu Technologies, Inc.

Lincolnshire, Illinois

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We have audited the consolidated balance sheet of UV Flu Technologies, Inc. as of September 30, 2013 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. UV Flu Technologies, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit of the financial statements include examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of UV Flu Technologies, Inc. as of September 30, 2013 and the consolidated results of its operations, stockholders’ equity, and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and is dependent upon the continued sale of its securities or obtaining debt financing for funds to meet its cash requirements. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/

Weaver Martin & Samyn, LLC

Kansas City, Missouri

January 13, 2014

 

F-3
 

 

UV FLU TECHNOLOGIES, INC

CONSOLIDATED BALANCE SHEETS

 

   September 30,
2014
   September 30,
2013
 
         
ASSETS          
           
Current Assets:          
Cash  $4,748   $7,857 
Accounts receivable   -    670 
 Inventories   170,891    255,046 
Prepaid expenses and other current assets   7,547    18,375 
           
Total Current Assets   183,186    281,948 
           
           
Property and Equipment, net   40,578    4,281 
           
Total Assets  $223,764   $286,229 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
Current Liabilities:          
Accounts payable and accrued expenses  $385,321   $91,249 
Derivative liabilities   213,843    - 
Current portion of debt obligations   315,140    82,985 
           
Total Current Liabilities   914,304    174,234 
           
Debt obligations, net of current portion   -    135,000 
           
Total Liabilities   914,304    309,234 
           
Commitments and contingencies          
           
Stockholders’ Deficit:          
           
Common Stock:          
Authorized:          
75,000,000 shares, par value $0.001 per  share          
Issued and outstanding:          
73,907,263 and 61,587,763 shares, respectively   73,908    61,589 
           
Common stock subscribed but unissued   30,000    - 
           
Additional paid-in capital   3,511,349    3,227,832 
           
Accumulated deficit   (4,305,797)   (3,312,426)
           
Total Stockholders’ Deficit   (690,540)   (23,005)
           
Total Liabilities and Stockholders’ Deficit  $223,764   $286,229 

 

See accompanying notes to consolidated financial statements

 

F-4
 

  

UV FLU TECHNOLOGIES, INC

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Year Ended   Year Ended 
   September 30,
2014
   September 30,
2013
 
Sales  $113,743   $213,797 
           
Cost of Sales   107,517    116,862 
           
Gross Profit   6,226    96,935 
           
Operating Expenses:          
Depreciation   4,085    1,464 
General and administrative   1,019,336    1,007,044 
           
Total Expenses   1,023,421    1,008,508 
           
Loss from Operations   (1,017,195)   (911,573)
           
Other Income (Expense):          
           
Interest expense   (64,430)   (35,087)
Change in fair value of derivative liabilities   88,254    - 
           
Total other income (expense), net   23,824    (35,807)
           
Net Loss  $(993,371)  $(946,660)
           
Net Loss Per Share – basic and diluted  $(0.01)  $(0.02)
           
Weighted Average Number Of Shares Outstanding – basic and diluted   69,334,379    56,258,763 

 

See accompanying notes to consolidated financial statements

 

F-5
 

 

UV FLU TECHNOLOGIES, INC

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

 

           Common            
      Stock   Additional        
   Common Stock   Subscribed but   Paid-in   Accumulated     
   Shares   Amount   Unissued   Capital   Deficit   Total 
                         
Balances, October 1, 2012   46,859,263   $46,860   $-   $2,493,596   $(2,365,766)  $174,690 
Shares issued for services   8,563,500    8,564    -    316,051    -    324,615 
Shares issued for cash   4,250,000    4,250    -    163,750    -    168,000 
Shares issued for interest   540,000    540    -    21,060    -    21,600 
Shares issued for warrant exercise   125,000    125    -    3,625    -    3,750 
Shares and options issued for compensation   2,300,000    2,300    -    228,700    -    231,000 
Shares cancelled   (1,050,000)   (1,050)   -    1,050    -    - 
Net loss   -    -    -    -    (946,660)   (946,660)
Balances, September 30, 2013   61,587,763    61,589    -    3,227,832    (3,312,426)   (23,005)
Shares issued for services   1,600,000    1,600    -    78,400    -    80,000 
Shares issued for cash   8,434,000    8,434    -    310,196    -    318,630 
Shares issued for interest   1,053,000    1,053    -    70,947    -    72,000 
Shares issued for warrant exercise   312,500    312    -    13,751    -    14,063 
Shares issued for compensation   920,000    920    -    42,320    -    43,240 
Stock-based compensation expense   -    -    -    70,000    -    70,000 
Common stock subscribed but unissued   -    -    30,000    -    -    30,000 
Reclassification of equity to derivative liabilities due to insufficient authorized shares   -    -    -    (302,097)   -    (302,097)
Net loss   -    -    -    -    (993,371)   (993,371)
Balances, September 30, 2014   73,907,263   73,908   $30,000   3,511,349   (4,305,797)  (690,540)

 

See accompanying notes to consolidated financial statements

 

F-6
 

  

UV FLU TECHNOLOGIES, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Year ended   Year ended 
   September 30,
2014
   September 30,
 2013
 
         
Cash flows from operating activities:          
Net loss  $(993,371)  $(946,660)
Adjustments to reconcile net loss to net cash used in operating activities          
Depreciation   4,085    1,464 
Stock - based compensation expense   70,000    231,000 
Shares issued for services   80,000    324,615 
Shares issued for interest   72,000    - 
Shares issued for compensation   43,240    - 
Change in fair value of derivative liabilities   (88,254)     
Changes in current assets and liabilities          
Accounts receivable   670    16,501 
Inventories   84,155    (122,021)
Prepaid expenses and other current assets   10,828    141,689 
Accounts payable and accrued expenses   289,072    53,992 
Net cash used in operating activities   (427,575)   (299,420)
           
Cash flows from investing activities:          
Purchase of equipment   (382)   (68)
Net cash used in investing activities   (382)   (68)
           
Cash flows from financing activities:          
Payments on debt obligations   (4,345)   - 
Proceeds from debt obligations   96,500    115,654 
Proceeds from exercise of warrants   14,063    3,750 
Proceeds from sale of common stock   318,630    168,000 
Net cash provided by financing activities   424,848    287,404 
           
Net change in cash   (3,109)   (12,084)
           
Cash, beginning of period   7,857    19,941 
           
Cash, end of period  $4,748   $7,857 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $1,524   $14,987 
Cash paid for taxes  $-   $- 
Supplemental disclosures of non-cash investing and financing activities:          
Reclassification of equity to derivative liabilities due to insufficient authorized shares  $302,097   $- 
Accrued interest added to the principal balance of debt obligations  $5,000   $- 
Stock and option issued for compensation  $-   $231,000 
Stock issued for services  $-   $324,615 
Stock subscribed but unissued  $30,000   $- 
           
Addition to property and equipment through accounts payable  $10,000   $- 

 

See accompanying notes to consolidated financial statements

 

F-7
 

 

UV FLU TECHNOLOGIES, INC

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended September 30, 2014 and 2013

 

1.DESCRIPTION OF BUSINESS

 

UV Flu Technologies, Inc (referred to herein as “Company” “we”, “us”, “our” and similar terms) was incorporated as Northwest Chariots Incorporated in the State of Nevada, United States of America, on April 4, 2006. On November 12, 2009, the Company changed its name from Northwest Chariots Incorporated to UV Flu Technologies, Inc. The Company’s fiscal year end is September 30. We acquired our subsidiary, RxAir Industries, LLC, on January 31, 2011. The consolidated financial statements as of and for the years ended September 30, 2014 and 2013 contain the accounts and activities of UV Flu Technologies, Inc. and RxAir Industries, LLC. All intercompany accounts and transactions have been eliminated in consolidation.

 

2.GOING CONCERN AND MANAGEMENT’S PLAN

 

The Company’s consolidated financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has had recurring losses from operations, has negative operating cash flows during the year ended September 30, 2014 and has an accumulated deficit of $4,305,797 as of September 30, 2014. The Company will need to raise additional capital to continue as a going concern. These factors raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

This summary of significant accounting policies is presented to assist in understanding our consolidated financial statements. Our consolidated financial statements and notes are representations of our management who is responsible for their integrity and objectivity. These accounting policies conform to GAAP and have been consistently applied in the preparation of the consolidated financial statements.

 

The Company has evaluated subsequent events through filing date of this Form 10-K, and have determined that no subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the notes thereto other than as discussed in the accompanying notes.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with 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 consolidated financial statements, and the reported amounts of net sales and expenses during the reporting period. By their nature, these estimates and assumptions are subject to an inherent degree of uncertainty. Significant estimates made by management include, among others, provisions for uncollectible receivables and sales returns, warranty liabilities, valuation of inventories, fair value of financial instruments, recoverability of long-lived assets, valuation of stock-based transactions and realization of deferred tax assets. The Company bases its estimates on historical experience, knowledge of current conditions and the Company’s belief of what could occur in the future considering available information. The Company reviews its estimates on an on-going basis. The actual results experienced by the Company may differ materially and adversely from its estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

 

F-8
 

  

Fair Value of Financial Instruments

 

The carrying value of our financial instruments consist of cash, accounts receivable, accounts payable and accrued expenses, derivative liabilities and debt instruments as of September 30, 2014 and 2013. See Note 11 for discussion regarding the classification of our financial instruments.

 

Cash and Cash Equivalents

 

Cash is comprised of cash on hand and demand deposits. Cash equivalents include short-term highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. The Company has no cash equivalents as of September 30, 2014 or 2013.

 

Credit Risks

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At September 30, 2014 and 2013, the Company had no funds in excess of the FDIC insured limits.

 

Sales Concentrations

 

For the year ended September 30, 2014, 48% of our sales were with two customers. 39 % of our sales for the year ended September 30, 2013 have been accounted for by a special sales agreement the Company had with Groupon. Of the remaining sales, 10 % have been accounted for by our largest customer.

 

Inventories

 

Inventories are stated at the lower of cost or market, with cost being determined using the first-in first-out method all of which are classified as finished goods.

 

Property and Equipment

 

Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. The estimated useful lives for significant property and equipment categories are as follows:

 

Equipment 5 years
Furniture 7 years

 

The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors. Based on this assessment there were no impairments needed as of September 30, 2014 or 2013.

 

F-9
 

  

Impairment of Long- Lived Assets

 

The Company evaluates the recoverability of the carrying value of long-lived assets held and used by the Company for impairment on at least an annual basis or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future net cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. If the carrying value is determined not to be recoverable from future operating cash flows, the asset is deemed impaired and an impairment loss is recognized to the extent the carrying value exceeds the estimated fair value of the asset. The fair value of the asset or asset group is based on market value when available, or when unavailable, on discounted expected cash flows. The Company’s management believes there is no impairment of long-lived assets as of September 30, 2014 and 2013. There can be no assurance, however, that market conditions will not change or demand for the Company’s products will continue, which could result in future impairment of long-lived assets.

 

Derivative Liabilities

 

The Company evaluates stock options, stock warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity. The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statements of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date.

 

Certain of the Company’s stock options, stock warrants and convertible debt are accounted for as derivative liabilities due to the insufficient authorized shares to settle outstanding contracts. The Company estimates the fair value of these stock options, stock warrants and embedded conversion features using the Black-Scholes-Merton option pricing model (“Black-Scholes”).

 

Stock-Based Compensation

 

The Company grants options to purchase the Company’s common stock to employees, directors and consultants under stock option plans. The benefits provided under these plans are stock-based payments that the Company accounts for using the fair value method.

 

The fair value of each option award is estimated on the date of grant using Black-Scholes that uses assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, expected stock price volatility, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. Expected volatilities are based on the historical volatility of the Company’s common stock and other factors. The expected terms of options granted are based on analyses of historical employee termination rates and option exercises. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant. Since the Company does not expect to pay dividends on common stock in the foreseeable future, it estimated the dividend yield to be 0%.

 

Stock-based compensation expense recognized during a period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest and is amortized under the straight-line attribution method. As stock-based compensation expense recognized in the accompanying consolidated statements of operations for the years ended September 30, 2014 and 2013 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The fair value method requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates forfeitures based on historical experience. Changes to the estimated forfeiture rate are accounted for as a cumulative effect of change in the period the change occurred.

 

Since the Company has a net operating loss carry-forward as of September 30, 2014, no excess tax benefits for tax deductions related to stock-based awards were recognized from stock options exercised in the year ended September 30, 2014 that would have resulted in a reclassification from cash flows from operating activities to cash flows from financing activities.

 

F-10
 

  

Revenue Recognition

 

It is our policy that revenues will be recognized in accordance with ASC Topic 605. Revenues are recognized only when the Company has transferred to the customer the significant risk and rewards of ownership of the goods, title to the products transfers, the amount is fixed and determinable, evidence of an agreement exists, there is reasonable assurance of collection of the sales proceeds, the Company has no future obligations, and the customer bears the risk of loss. This occurs at the time of shipment (FOB shipping point) of the products from the Company’s warehouse and an invoice is prepared. There are no rights of return and exchange is allowed only on defective products. Recognition of revenue is not affected as the right of exchange results in new units being shipped to the customer once defective units have been received by the company and verified as defective.

 

Advertising

 

Advertising costs are expensed as incurred in accordance with ASC subtopic 720-35. Advertising costs for the years ended September 30, 2014 and 2013 were $14,299 and $9,395, respectively. These costs were included in general and administrative expenses.

 

Income Taxes

 

The Company accounts for income taxes and the related accounts under the liability method. Deferred tax assets and liabilities are determined based on the differences between the consolidated financial statement carrying amounts and the income tax bases of assets and liabilities. A valuation allowance is applied against any net deferred tax asset if, based on available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Therefore, the Company has recorded a full valuation allowance against the net deferred tax assets.

 

The Company recognizes any uncertain income tax positions on income tax returns at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. There is no unrecognized tax benefits included in the consolidated balance sheet that would, if recognized, affect the effective tax rate.

 

The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had $0 accrued for interest and penalties on each of the Company’s consolidated balance sheets at September 30, 2014 and 2013.

 

The Company is subject to taxation in the U.S. and various state jurisdictions. The Company’s tax years for 2011 and forward for federal and 2010 and forward for state purposes are subject to examination by the U.S. and Illinois tax authorities due to the carry-forward of unutilized net operating losses. The Company does not foresee material changes to its gross uncertain income tax position liability within the next twelve months.

 

Basic and Diluted Loss Per Share

 

Basic net loss per share is calculated by dividing net loss by the weighted-average common shares outstanding during the year. Diluted net loss per share is calculated by dividing the net loss by the weighted-average shares and dilutive potential common shares outstanding during the year. Dilutive potential shares consist of dilutive shares issuable upon the exercise of outstanding stock options, warrants using the treasury stock method and convertible debt computed using as-if converted method. In periods of losses, basic and diluted loss per share are the same, as the effect of stock options, warrants and convertible debt on loss per share is anti-dilutive.

 

F-11
 

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes the revenue recognition requirements in FASB Topic 605, "Revenue Recognition". The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. On April 1, 2015, the FASB proposed deferring the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date. The FASB also proposed permitting early adoption of the standard, but not before the original effective date for reporting periods beginning after December 15, 2016. The Company has not selected a transition method and management has not yet selected a transition method and is currently assessing the impact the adoption of ASU 2014-09 will have on our consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements-Going Concern”. Currently, there is no guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this ASU are effective for the reporting periods beginning after December 15, 2016 and early application is permitted. Management is currently assessing the impact the adoption of ASU 2014-15 will have on our consolidated financial statements.

 

4.PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

The Company had $7,547 and $18,375 in prepaid expenses and other current assets as of September 30, 2014 and 2013 respectively. The balance as of September 30, 2014 consists of prepaid insurance of $3,167 and deposits of $4,380. The balance as of September 20, 3013 consisted of prepaid insurance of $7,405, prepaid rent of $1,950, deposits of $4,380, and prepaid interest of $4,640. The Company expects to use all the prepaid expenses and other assets within the next year.

 

5.PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following at September 30:

 

   2014   2013 
         
Tooling equipment  $40,341   $- 
Office equipment   8,547    8,506 
    48,888    8,506 
           
Less accumulated depreciation   (8,310)   (4,225)
           
   $40,578   $4,281 

 

Depreciation expense of property and equipment for the years ended September 30, 2014 and 2013 amounted to $4,085 and $1,464, respectively.

 

F-12
 

  

6.ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses at September 30, 2014 and 2013 are as follows:

 

   September 30, 
   2014   2013 
Accounts payable  $264,415   $79,267 
Accrued expenses   100,306    11,982 
Accrued payroll   20,600    - 
           
Total accounts payable and accrued expenses  $385,321   $91,249 

 

7.DEBT OBLIGATIONS

 

The Company has a note payable which is due in 60 monthly installments of $489. The note matured in September of 2014. As of September 30, 2014, the balance due on this note is $3,640 of which all is current. As of September 30, 2013, the balance due on this note is $7,985 of which all $7,985 is current.

 

In August 2012, the Company borrowed $20,000. The note was originally due on February 23, 2014 but was extended to January 31, 2014. As part of the extension, the Company agreed to move $5,000 of accrued interest into the balance of the note and drop the interest rate to 1% per month. As of September 30, 2014 and 2013, accrued interest relating to this note was $0 and $5,000 respectively. As of September 30, 2014 and 2013, the balance of the note is $25,000, respectively.

 

During the year ended September 30, 2012, the Company borrowed $70,000. The loan was payable on demand. The note was convertible at an amount that was less than the fair market value of the stock on the date the note was executed. This beneficial conversion feature was calculated at $25,714 and was amortized into interest expense immediately since the note was a demand note. During January 2013, the Company borrowed an additional $15,000 from the same entity and consolidated that and the previous $70,000 in loans into one promissory note in the amount of $85,000. The note was originally due in January 2014 but was extended to January 2015. The note is convertible at $0.04 per share and bears interest at 12% if interest is paid in cash and 24% if interest is paid in stock. The Company has the option to pay interest in shares of common stock at $0.04 per share. As of September 30, 2014 and 2013, the balance on this note is $85,000.

 

In February 2013, the Company borrowed $30,000. The note was due 60 days from the date of execution and had an interest rate of 8% for the 60 day period. This note was repaid in April 2013. As of September 30, 2013, there is no balance on this note.

 

In April 2013, the Company borrowed $15,000. The note was due 60 days from the date of execution and had an interest rate of 8% for the 60 day period. This note was repaid in June of 2013. As of September 30, 2013, there is no balance on this note.

 

In July 2013, the Company borrowed $10,000. The note was due in July 2014, has an interest rate of 24% if interest is paid in cash and 48% if interest is paid in stock. The note is convertible at $0.04 per share. The Company has the option to pay interest on this note in stock at $0.04 per share. As of September 30, 2014 and 2013, the balance on this note is $10,000.

 

In July 2013, the Company borrowed $10,000. The note was due in July 2014, has an interest rate of 24% if interest is paid in cash and 48% if interest is paid in stock. The note is convertible at $0.04 per share. The Company has the option to pay interest on this note in stock at $0.04 per share. As of September 30, 2014 and 2013, the balance on this note is $10,000.

 

In September 2013, the Company borrowed $5,000. The note was due in September 2014, has an interest rate of 24% if interest is paid in cash and 48% if interest is paid in stock. The note is convertible at $0.04 per share. The Company has the option to pay interest on this note in stock at $0.04 per share. As of September 30, 2014 and 2013, the balance on this note is $5,000.

 

F-13
 

  

In May 2013, the Company borrowed $15,000. The note was originally due in November 2013 but was extended to May 2014. The note has an interest rate of 24% if interest is paid in cash and 48% if interest is paid in stock. The note was originally convertible at $0.04 per share but the conversion price was changed to $0.03 per share when it was extended.. The Company has the option to pay interest on this note in stock at $0.04 per share. As of September 30, 2014 and 2013, the balance on this note is $15,000. As part of the extension, the Company agreed to pay a penalty of 30,000 shares of common stock for every month the loan and interest is in arrears.

 

In April 2013, the Company borrowed $20,000. The note was due in October 2014, has an interest rate of 12% if interest is paid in cash and 24% if interest is paid in stock. The note is convertible at $0.05 per share. The Company has the option to pay interest on this note in stock at $0.05 per share. As of September 30, 2014 and 2013, the balance on this note is $20,000.

 

In March 2013, the Company borrowed $15,000. The note was due in September of 2014, has an interest rate of 12% if interest is paid in cash and 24% if interest is paid in stock. The note and is convertible at $0.04 per share. The Company has the option to pay interest on this note in stock at $0.04 per share. As of September 30, 2014 and 2013, the balance on this note is $15,000.

 

In April 2013, the Company borrowed $30,000. The note was due in October 2014, has an interest rate of 12% if interest is paid in cash and 24% if interest is paid in stock. The note is convertible at $0.05 per share. The Company has the option to pay interest on this note in stock at $0.05 per share. As of September 30, 2014 and 2013, the balance on this note is $30,000.

 

In October 2013, the Company borrowed $5,000. This note was due in August 2014, has an interest rate of 24% if interest is paid in cash and 48% if interest is paid in stock. The note is convertible at $0.04 per share. The Company has the option to pay interest on this note in stock at $0.04 per share. As of September 30, 2014, the balance on this note is $5,000.

 

In January 2014, the Company borrowed $10,000. This note was due in February 2015, has an interest rate of 12% if interest is paid in cash and 24% if interest is paid in stock. The note is convertible at $0.03 per share. The Company has the option to pay interest on this note in stock at $0.03 per share. As of September 30, 2014, the balance on this note is $10,000.

 

In May 2014, the Company borrowed $30,000. This note was due in May 2015 and has an interest rate of 4%. As of September 30, 2014, the balance on this note is $30,000.

 

In June 2014, the Company borrowed $30,000. This note is due in June 2015 and has an interest rate of 4%. As of September 30, 2014, the balance on this note is $30,000.

 

In July 2014, the Company borrowed $21,500. This note is due in July 2015 and has an interest rate of 4%. As of September 30, 2014, the balance on this note it $21,500.

 

During the years ended September 30, 2014 and 2013, no debt or payables were converted to common stock or forgiven.

 

As of September 30, 2014, a number of the outstanding debt obligation balances became delinquent and are classified as current in the accompanying consolidated balance sheet. The Company is working with the note holders to negotiate new terms.

 

As of September 30, 2014, total notes payable were $315,140, all of which is current. Interest expense related to the above notes payable was $64,430 and $35,807 for the years ended September 30, 2014 and 2013, respectively.

 

F-14
 

 

8.STOCKHOLDERS’ DEFICIT

 

Common Stock:

 

As September 30, 2014, our authorized common stock consists of 75,000,000 shares of common stock with a par value of $0.001 per share.

 

In October 2012, 1,950,000 shares of common stock were issued for a capital investment of $78,000.

 

In October 2012, 2,452,500 common shares were issued for consulting services. All were valued at fair market value of $0.03 for a total expense of $73,575.

 

In October 2012, a total of 1,100,000 shares, all valued at fair market value of $0.03, were issued for compensation for a total expense of $33,000.

 

In October 2012, the Board of Directors approved a Non-Qualified stock option plan for key employees and directors. 5,000,000 shares of common stock were reserved and 5,000,000 options were issued as compensation. All the options were valued at $0.03 which was fair market value at the time of issuance. 2,500,000 options vested immediately and were expensed as compensation expense during the three months ended December 31, 2012. 1,250,000 of the options vest in six months and the remaining 1,250,000 options vest in twelve months. These vesting options were valued and recorded as a prepaid asset that will be amortized into compensation expense over the vesting period. During the year ended September 30, 2013, $75,000 was amortized into expense and nothing remains in prepaid expense as of September 30, 2013. The options have a term of ten years and an exercise price of $0.03, which was the fair market value of the stock on the date of the grant. During the remainder of the year ended September 30, 2013, two employees left the Company and the related 1,700,000 options were canceled. There are 2,475,000 options vested as of September 30, 2013 with another 825,000 vesting in October 2013.

 

In January 2013, 1,125,000 shares of common stock were issued for a capital investment of $45,000. In addition to the common stock, the buyers each received a warrant for 50% of the number of shares they purchased for a total of 562,500 warrants. The warrants have a term of two years and a strike price of $0.03.

 

In January 2013, 2,737,500 common shares were issued for consulting services. All were valued at fair market value of $0.04 for a total expense of $109,500.

 

In January 2013, 255,000 shares, all valued at fair market value of $0.04, were issued as payment of interest on promissory notes as detailed in Note 6.

 

In April 2013, the Company issued 1,652,500 shares for consulting services and 550,000 shares for compensation. All shares were valued at $0.04 for a total expense of $88,100.

 

In June 2013, 250,000 shares of common stock were issued for a capital investment of $10,000.

 

In June 2013, 455,000 and 650,000 common shares were issued for consulting services and compensation, respectively. All were valued at fair market value of $0.04 for a total expense of $44,200.

 

In June 2013, 90,000 shares, all valued at fair market value of $0.04, were issued as payment of interest on promissory notes as detailed in Note 6.

 

In July 2013, 500,000 shares of common stock were issued for a capital investment of $20,000.

 

In July 2013, 330,000 common shares were issued for consulting services. All were valued at fair market value of $0.06 for a total expense of $19,800.

 

In July 2013, 120,000 shares, all valued at fair market value of $0.04, were issued as payment of interest on promissory notes as detailed in Note 6.

 

In July 2013, 125,000 shares were issued for the exercise of 125,000 warrants. Cash of $3,750 was received.

 

In June and July 2013, the Company had 1,050,000 shares returned and canceled. The shares were originally issued in prior periods for consulting services that were not completed.

 

F-15
 

  

In September 2013, 425,000 shares of common stock were issued for a capital investment of $15,000.

 

In September 2013, 936,000 common shares were issued for consulting services. All were valued at fair market value of $0.04 for a total expense of $37,440.

 

In September 2013, 75,000 shares, all valued at fair market value of $0.04, were issued as payment of interest on promissory notes as detailed in Note 6.

 

As September 30, 2013, the Company had 61,587,763 common shares issued and outstanding. The Company also had 3,300,000 outstanding options and 437,500 outstanding warrants. All had an exercise price of $0.03.

 

During the year ended September 30, 2014, the Company issued 1,600,000 shares of its common stock for services. The shares were valued at $0.045 per share, the closing market price of the Company’s common stock on the date of grants, in the amount of $80,000.

 

During the year ended September 30, 2014, the Company issued 8,434,000 shares of its common stock for cash. The closing market price of the Company’s common stock on the respective dates of grant for 5,314,000 shares were $0.025 per share, 1,000,000 shares were $0.04 per share and 2,120,000 shares were $0.069 per share, for a total amount of $318,630.

 

During the year ended September 30, 2014, the Company issued 1,053,000 shares of its common stock for interest. The closing market price of the Company’s common stock on the respective dates of grant for 30,000 shares were $0.045 per share and the remaining 1,023,000 shares were $0.069 per share, for a total amount of $72,000.

 

During the year ended September 30, 2014, the Company issued 312,500 shares of its common stock for a warrant exercise. The shares were valued at $0.045, the closing market price of the Company’s common stock on the date of grant, in the amount of $14,063.

 

During the year ended September 30, 2014, the Company issued 920,000 shares of its common stock for compensation. The closing market price of the Company’s common stock on the date of grant for 460,000 shares were $0.025 per share and the remaining 460,000 shares were $0.069 per share, for a total amount of $43,240.

 

Common Stock Subscribed Not Issued:

 

During the year ended September 30, 2014, the Company agreed to issue shares of common stock that had not been issued to stockholders and accordingly, the unissued shares has been reflected as common stock subscribed but not issued in the accompanying consolidated balance sheet as of September 30, 2014. The shares were issued in October 2014.

 

Options and Warrants:

 

Stock Options

 

In October 2013, the Company issued 3,500,000 options as a signing bonus to its new CEO. The fair value of the Company's option grants was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions:

 

   2014 
Expected term (based upon historical experience)   5 years 
Expected volatility   278.67%
Expected dividends   None 
Risk free interest rate   0.43%

  

F-16
 

 

 

No options were exercised during the year ended September 30, 2014. The weighted-average grant date fair value of options granted during the year ended September 30, 2014 was $0.02 per share. For the year ended September 30, 2014, the Company recorded stock-based compensation expense related to stock options of $70,000 which is included in general and administrative expenses in the accompanying consolidated statement of operations. The Company had no unrecognized stock-based compensation expense for options outstanding as of September 30, 2014.

 

Information pertaining to options outstanding and exercisable at September 30, 2014 is as follows:

 

    Options Outstanding   Options Exercisable 
Exercise Prices   Number of Shares   Weighted
Average
Remaining
Contractual
Life (In Years)
   Number of Shares   Weighted
Average
Remaining
Contractual
Life (In Years)
 
 0.02    1,300,000    2.19    1,300,000    2.19 
 0.03    3,500,000    6.57    3,500,000    6.57 
      4,800,000    8.76    4,800,000    8.76 

 

Summary of the stock option plan during the year ended September 30, 2014 is as follows:

 

    Number of
Shares
    Weighted
Average Price
    Weighted Average
Remaining  Contractual
Life (In Years)
    Aggregate
Intrinsic Value
 
Options outstanding at October 1, 2013     3,300,000       0.03                  
Granted     3,500,000       0.02                  
Cancelled     (2,000,000 )     0.03                  
Options outstanding and expected to vest
at September 30, 2014
    4,800,000     $ 0.02     $ 8.76     $ 21,000  
Options exercisable at September 30, 2014     4,800,000     $ 0.02     $ 8.76     $ 21,000  

 

Warrants

 

During the year ended September 30, 2014, the Company issued warrants to purchase 4,350,333 shares of the Company’s common stock of which 3,917,000 have an exercise price of $0.025 and 433,333 have an exercise price of $0.035 for consulting services. During the year ended September 30 2014, the Company expensed approximately $141,000 which is included in general and administrative expenses in the accompanying consolidated statements of operations. As of September 30, 2014, 4,475,333 remain outstanding and exercisable. The warrants expire through August 2016.

 

Summary of the warrant activity during the year ended September 30, 2014 is as follows:

 

   Shares of
Common  Stock
Purchasable Upon
Exercise of Warrants
   Weighted
Average
Exercise Price
per Share
   Range of
Exercise  Prices
 
Outstanding at October 1, 2013   437,500   $0.03   $0.03 
Issued   4,350,333   $0.03   $0.025 – 0.035 
Exercised   (312,500)  $0.03   $0.03 
                
Outstanding at September 30, 2014   4,475,333   $0.03   $0.03 

 

F-17
 

  

The Company issued options and warrants during the year ended September 30, 2013. The following table sets for the outstanding options and warrants as of September 30, 2013:

 

   Options   Weighted
Average
Exercise
Price
   Warrants   Weighted
Average
Exercise
Price
 
Outstanding as of 09/30/12:   -   $-    -   $- 
Granted   5,000,000    -    562,500    0.03 
Cancelled   1,700,000    -    -    - 
Exercised   -    -    125,000    0.03 
Outstanding as of 09/30/13:   3,300,000   $0.03    437,500   $0.03 

 

As of September 30, 2013, the warrants expire in May of 2015 and the options expire in October of 2022.

 

9.INCOME TAXES

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:

 

   September 30,
2014
   September 30,
2013
 
Deferred tax assets (liabilities):          
Accruals and prepaids  $23,000   $- 
Stock options and warrants    92,000    - 
Operating loss carryforward   1,259,000    905,000 
Total deferred tax assets   1,374,000    905,000 
Valuation allowance   (1,374,000)   (905,000)
   $-   $- 

 

The Company evaluates whether a valuation allowance should be established against its deferred tax assets based on the consideration of all available evidence using a "more likely than not" standard. In making such judgments, significant weight is given to evidence that can be objectively verified. As of September 30, 2014 and 2013, a valuation allowance of $1.4 million and $0.9 million, respectively, has been provided based on the Company's assessment that it is more likely than not, that sufficient taxable income will not be generated to realize the tax benefits of the temporary differences. The valuation allowance increased by approximately $469,000 between the periods of September 30, 2014 and 2013, primarily related to the increase in net operating loss carryforward.

 

At September 30, 2014, the Company has approximately $2.9 million of federal net operating loss carryforwards and approximately $2.9 million of state net operating loss carryforwards which begin to expire in 2030.

 

Utilization of the net operating loss (“NOL”) and tax credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended.  These ownership changes may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income.  The Company has not completed a study to assess whether an ownership change under IRC Section 382 has occurred or whether there have been multiple ownership changes since the Company's formation due to the complexity and cost associated with such a study, and the fact that there may be additional such ownership changes in the future.  If the Company has experienced an ownership change at any time since formation, utilization of the NOL and tax credit carryforwards would be subject to an annual limitation.  Any limitation may result in expiration of a portion of the NOL and tax credit carryforwards before utilization.  Further, until a study is completed and any limitation known, no amounts are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit.  Due to the existence of the valuation allowance, future changes in the Company's unrecognized tax benefits will not impact its effective tax rate.  Any carryforwards that will expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance.

 

The Company's income tax provision consists of the following:

 

   September 30,
2014
 
Current:    
Federal  - 
State  - 
Current provision  - 
      
Deferred:     
Federal   366,957 
State   102,532 
Change in valuation allowance   (469,489)
Deferred provision   - 
      
Provision   - 

 

F-18
 

 

A reconciliation of income taxes computed by applying the statutory U.S. tax rate to the Company's loss before income taxes to the income tax provision is as follows:

 

   September 30, 2014 
Loss before tax   (337,746)
Meals & entertainment   796 
Change in derivative liability    (30,006)
Federal valuation allowance   366,956 
Total provision   - 
Effective tax rate   0.00%

 

10.DERIVATIVE LIABILITIES

 

We apply the accounting standard that provides guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s own stock. The standard applies to any freestanding financial instrument or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock.

 

During the year ended September 30 2014, the Company had an insufficient number of available shares of common stock to settle outstanding contracts. The Company estimates the fair value of stock options, stock warrants, and embedded conversion features related to the insufficient number of authorized shares to settle outstanding contracts using Black-Scholes.

 

Expected volatility is based primarily on historical volatility. Historical volatility was computed using weekly pricing observations for recent periods. We believe this method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants and embedded conversion features.

 

We currently have no reason to believe that future volatility over the expected remaining life of these options, warrants and embedded conversion features is likely to differ materially from historical volatility. The expected life is based on the remaining term of the options, warrants and embedded conversion features. The risk-free interest rate is based on one-year to five-year U.S. Treasury securities consistent with the remaining term of the options, warrants and embedded conversion features.

 

The following table presents our derivative liabilities which have no observable market data and are derived using Black-Scholes measured at fair value on a recurring basis, using Level 3 inputs, as of September 30:

 

   2014 
    
Annual dividend yield   - 
Expected life (years)   0.25 – 7.75 
Risk-free interest rate   0.13% – 2.37% 
Expected volatility   248.98% – 265.92% 

 

F-19
 

 

The following table presents the Company’s common stock equivalents measured at fair value on a recurring basis:

  

   # of Shares
Convertible/
Exercisable
   Level 3
Carrying Value
September 30,
2014
 
         
Options outstanding   1,000,000   $30,000 
Warrants outstanding   4,475,333    133,010 
Convertible debt   5,083,333    50,833 
           
Total   10,558,666   $213,843 
           
Decrease in fair value       $88,254 

 

During the year ended September 30, 2014, we recorded other income of $88,254 and are included in the change in fair value of derivative liabilities in the accompanying consolidated statements of operations.

 

11.FAIR VALUE MEASUREMENTS

 

ASC Topic 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). ASC Topic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability. The three levels of the fair value hierarchy under ASC Topic 820-10 are described below:

 

Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.

 

Level 2 – Valuations based on quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

 

Level 3 – Valuations based on inputs that are supportable by little or no market activity and that are significant to the fair value of the asset or liability.

 

The following table presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis as of September 30, 2014:

 

   Level 1   Level 2   Level 3   Fair Value 
Derivative liabilities  $-   $-   $213,843   $213,843 

  

F-20
 

  

The following table provides a reconciliation of the beginning and ending balances for our liabilities measured at fair value using Level 3 inputs for the year ended September 30:

 

   2014 
Balance at October 1,  $ 
Reclassification of equity to derivative liabilities due to insufficient authorized shares   302,097 
Change in fair value   (88,254)
Balance at September 30,  $213,843 

 

The Company did not elect the fair value option, as allowed, to account for financial assets and liabilities that were not previously carried at fair value. Therefore, material financial assets and liabilities that are not carried at fair value, such as trade accounts receivable and payable, are reported at their historical carrying values. We have no other assets or liabilities that are required to be measured at fair value on a recurring basis as of September 30, 2014.

 

The following table presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis as of September 30, 2013:

 

   Level 1   Level 2   Level 3   Fair Value 
Cash  $7,857   $-   $-   $7,857 
Accounts receivable   -    670    -    670 
Accounts payable   -    91,249    -    91,249 
Notes payable   -    217,985    -    217,985 

 

12.COMMITMENTS AND CONTINGENCIES

 

Lease Commitment

 

The Company leases its office space for payments of $1,460 - $1,820 per month through April 2015 and is currently month-to-month. The minimum future payments under the lease are $16,380 for the year ending September 30, 2015. For the years ended September 30, 2014 and 2013, rent expense was $19,475 and $30,445, respectively, and is included in general and administrative expenses in the accompanying consolidated statements of operations.

 

Legal Matters

 

In the normal course of business, the Company periodically becomes involved in litigation. As of September 30, 2014, in the opinion of management, the Company had no pending litigation that would have a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows.

 

Indemnities and Guarantees

 

The Company has made certain indemnities and guarantees, under which it may be required to make payments to a guaranteed or indemnified party, in relation to certain actions or transactions. The Company indemnifies its directors, officers, employees and agents, as permitted under the laws of the State of Nevada. In connection with its facility leases, the Company has agreed to indemnify its lessors for certain claims arising from the use of the facilities. The duration of the guarantees and indemnities varies, and is generally tied to the life of the agreement. These guarantees and indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not been obligated nor incurred any payments for these obligations and, therefore, no liabilities have been recorded for these indemnities and guarantees in the accompanying consolidated balance sheets.

 

F-21
 

  

13.RELATED PARTY TRANSACTIONS

 

During the year ended September 30, 2014, the Company paid Chamberlain Capital Partners (“Chamberlain”) a company owned by Jack Lennon, then president, approximately $14,000 in compensation for consulting work. Chamberlain received cash receipts for $10,500 for sales of UV Flu product and $23,000 was paid to Chamberlain for consulting expenses related to UV Flu. As of September 30, 2014, the accounts payable to Chamberlain is $16,000.

 

During the year ended September 30, 2013, the Company paid Chamberlain for Mr. Lennon’s services and also reimbursed Chamberlain for the President’s health insurance and for miscellaneous office expenses. During the year ended September 30, 2013, the Company paid Chamberlain approximately $78,000 in compensation for the President’s services, and approximately $15,000 in reimbursements for health insurance and miscellaneous office expenses. As of September 30, 2013, the accounts payable to Chamberlain is $9,124.

 

14.SUBSEQUENT EVENTS

 

On October 15, 2014, the Company amended its Articles of Incorporation to increase its number of authorized shares of common stock from 75,000,000 to 150,000,000.

 

From October 1, 2014 through the filing date of this Annual Report, the Company issued a total of 3,603,000 shares of common stock for gross proceeds of $80,635.

 

F-22