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EX-32.01 - EXHIBIT 32.01 - Item 9 Labs Corp.airw0810form10qexh32_01.htm
EX-31.01 - EXHIBIT 31.01 - Item 9 Labs Corp.airw0810form10qexh31_01.htm
EX-31.02 - EXHIBIT 31.02 - Item 9 Labs Corp.airw0810form10qexh31_02.htm
EX-32.02 - EXHIBIT 32.02 - Item 9 Labs Corp.airw0810form10qexh32_02.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 


 FORM 10-Q


 

 

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

For the quarterly period ended June 30, 2015

 

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

For the transition period from:

 

Commission File Number 000-54730

 

 

AIRWARE LABS CORP.

(Exact name of registrant as specified in its charter)

 

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

 

7377 E Doubletree Ranch Rd., Suite 260

Scottsdale, AZ 85258

(Address of principal executive offices)

 

(480) 463-4246

(Registrant’s telephone number)

 

 

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

☑Yes     ☐ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☑ Yes     ☐ No (Not required)

 

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

 

Large Accelerated Filer Accelerated Filer

 

Non-Accelerated Filer Smaller Reporting Company

 

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

 ☐ Yes  ☑ No

 

As of August 7, 2015, there were 69,077,883 shares of the registrant’s $0.0001 par value common stock issued and outstanding.

 
 

 

AIRWARE LABS CORP.

TABLE OF CONTENTS

     
  Page
   
PART I.                 FINANCIAL INFORMATION  
   
ITEM 1. FINANCIAL STATEMENTS 3 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15
ITEM 4. CONTROLS AND PROCEDURES 15
   
PART II.               OTHER INFORMATION  
   
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 1A. RISK FACTORS 16
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. MINE SAFETY DISCLOSURES 17
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS 17
   

Special Note Regarding Forward-Looking Statements

 

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

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

 
 

PART I - FINANCIAL INFORMATION

 

 

ITEM 1.

 

FINANCIAL STATEMENTS

 

 

INDEX          F-1

Condensed Consolidated Balance Sheets as of June 30, 2015 (Unaudited) and September 30, 2014

F-2

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2015 and 2014 (Unaudited)

F-3

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2015 and 2014 (Unaudited)

F-4

Notes to Condensed Consolidated Financial Statements (Unaudited)

F-5

 

 

 

 

F-1
 

 

 

AIRWARE LABS CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
           
           
    June 30,     September 30,  
    2015    2014 
    (Unaudited)      
           
ASSETS          
Current Assets:          
Cash and cash equivalents  $35,448   $42,582 
Accounts receivable   530    3,137 
Inventory   65,752    71,614 
Deposits   10,000    10,000 
Prepaid expenses and other current assets   30,040    66,205 
   Total current assets   141,770    193,538 
           
Other Assets:          
Property and equipment, net   16,625    20,039 
Intangible assets, net   259,768    292,402 
Deposits   2,387    2,387 
Investment in Breathe Active, LLC   290    290 
Total Assets  $420,840   $508,656 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
Current Liabilities:          
Accounts payable  $1,668,489   $1,639,529 
Accrued interest - related parties   100,760    32,076 
Accrued interest   1,544    1,244 
Accrued expenses   99,099    72,172 
Note payable to former officer   35,625    —   
Convertible notes payable   5,000    27,678 
Convertible notes payable to related party, net of discount   2,646,748    1,324,659 
   Total current liabilities   4,557,265    3,097,358 
           
Accrued interest to related party   202    106 
Note payable to former officer   11,875    47,500 
   Total liabilities   4,569,342    3,144,964 
           
Commitments and Contingencies          
           
Stockholders' Deficit:          
Common stock, par value $.0001 per share, 200,000,000 shares authorized; 67,107,677 and 62,256,379 shares issued and outstanding at June 30, 2015 and September 30, 2014, respectively   6,711    6,226 
Common stock to be issued, 180,000 shares, par value $.0001   18    —   
Additional paid-in capital   30,704,140    29,452,379 
Accumulated deficit   (34,859,371)   (32,094,913)
Total stockholders' deficit   (4,148,502)   (2,636,308)
           
Total Liabilities and Stockholders' Deficit  $420,840   $508,656 
           

 

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

 

F-2
 

 

AIRWARE LABS CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
             
   Three Months Ended  Nine Months Ended
   June 30,  June 30,  June 30,  June 30,
   2015  2014  2015  2014
             
Revenues, net  $14,106   $113,365   $117,877   $168,705 
Cost of products sold   15,635    57,970    80,435    101,577 
Gross profit   (1,529)   55,395    37,442    67,128 
                     
Operating expenses                    
     General and administrative   188,061    220,277    660,652    728,470 
     Sales and marketing   49,689    69,610    205,428    153,132 
Total expenses   237,750    289,887    866,080    881,602 
                     
Loss from operations   (239,279)   (234,492)   (828,638)   (814,474)
                     
Other income (expense)                    
     Interest income   —      —      —      289 
     Forgiveness of debt   —      —      —      20 
     Induced note conversion expense   —      —      —      (2,697)
     Interest expense   (603,451)   (425,204)   (1,935,819)   (943,521)
     Valuation (loss) - common stock warrants   —      —      —      (707,400)
     Loss on warrants exercised   —      —      —      (13,914,034)
Total other income (expense)   (603,451)   (425,204)   (1,935,819)   (15,567,343)
                     
Loss before income taxes   (842,730)   (659,696)   (2,764,457)   (16,381,817)
                     
Income tax expense   —      —      —      —   
                     
Net loss  $(842,730)  $(659,696)  $(2,764,457)  $(16,381,817)
                     
Basic and diluted net loss per common share  $(0.01)  $(0.01)  $(0.04)  $(0.36)
                     
Basic and diluted weighted average common                    
     shares outstanding   66,818,701    59,124,158    65,154,828    45,896,020 
                     

 

 

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

F-3
 

 

AIRWARE LABS CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
   Nine Months Ended
   June 30,  June 30,
   2015  2014
       
Operating Activities:          
Net loss  $(2,764,457)  $(16,381,817)
Adjustments to reconcile net loss to net cash used in operating activities:          
     Depreciation and amortization   51,047    45,808 
     Common stock issued for services   86,000    411,408 
     Options and warrants issued for services   55,406    43,773 
     Interest expense from amortization of debt discount   1,322,089    735,763 
     Induced conversion expense   —      2,697 
     Stock issued for interest expense   544,057    180,059 
     Forgiveness of debt   —      (20)
     Loss on warrants exercised   —      13,914,034 
     Valuation expense - common stock warrants   —      707,400 
Changes in operating assets and liabilities:          
     Accounts receivable   2,607    5,044 
     Inventory   5,862    1,372 
     Prepaid expenses   36,165    (21,100)
     Deposits   —      (25,987)
     Accounts payable   28,960    (213,437)
     Accrued interest   69,081    11,304 
     Accrued expenses   26,927    28,154 
Net Cash Used in Operating Activities   (536,256)   (555,545)
           
Investing Activities:          
     Purchases of property and equipment   (15,000)   —   
Net Cash Used in Investing Activities   (15,000)   —   
           
Financing Activities:          
     Stock issued for cash   68,800    —   
     Proceeds from convertible notes payable   498,000    1,252,000 
     Repayment of convertible notes payable   —      (16,104)
     Repayment of notes payable   (22,678)   (18,178)
     Options re-purchased   —      (2,500)
     Stock re-purchased   —      (601,762)
Net Cash Provided by Financing Activities   544,122    613,456 
           
Net (Decrease)/Increase in Cash   (7,134)   57,911 
           
Cash - Beginning of Period   42,582    19,942 
           
Cash - End of Period  $35,448   $77,853 
           
Supplemental disclosure of cash flow information:          
Interest paid in cash  $292   $1,718 
           
Non-cash investing and financing activities:          
Stock issued for convertible notes  $—     $5,000 
Debt discount on note payable, related party  $498,000   $—   

 

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

 

F-4
 

AIRWARE LABS CORP. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. Summary of Significant Accounting Policies and Use of Estimates

 

Basis of Presentation and Organization

 

Airware Labs Corp. (“Airware Labs” or the “Company”), formerly Crown Dynamics Corp., is a Delaware corporation. The Company was incorporated under the laws of the State of Delaware on June 15, 2010. On October 26, 2012, the Articles of Incorporation were amended to reflect a name change to Airware Labs Corp.

 

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

 

Accounting Estimates

 

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

 

Revenue Recognition

 

The Company recognizes revenue on the sale of products at the time of delivery and acceptance. Delivery is generally FOB destination. At the time of delivery, the following have occurred:

·Evidence of delivery;
·A price per unit has been determined; and
·Collectability has been reasonably assured.

 

Revenues are recorded net of slotting payments and co-operative advertising costs when applicable.

 

Unaudited Interim Financial Statements

 

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

 

Income Taxes

 

The Company accounts for income taxes under FASB ASC 740, Income Taxes. Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

 

F-5
 

Net Loss per Share

 

Basic earnings per share does not include dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. Dilutive securities are not included in the weighted average number of shares when inclusion would be anti-dilutive. Due to the net losses for the periods ended June 30, 2015 and 2014, basic and diluted loss per common share were the same, as the effect of potentially dilutive securities would have been anti-dilutive.

 

As of June 30, 2015, there were total shares of 33,328,622 issuable upon conversion of notes payable, exercise of warrants and options that were not included in the earnings per share calculation as they were anti-dilutive.

2. Going Concern

 

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), which contemplates continuation of the Company as a going concern, which assumes the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The Company has experienced negative cash flows from operations since inception, has net losses from continuing operations of $2,764,457, and $16,381,817, for the nine months ended June 30, 2015, and 2014, respectively, and has an accumulated deficit of $34,859,371 at June 30, 2015. These factors raise substantial doubt about the Company’s ability to continue as a going concern and to operate in the normal course of business.

The Company’s selling activity has not yet reached a level of revenue sufficient to fund its operating activities.

In response to these financial difficulties, management is continuing to pursue financing from various sources, including private placements from investors and institutions. Management believes these efforts will contribute toward funding the Company’s activities until sufficient revenue can be earned from future operations. In addition, the Company is seeking additional distribution partners in both domestic and foreign markets. Management believes these combined efforts, if successful, will be sufficient to meet its working capital needs and its currently anticipated expenditure levels for the next year, however there is no guarantee this will be successful.

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

 

3. Convertible Note Payable

 

The Company has a convertible note payable with a principal balance of $5,000, which was due on August 22, 2012, is unsecured, carries an interest rate of 8% and is convertible to common stock at $.50 per share.

 

4. Note Payable to Former Officer

 

The Company has a Note payable with a principal balance of $47,500 due to a former officer, which is due on August 1, 2016, is unsecured and carries an interest rate of 0.27%. On December 5, 2013 the Company revised the terms of the Note calling for four equal payments to begin on November 1, 2015 and ending August 1, 2016. As part of this revision, the interest rate was reduced from 2% to 0.27%. The following represents future minimum payments due on the outstanding balance:

 

Principal balance at June 30, 2015  $47,500 
Less current portion   (35,625)
   $11,875 

 

F-6
 

5. Convertible Notes Payable to Related Parties

 

Convertible notes payable to related parties consist of the following:

 

On August 21, 2013 the Company entered into a ninth allonge to a convertible secured bridge note with a significant shareholder.  The note provides up to $3,206,000 of available principal at 12% interest and is due September 30, 2015.  The note is convertible into shares of the Company’s common stock at $.10 per share.  The debt is secured by substantially all of the assets of the Company.  As of June 30, 2015 the Company has borrowed the full amount of $3,206,000 against the note, and has recorded the balance net of the unamortized debt discount of $579,252  $3,206,000 
Less: Unamortized debt discount   (579,252)
The Company has a note payable due to an advisory board member, which bears interest at 8%, was due August 26, 2012 and is convertible to common stock at $.50 per share. Interest payments were due at maturity and the note is unsecured.   20,000 
   $2,646,748 

 

6. Related Party Transactions

 

The Company has a note payable due to its former President and Executive Chairman, see footnote 4.

The Company has a convertible secured bridge note with a significant shareholder. During the nine months ended June 30, 2015, the Company borrowed $498,000 against this note, see footnote 5.

 

The Company has a convertible note payable due to an advisory board member, see footnote 5.

 

7. Commitments and Contingencies

 

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

 

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

The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of June 30, 2015.

 

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

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

On April 8, 2013, the Company entered into an exclusive agency agreement with National United Trading and Investment FZ LLC. This is a performance-based agreement to develop new markets in the United Arab Emirates and other Middle Eastern markets of relevance. There has been no expense recognized through June 30, 2015 as a result of this agreement.

 

F-7
 

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

 

On April 23, 2014, the Company entered into a product development agreement with Dan Pool of Designer Products. This agreement was modified on June 16, 2014. As compensation, the Company would pay $5,000 monthly, as well as issue up to two million stock options as the Company’s stock price hits certain benchmarks. Additionally, the Company will pay a monthly royalty of 5% of net sales of any products created by Dan Pool as inventor. As of June 15, 2015, this agreement has been terminated by the Company and there will be no further liability or cost related to this agreement.

 

On August 28, 2014, the Company was named as a Defendant in a lawsuit by a former officer alleging wrongful termination. On March 31, 2015, the Company entered into a settlement agreement with the former officer wherein the Company shall pay $30,000 over the course of six months, starting on April 7, 2015. The payments through June 30, 2015, totaling $15,000, have been made timely and the remaining balance is recorded on the balance sheet as part of accrued expenses.

 

The Company sells the majority of its products through major distributors. The Company warrants to the distributors that the product will be free from defects in material and workmanship. The Company has determined its product warranty to be immaterial at June 30, 2015. The likelihood that the Company’s estimate of the accrued product warranty claims will materially change in the near term is considered remote.

 

8. Stockholders’ Deficit

 

Common Stock

 

During the nine months ended June 30, 2015, the Company issued 4,103,027 shares of common stock in payment of interest on the convertible note due to a significant shareholder.

 

On November 20, 2014, the Company issued 322,250 shares of common stock for the payment of consulting services. 72,250 shares were recorded at the grant date fair value of $12,000. The remaining 250,000 shares were valued at the closing stock price on the date of agreement ($0.20).

 

On January 28, 2015, the Company issued 82,051 shares of common stock for the payment of consulting services. The Company recorded the grant date fair value of the shares, totaling $12,000.

 

On April 28, 2015, the Company issued 250,000 shares of common stock per a subscription agreement totaling $50,000. The Company received net proceeds of $40,000, net of issuance costs of $10,000 paid as a capital marketing fee.

 

On April 28, 2015, the Company issued 93,970 shares of common stock for the payment of consulting services. The Company recorded the grant date fair value of the shares totaling $12,000.

 

During the quarter ended June 30, 2015, the company received $36,000 towards the purchase of 180,000 shares of common stock. This was part of a subscription agreement totaling $375,000. The shares were not issued as of the end of the quarter.

 

F-8
 

Warrants

 

The balance of warrants outstanding for purchase of the Company’s common stock as of June 30, 2015 is as follows:

 

  

Common Shares

Issuable Upon

Exercise of Warrants

   Exercise Price of Warrants    Date Issued    

Expiration

Date

 

Issued for financing expense

   20,000   $0.25    3/08/2012   3/07/2017
Issued per distribution agreement   125,464   $0.75    12/22/2012   12/21/2015
Issued per distribution agreement   172,028   $0.14    12/22/2013   12/22/2016
Issued under a private placement memorandum   25,000   $0.40    7/2/2014   6/1/2016
Issued under a private placement memorandum   50,000   $0.60    7/2/2014   6/1/2016
Issued under a private placement memorandum   25,000   $0.80    7/2/2014   6/1/2016
Issued per distribution agreement   145,510   $0.13    12/22/2014   12/22/2017
Balance of Warrants at June 30, 2015   563,002                

 

Stock Options

The Company had the following options outstanding at June 30, 2015:

 

  

Common Shares

Issuable Upon

Exercise of Options

   Exercise Price of Options    Date Issued    

Expiration

Date

 
Options granted to former officer & two former senior advisory board members   775,000   $0.50    4/20/2011   4/19/2021
Options granted to former employee and three consultants   300,000   $0.50    7/19/2011   7/18/2016
Options granted under a consultant agreement settlement   52,844   $0.25    4/30/2012   4/29/2022
Options granted to Board member   150,000   $0.30    1/25/2013   1/24/2023
Options granted to employee and two consultants   1,550,000   $0.30    1/25/2013   1/24/2023
Options granted to medical advisory board member   250,000   $0.26    5/20/2013   5/19/2016
Options granted to consultant   250.000   $0.28    9/5/2013   9/4/2016
Options issued for investment in Breathe Active, LLC   500,000   $0.25    9/28/2013   12/31/2014
Options issued for investment in Breathe Active, LLC   500,000   $0.50    9/28/2013   12/31/2014
Options granted to Board member   150,000   $0.11    10/4/2013   10/3/2023
Options granted to Officers   433,333   $0.11    10/4/2013   10/3/2023
Options granted to Board member   150,000   $0.25    9/5/2014   9/4/2024
Options granted to Officers and consultants   633,333   $0.25    9/5/2014   9/4/2024
Options granted to consultant   200,000   $0.10    4/2/2015   4/2/2025
Balance of Options at June 30, 2015   5,894,510                

 

On April 2, 2015, the Company and Gerdz Investments Limited Partnership, RLLP (“Gerdz”) entered into a Cancellation Agreement with regards to 200,000 options originally issued on July 19, 2011, exercisable at $0.50. On April 2, 2015, the Company issued 200,000 options to Gerdz, exercisable at $0.10 per share, which vest immediately and shall expire on April 2, 2025.

 

During the nine months ended June 30, 2015, $51,413 was expensed for the pro-rata vesting of stock-based compensation. As of June 30, 2015, the balance of unrecognized compensation cost related to non-vested stock-based compensation to be expensed in future periods was $53,501.

 

9. Significant Customer

 

For the nine months ended June 30, 2015, 71% of the Company’s revenues were from one customer. Accounts receivable for this customer as of June 30, 2015 totaled $0.

 

F-9
 

10. Subsequent Events

 

On July 9, 2015, the Company issued an aggregate of 1,892,106 restricted shares of common stock as payment for interest totaling $94,605 on loans to the Company.

 

On July 9, 2015, the Company issued 78,100 restricted shares of common stock in settlement of amounts owed to a consultant for services rendered to the Company, at a grant date fair value of $19,525.

 

 

 

End of Notes to Financial Statements

 

 

F-10
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

The following discussion should be read in conjunction with our unaudited consolidated financial statements and related notes and other financial data included elsewhere in this report. See also the notes to our consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended September 30, 2014, filed with the SEC on January 9, 2015.

 

Results of Operations

 

Total revenue for the three months ended June 30, 2015 was $14,106, as compared to $113,365 for the three months ended June 30, 2014. The decrease in revenue is primarily due to there not being a distributor order in the quarter ended June 30, 2015. Operating expenses in the quarter ended June 30, 2015 amounted to $237,750 as compared to $289,887 for the quarter ended June 30, 2014. The decrease in expenses is primarily result of a decrease in consulting fees and patent-related legal fees.

 

Total revenue for the nine months ended June 30, 2015 was $117,877 as compared to $168,705 for the nine months ended June 30, 2014. The decrease is due to there only being one distributor order in the nine months ended June 30, 2015 versus two in the nine months ended June 30, 2014. Operating expenses for the nine months ended June 30, 2015 was $866,080 as compared to $881,602 for the nine months ended June 30, 2014.

 

The net loss for the quarter ended June 30, 2015 was $842,730 as compared to $659,696 for the quarter ended June 30, 2014. This is due to a significant increase in interest expense from amortization of debt discount. The net loss for the nine months ended June 30, 2015 was $2,764,457 as compared to $16,381,817 for the nine months ended June 30, 2014. The reduction in net loss is related to the loss on warrants exercised in the nine months ended June 30, 2014 of $13,914,034 as well as the valuation loss on common stock warrants of $707,400.

 

Liquidity and Capital Resources

 

Our balance sheet as of June 30, 2015 reflects $35,448 in cash and cash equivalents as compared to $42,582 as at September 30, 2014. We intend to raise the balance of our cash requirements for the next 12 months from private placements or a registered public offering (either self-underwritten or through a broker-dealer). If we are unsuccessful in raising enough money through future capital-raising efforts, we may review other financing possibilities such as bank loans. At this time, our Company does not have a commitment from any broker/dealer to provide additional financing. There is no assurance that any additional financing will be available or if available, on terms that will be acceptable.

 

Cash Flow from Operating Activities

 

During the nine months ended June 30, 2015, the Company’s operating activities used $536,256 in cash as compared to $555,545 used by operating activities for the nine months ended June 30, 2014. The decrease in cash used for operating activities is primarily due to an increase in the accounts payable balance.

 

13
 

Cash Flow from Investing Activities

 

During the nine-month periods ended June 30, 2015 and 2014, the Company used $15,000 and $0, respectively, in cash for investing activities. The increase in cash used for investing activities is related to there not having been any purchases of fixed assets in the nine months ended June 30, 2014.

 

Cash Flow from Financing Activities

 

During the nine months ended June 30, 2015, the Company received $544,122 in cash from financing activities. This consisted of $475,322 in net financing from notes payable and $68,000 in stock to be issued for cash. This compares with $613,456 provided during the nine months ended June 30, 2014 which consisted of $1,217,718 in net financing from notes payable less $604,262 in payments for the re-purchase of common stock and options.

 

Going Concern

 

We have not attained profitable operations and are dependent upon obtaining financing to pursue any extensive acquisitions and activities. For these reasons, there is substantial doubt of our ability to continue as a going concern.

 

Future Financings

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

Off-Balance Sheet Arrangements

 

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

 

Critical Accounting Policies

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

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

Recently Issued Accounting Pronouncements

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

14
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management carried out an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act"). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were effective as of June 30, 2015.

 

Changes in Internal Control over Financial Reporting

 

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

 

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

 

15
 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

On August 28, 2014, the Company was named as a Defendant in a lawsuit in Maricopa County, Arizona by a former officer alleging wrongful termination. On March 31, 2015, the Company and the former officer entered into a Settlement Agreement wherein: (i) the Corporation shall pay $30,000 to the former officer, commencing with an initial payment of $5,000 on April 7, 2015 and monthly payments of $5,000 for the five successive months thereafter, commencing on May 7, 2015; (ii) both the Corporation and the former officer shall cause their attorneys to execute a stipulation for dismissal with prejudice and a proposed form of order, which shall be filed with the court after the Corporation has completed its payment obligations; and, (iii) the Corporation and Defendant shall enter into a Share Re-Purchase Agreement through which the Corporation or its assignee shall purchase from the former officer 176,078 shares of common stock.

 

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

 

ITEM 1A. RISK FACTORS

 

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

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

1.Quarterly Issuances:

 

On April 28, 2015, the Company issued 629,987 restricted shares of common stock as payment for interest totaling $31,499 on loans to the Company for March 2015.

 

On April 28, 2015, the Company issued 250,000 restricted shares of common stock to one shareholder for proceeds of of $50,000 pursuant to a subscription agreement dated April 10, 2015.

 

On April 28, 2015, the Company issued 93,970 restricted shares of common stock with a grant date fair value of $12,000 as compensation to a consultant for services rendered to the Company between January and March 31, 2015.

 

2.Subsequent Issuances:

 

On July 9, 2015, the Company issued an aggregate of 1,892,106 restricted shares of common stock as payment for interest totaling $94,605 on loans to the Company.

 

On July 9, 2015, the Company issued 78,100 restricted shares of common stock in settlement of amounts owed to a consultant for services rendered to the Company, with a grant date fair value of $19,525.

 

 

16
 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

N/A.

 

ITEM 5. OTHER INFORMATION

 

Quarterly Events:

 

On April 2, 2015, the Company and Gerdz Investments Limited Partnership, RLLP (“Gerdz”) entered into a Cancellation Agreement with regards to 200,000 options originally issued on July 19, 2011, exercisable at $0.50. On April 2, 2015, the Company issued 200,000 options to Gerdz, exercisable at $0.10 per share, which vest immediately and shall expire on April 2, 2025.

 

ITEM 6. EXHIBITS

 

 

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

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

17
 

SIGNATURES

 

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

 

  AIRWARE LABS CORP.
   
Date: August 12, 2015 By: /s/  Jeffrey Rassas  
  Name:                    Jeffrey Rassas   
  Title:                      Chief Executive Officer and Director
   
 Date: August 12, 2015 By : /s/  Jessica Smith  
  Name :             Jessica Smith  
  Title :              Chief Accounting and Financial Officer

 

 

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

 

 

Date: August 12, 2015 By: /s/  Jeffrey Rassas  
  Name:                     Jeffrey Rassas   
  Title:                       Chief Executive Officer and Director
   
 Date: August 12, 2015 By : /s/  Jessica Smith  
  Name :                   Jessica Smith  
  Title :                      Chief Accounting and Financial Officer
   
 Date: August 12, 2015 By : /s/  Ronald L. Miller  
  Name :                   Ronald L. Miller  
  Title: Director