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EX-31.01 - EXHIBIT 31.01 - AIRWARE LABS CORP.airw0302form10kexh31_01.htm
EX-32.01 - EXHIBIT 32.01 - AIRWARE LABS CORP.airw0302form10kexh32_01.htm
EX-32.02 - EXHIBIT 32.02 - AIRWARE LABS CORP.airw0302form10kexh32_02.htm
EX-31.02 - EXHIBIT 31.02 - AIRWARE LABS CORP.airw0302form10kexh31_02.htm

 

UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 FORM 10-K 

 

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

 

For the yearly period ended September 30, 2015

 

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

 

For the transition period from _____ to _____.

 

AIRWARE LABS CORP.

(Exact name of small business issuer as specified in its charter)

 

     
Delaware 000-54730 98-0665018
(State or other jurisdiction (Commission File Number) (IRS Employer
of Incorporation)   Identification Number)
 

7377 E Doubletree Ranch Rd., Suite 260

Scottsdale, AZ 85258

(Address of principal executive offices)

 

 
   (480)-463-4246  
  (Registrant’s Telephone Number)  

 

 

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

None

 

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

Common Stock, $0.0001 par value

 

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

Yes  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  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 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

 

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 registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 

 

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 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

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $4,519,906, based upon the price ($0.10) at which the common stock was last sold as of March 31, 2015, the last business day of the registrant’s most recently completed second fiscal quarter, multiplied by the approximate number of shares of common stock held by persons other than executive officers, directors and five percent stockholders of the registrant without conceding that any such person is an “affiliate” of the registrant for purposes of the federal securities laws.  

 

As of February 29, 2016, there were 74,429,954 shares of the registrant’s $0.0001 par value common stock issued and outstanding.

 

Documents Incorporated By Reference:  None 

 

 
 

 

TABLE OF CONTENTS

 

      Page No.
    PART I   
Item 1.   Business 4
Item 1A.   Risk Factors 8
Item 1B.   Unresolved Staff Comments 8
Item 2.   Properties 8
Item 3.   Legal Proceedings 8
Item 4.   Mine Safety Disclosures 9
    PART II  
Item 5.           Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 9
Item 6.   Selected Financial Data 12
Item 7.          Management’s Discussion and Analysis of Financial Condition and Results of Operations 12
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk 14
Item 8.   Financial Statements and Supplementary Data 15
Item 9.          Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 40
Item 9A.   Controls and Procedures 40
Item 9B.   Other Information 40
    PART III  
Item 10.   Directors, Executive Officers and Corporate Governance 41
Item 11.   Executive Compensation 43
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 45
Item 13.   Certain Relationships and Related Transactions, and Director Independence 46
Item 14.   Principal Accounting Fees and Services 47
    PART IV  
Item 15.   Exhibits and Financial Statement Schedules 47
    Signatures 48

 

 
 

 

PART I

 

Special Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are not historical facts but rather are based on current expectations, estimates and projections. We may use words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “foresee,” “estimate” and variations of these words and similar expressions to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted. These risks and uncertainties include the following:

 

·The availability and adequacy of our cash flow to meet our requirements;
·Economic, competitive, demographic, business and other conditions in our local and regional markets;
·Changes or developments in laws, regulations or taxes in our industry;
·Actions taken or omitted to be taken by third parties including our suppliers and competitors, as well as legislative, regulatory, judicial and other governmental authorities;
·Competition in our industry;
·The loss of or failure to obtain any license or permit necessary or desirable in the operation of our business;
·Changes in our business strategy, capital improvements or development plans;
·The availability of additional capital to support capital improvements and development; and
·Other risks identified in this report and in our other filings with the Securities and Exchange Commission or the SEC.

 

This report should be read completely and with the understanding that actual future results may be materially different from what we expect. The forward looking statements included in this report are made as of the date of this report and should be evaluated with consideration of any changes occurring after the date of this Report. We will not update forward-looking statements even though our situation may change in the future and we assume no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Use of Term

 

Except as otherwise indicated by the context, references in this Annual Report to the words "we," "our," "us," the "Company," "AIRW," or “Airware” refers to Airware Labs Corp. All references to “USD” or United States Dollars refer to the legal currency of the United States of America.

 

 

ITEM 1. BUSINESS.

 

Corporate Background

 

We were incorporated in Delaware on June 15, 2010 under the name Crown Dynamics Corp. The Company’s original business plan was to develop dental technology.

 

On January 3, 2012, the Company implemented a 3 for 1 forward stock split of its issued and outstanding shares of common stock to the holders of record. As a result of the split, each holder of record on the record date automatically received two additional shares of the Company’s common stock. The accompanying financial statements and related notes thereto have been adjusted accordingly to reflect this forward stock split.

 

On January 20, 2012, the Company entered into an Exclusive Technology License Agreement (the “Zorah Exclusive License Agreement”) with Zorah Technology LLC (“Zorah”) and shifted our business focus away from dental technology to greater applications in home medical technology. The Zorah Exclusive License Agreement required a one-time issuance of One Million One Hundred and Twenty-Five Thousand (1,125,000) shares of restricted common stock to Zorah. As a result of the Zorah Exclusive License Agreement, the Company obtained exclusive rights to develop and distribute Zorah’s various technologies, which include a wireless technology to remotely monitor senior citizens and special needs adults and a transdermal blood sugar monitoring unit, which would allow people to take their blood sugar levels without pricking themselves (the “Zorah Technology”).

 

On March 20, 2012, through an equity exchange agreement (the “Share Exchange”), the Company acquired all of the issued and outstanding stock of Airware Holdings, Inc., a Nevada corporation (“Airware”), in exchange for 21,629,695 shares of the Company’s newly-issued common stock. Airware Holdings, Inc. was formed in February 17, 2010 as a Nevada corporation and is a non-prescription medical products company. Since the Share Exchange, the principal business purpose of the Company has shifted to the development, manufacture and distribution of nasal breathing devices. The Company now targets prospective customers such as compassionate sleeping partners, individuals with allergies and athletic enthusiasts throughout the United States, Canada and Europe.

 

On August 23, 2012, the Company entered into a Non-Exclusive License Agreement (the “Agreement”) with Zorah Technology, LLC (“Zorah”). The Agreement required a one-time issuance of Two Hundred Thousand (200,000) shares of restricted common stock in exchange for non-exclusive rights to develop and distribute the Zorah Technology. This Non-Exclusive License Agreement is meant to modify the existing license agreement originally entered into by the Company and Zorah on January 20, 2012. As a result of this modification, the 1,125,000 common shares issued pursuant to the January 20, 2012 Agreement were cancelled and returned to treasury.

 

Effective on November 13, 2012, the Company’s name was changed from Crown Dynamics Corp. to Airware Labs Corp.

 

Our principal offices are located at 7377 E Doubletree Ranch Rd., Suite 260, Scottsdale, AZ 85258. Our registered agent for service of process in Delaware is located at 113 Barksdale Professional Center, Newark, DE 19711, and our registered agent is Delaware Intercorp. Our fiscal year end is September 30.

 

All references to “we,” “us,” “our,” “Airware,” “Airware Labs,” or similar terms used in this Annual Report refer to Airware Labs Corp.

 

 4 

 

Business Summary

 

To date, we primarily engage in the development, manufacture and distribution of nasal breathing devices. The Company has a portfolio of patents all related to the nasal dilator-breathing device, both filtered and non-filtered, and its use as a primary delivery mechanism through the nasal passage of therapeutic essential oils. The Company targets prospective customers such as compassionate sleeping partners, individuals with chronic sinus issues, individuals that suffer from chronic sleep disorders and individuals with allergies throughout the United States, Canada, Asia and Europe. The Company utilizes information and current studies in the development and manufacture of our products in order to help promote the health benefits of improved breathing, particularly information regarding breathing and its impact on the human body, the effects of environmental factors, and the potential benefits provided by the strategic use of therapeutic essential oils. The Company is supported by a selective group of highly experienced doctors, engineers and scientists who provide advice and information on research topics relevant to the Company’s business purpose. 

Business Plan

Airware Labs is a leader in innovative breathing technology solutions and consumer product offerings that enhance breathing. Airware products provide consumers with safe and effective methods to control their own personal breathing environment. Our filtered product also contains 3M filtration media for allergy sufferers. 

Airware Labs maintains an efficient and economic corporate structure, outsourcing manufacturing and distribution through key strategic partnerships. Airware manufactures all products in China through an exclusive partnership with a factory that manufactures Airware products. Airware’s corporate headquarters are located in Scottsdale, Arizona and houses the management, sales and marketing teams. 

In April of 2012, Airware entered into a strategic partnership with Quest Products, Inc. (“Quest”), whereby Quest will promote and distribute the AIR® product line. Quest Products, Inc. (www.questproductsinc.com) provides turnkey solutions to Consumer Products Group (“CPG”) companies looking to develop their product's distribution and sales to all classes of trade. Quest works with varying sizes of CPG companies, from inventors and entrepreneurs beginning start-up brands, to large industry leading CPG manufacturers looking to expand their reach. Quest's unique core competencies allow them to create turnkey solutions and drive new and incremental opportunities in sales for their client partners. Quest's sales team works with food, drug, and mass retailers across the USA and Canada, including Wal-Mart, Target, CVS, and Walgreens. Quest was listed as one of the fastest growing companies four years in a row by INC. Magazine. 

Quest was successful in placing the AIR® product line with many of the largest online retailers, including Walgreens.com, Amazon.com, Drugstore.com, Target.com and more. Quest has also been successful in placing AIR® products in approximately 7,300 Walgreens stores located in the United States and the Company continues to receive reorders from Walgreens. Quest is presently attempting to gain distribution in other retail chains.

In March of 2014, Airware entered into a Joint Venture (“JV”) with Eastar Industries in China to act as the exclusive distributor for all Airware products with an initial focus on the AIR® filters product line. Eastar Industries, a subsidiary of Eastar Chemical Corporation, focuses on Eastar's pharmaceutical and health/beauty business for China and selected Southeast Asian countries. Eastar Industries licenses patented pharmaceuticals, medical devices and unique health/beauty products from U.S. and European companies for import to China and Southeast Asia through its local joint venture partner companies. Airware will own 18% of the JV that is formed in Hong Kong. Initial launch of AIR® PM2.5 began in December of 2014 in response to the severe pollution issues burdening most of the tier 1 cities of China. While Eastar remains a distribution partner, the creation of the JV entity has been put on hold as Airware evaluates new distribution options in the Asian market. Given the poor air quality and high demand for discreet and effective personal filtration devices, Airware is exploring more aggressive strategies to market in this region.

In August 2015, Airware hired Dr. Dan Cohen to assume the role of President. Dr. Cohen is the former Founder, Chairman and CEO of CNS, Inc., parent company of Breathe Right. Dr. Cohen was the driving force behind the meteoric rise of Breathe Right nasal strips, acquiring the rights to manufacture and sell the product for the medical equipment company he founded in 1982. With the successful drive to achieve FDA approval for marketing of the largely unknown product and with all of the top ten pharmaceutical wholesalers on board, Cohen launched a legendary marketing effort to generate market awareness. His efforts created an outcry of domestic and international consumer demand that rocketed CNS sales to a 77% increase as the company took the public spotlight and was named Fortune magazine's fourth fastest growing company in the U.S. in 1996. In 2006, GlaxoSmithKline acquired Breathe Right for $566 million.

Dr. Cohen is a board certified neurologist and an accomplished entrepreneur. In addition to CNS, Inc., he is also the co-founder of Round River Research Corporation and the inventor of patented technology used for stress reduction and personal development. Dr. Cohen holds numerous patents related to EEG signal processing, physiologic analysis algorithms and additional utility patents related to synchronized sound, vibration and electromagnetic fields and their effect on the body and mind.

 

Dr. Cohen believes the Airware Nasal filter to be the best product in the market and has engineered a strategic plan to enhance Airware’s nasal filtration product line with a launch planned in 2016, which includes extensive PR, education and awareness of the product benefits and competitive advantages.

 5 

 

 Business Opportunity & Product Solutions

In the US alone, there exists a multi-billion dollar market for health related breathing products. Many of these products are sold over-the-counter (OTC) and have been developed specifically to enhance nasal breathing, relieve symptoms of allergic rhinitis, reduce snoring and improve sleep. Air® products specifically target these segments of the OTC breathing products market. 

The AIR® nasal dilator is made from FDA-approved, latex-free/adhesive-free hypoallergenic medical grade material and has passed both cytotoxicity and an intra-cutaneous reactivity testing. The product is discreet, positioned inside the nostrils, and gently expands the nasal valve regions of the nasal passages thus opening the nasal airway allowing for easier nasal breathing. Many snorers do so because they cannot effectively breathe through their nose. By opening up the nasal passages allowing for greater nasal airflow, users are able to close their mouths and thereby reduce or stop snoring. Improved nasal breathing as well as reduced snoring generally improves sleep too. Unlike nasal strips, whose sales exceed $150M, the AIR® product can be worn all day and night in comfort, without significantly altering appearance.

AIR® nasal products are manufactured with or without 3M's Filtration Media depending on the whether the product is designed to enhance nasal breathing alone or in addition, filter the air of particulate matter including allergens and bacteria. AIR® Allergy with 3M Filtration Media captures a larger number, and smaller size of particles, preventing them from entering the body. This in turn helps with the prevention of allergy symptoms and infection gained through airborne illnesses. The product is worn discreetly inside the nose, allowing daytime or nighttime use.

The 3M™ Air Filter Media used in Air products is uniquely constructed of permanently charged engineered fibers. These high permanent electrostatic charges allow the fibers to better capture and hold sub-micron particles, allowing particles to be effectively captured throughout the depth of the media, rather than only on the upstream surface, creating a filter that captures both a smaller sized particle, as well as an increase in the number of particles collected. The use of this filter technology in the AIR® Allergy product is the first use of the technology in this format.

Products

Air® Allergy

Air® Allergy is a discreet personal filter that helps protect you from irritating airborne allergens. Air® Allergy fits just inside the nose and uses filtration media from 3M to help stop allergens before they enter your system. Air® Allergy is also lightly infused with a blend of premium therapeutic essential oils that is shown to help reduce the symptoms associated with allergies.

Breathe better. Feel better with Air® Allergy:

  • Helps block airborne allergens like pollen, dust and pet dander
  • Filtration media from 3M
  • Easy to breathe through
  • Drug-free
  • Infused with an essential oil blend designed to reduce allergy symptoms
  • Soft, comfortable and discreet
  • Latex-free

 6 

 

Sleep/Snore

Air® Sleep/Snore provides instant, drug-free relief for congestion and snoring caused by nasal breathing difficulties. It fits discreetly and comfortably just inside the nose to gently open nasal passages and increase airflow. Air® Sleep/Snore is also infused with a calming lavender essential oil blend that is shown to help reduce congestion and promote restful sleep.

Breathe better. Sleep better with Air® Sleep/Snore:

  • Instantly relieves nasal congestion
  • Clinically proven to reduce snoring
  • Infused with a calming lavender essential oil blend
  • Drug-free and adhesive-free
  • Soft, comfortable and discreet
  • Latex-free

Competition

Our potential competitors include large pharmaceutical and biotechnology companies, specialty pharmaceutical companies, and generic drug companies that offer products similar to ours. Many of our potential competitors have substantially greater financial, technical, and human resources than we do, as well as greater experience in the discovery and development of products and the commercialization of those products. Our competitors’ products may be more effective, or more effectively marketed and sold, than any products we may commercialize and may render our products obsolete or non-competitive before we can recover the expenses of their development and commercialization. We anticipate that we will face intense and increasing competition as new products enter the market and advanced technologies become available. However, we believe that our products offer key potential advantages over competitive products that could enable our products to capture meaningful market share from our competitors. 

WHERE YOU CAN GET ADDITIONAL INFORMATION

 

We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy our reports or other filings made with the SEC at the SEC’s Public Reference Room, located at 100 F Street, N.E., Washington, DC 20549. You can obtain information on the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You can also access these reports and other filings electronically on the SEC’s web site, www.sec.gov.

 

 7 

 

 

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 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

Our principal offices are located at 7377 Doubletree Ranch Rd., Suite 260, Scottsdale, AZ 85258. We currently rent this space for $2,387 per month. The lease expires on August 31, 2017. We believe that this space is adequate for our current and immediately foreseeable operating needs.

 

ITEM 3. 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 December 27, 2011, the Company was named as a defendant in a lawsuit alleging a default on two notes payable totaling $75,000 plus accrued interest. Ultimately, a judgment for $92,001 was entered against the Company as a result of this lawsuit. Per a later settlement agreement, the Company has been making monthly payments of $4,000 against this judgment with interest due on the remaining balance of 4.25% per annum. The notes and accrued interest are reflected in the Company’s Balance Sheets in Convertible Notes Payable as of September 30, 2014 in the amount of $22,678. During the year ended September 30, 2015, this settlement was paid in full.

 

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 September 30, 2015, totaling $30,000, have been made timely, satisfying the agreement in full.

 

Other than the foregoing, 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.

 

 8 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

PART II

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

 

Market Information

 

Our common stock is currently quoted on the OTC Bulletin Board. Our common stock has been quoted on the OTC Bulletin Board since November 3, 2011 under the symbol “CDYY.OB.” On November 9, 2012, our symbol was changed to “AIRW.OB” to reflect the Company’s name change. Because we are quoted on the OTC Bulletin Board, our common stock may be less liquid, receive less coverage by security analysts and news media, and generate lower prices than might otherwise be obtained if it were listed on a national securities exchange.

 

The following table sets forth the high and low bid prices for our Common Stock per quarter as reported by the OTC Bulletin Board for the quarterly periods indicated below based on our fiscal year end September 30. Our common stock began trading in 2012. These prices represent quotations between dealers without adjustment for retail mark-up, markdown or commission and may not represent actual transactions.

 

  Fiscal Quarter   High   Low
First Quarter (Oct. 1, 2013 – Dec. 31, 2013)  $   0.30    $   0.106  
Second Quarter (Jan. 1, 2014 – Mar. 31, 2014)     1.50       0. 15  
Third Quarter (Apr. 1, 2014 – Jun. 30, 2014)     0.39       0.20  
Fourth Quarter (Jul. 1, 2014 – Sept. 30, 2014)     0.24       0.075  

 

         
First Quarter (Oct. 1, 2014 – Dec. 31, 2014)            $   0.25               $   0.10  
Second Quarter (Jan. 1, 2015 – Mar. 31, 2015)     0.18       0.041  
Third Quarter (Apr. 1, 2015 – Jun. 30, 2015)     0.25       0.058  
Fourth Quarter (Jul. 1, 2015 – Sept. 30, 2015)     0.299       0.13  

 

 

Record Holders

 

As of February 29, 2016, there were 74,429,954 common shares issued and outstanding, which were held by 145 stockholders of record.

 

Dividends

 

We have never declared or paid any cash dividends on our common stock nor do we anticipate paying any in the foreseeable future. Furthermore, we expect to retain any future earnings to finance our operations and expansion. The payment of cash dividends in the future will be at the discretion of our Board of Directors and will depend upon our earnings levels, capital requirements, any restrictive loan covenants and other factors the Board considers relevant.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

None.

 

 9 

 

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

 

Year Ended September 30, 2014

 

On October 9, 2013, the Company issued 255,867 restricted shares of common stock to a related party as payment for interest on loans to the Company for September 2013, at a cost basis of $0.05 per share.

 

On November 7, 2013, the Company issued 293,907 restricted shares of common stock to a related party as payment for interest on loans to the Company for October 2013, at a cost basis of $0.05 per share.

 

On December 10, 2013, the Company issued 291,200 restricted shares of common stock to a related party as payment for interest on loans to the Company for November 2013, at a cost basis of $0.05 per share.

 

On January 21, 2014, the Company issued 382,094 restricted shares of common stock to a related party as payment for interest on loans to the Company for December 2013, at a cost basis of $0.05 per share.

 

On January 21, 2014, the Company issued 102,916 restricted shares of common stock as payment for consulting services rendered to the Company, at a cost basis of $0.18 per share.

 

On January 27, 2014, the Company issued 225,000 restricted shares of common stock as payment for consulting services rendered to the Company, at a cost basis of $0.165 per share.

 

On February 20, 2014, the Company issued a total of 52,941 restricted shares of common stock as payment for consulting services rendered to the Company, at a cost basis of $0.34 per share.

 

On February 28, 2014, the Company issued 1,207,388 shares of restricted common stock as payment to settle debts with two parties, eliminating a total of $301,846.92 of debt.

 

On February 28, 2014, the Company received a Warrant Exercise Notice from Stockbridge Enterprises L.P., a Nevada limited partnership (“Stockbridge”), to purchase 26,200,000 shares of its common stock, par value $0.0001. Stockbridge acquired the warrants pursuant to a Senior Secured Convertible Note (the “Note”), dated December 14, 2009, by and between Stockbridge and the Company. Pursuant to the terms of the warrants, Stockbridge elected to use a cashless exercise formula which resulted in the issuance of 22,457,143 shares of restricted common stock of the Company.

 

On March 3, 2014, the Company issued 23,200 restricted shares of common stock pursuant to a conversion notice dated February 27, 2014 at a cost basis of $0.25 per share.

 

On March 7, 2014, the Company issued 920,587 restricted shares of common stock to a related party as payment for interest on loans to the Company for January and February 2014, at a cost basis of $0.05 per share.

 

On April 10, 2014, the Company issued 461,600 shares of restricted common stock to a related party as payment for interest on loans to the Company for March 2014, at a cost basis of $0.05 per share.

 

On April 10, 2014, the Company issued 43,926 restricted shares of common stock as payment for consulting services rendered to the Company, at a cost basis of $0.34 per share.

 

On April 10, 2014, the Company issued 38,465 restricted shares of common stock as payment for consulting services rendered to the Company, at a cost basis of $0.32 per share.

 

On May 15, 2014, the Company issued 470,267 shares of restricted common stock to a related party as payment for interest on loans to the Company for April 2014, at a cost basis of $0.05 per share.

 

On May 28, 2014, the Company issued a total of 29,236 restricted shares of common stock as payment for services rendered to the Company, at a cost basis of $0.29 per share.

 

On June 23, 2014, the Company issued 509,653 shares of restricted common stock to a related party as payment for interest on loans to the Company for May 2014, at a cost basis of $0.05 per share.

 

 10 

 

On July 8, 2014, the Company issued 125,000 restricted shares of common stock to one investor at a cost basis of $0.20 per share pursuant to a Subscription Agreement dated July 2, 2014.

 

On July 17, 2014, the Company issued 75,000 restricted shares of common stock pursuant to a Settlement Agreement dated July 3, 2014, at a cost basis of NIL.

 

On July 17, 2014, the Company issued 511,600 shares of restricted common stock to a related party as payment for interest on loans to the Company for June 2014, at a cost basis of $0.05 per share.

 

On July 23, 2014, the Company issued a total of 89,837 restricted shares of common stock as payment for consulting services rendered to the Company, at a cost basis of $0.26 per share.

 

On July 23, 2014, the Company issued a total of 12,821 restricted shares of common stock as payment for consulting services rendered to the Company pursuant to a Consulting Agreement dated March 27, 2014, at a cost basis of $0.39 per share.

 

On August 4, 2014, the Company issued 300,000 shares of restricted common stock at a cost basis of $0.20 per an Asset Acquisition Agreement dated July 23, 2014.

 

On August 12, 2014, the Company issued 511,600 shares of restricted common stock to a related party as payment for interest on loans to the Company for July 2014, at a cost basis of $0.05 per share.

 

On September 15, 2014, the Company issued 553,653 shares of restricted common stock to a related party as payment for interest on loans to the Company for August 2014, at a cost basis of $0.05 per share.

 

On September 15, 2014, the Company issued 200,000 shares of restricted common stock, at a cost basis of $0.10 per share, pursuant to a Business Development Consulting Agreement dated September 2, 2014. 

Year Ended September 30, 2015

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

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

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

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

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

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

 

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

 

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

On March 17, 2015, the Company issued 591,600 restricted shares of common stock to a related party as payment for interest on loans to the Company for February 2015, at a cost basis of $0.05 per share

 

On April 28, 2015, the Company issued 629,987 restricted shares of common stock to a related party as payment for interest on loans to the Company for March 2015, at a cost basis of $0.05 per share.

 

On April 28, 2015, the Company issued 250,000 restricted shares of common stock to one shareholder at a cost basis of $50,000.00 pursuant to a subscription agreement dated April 10, 2015.

 

On April 28, 2015, the Company issued 93,970 restricted shares of common stock as compensation to a consultant for services rendered to the Company between January and March 31, 2015.

 

 11 

 

On July 9, 2015, the Company issued an aggregate of 1,892,106 restricted shares of common stock to a related party as payment for interest in the months of April-June, 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.

 

On August 26, 2015, the Company issued 641,200 restricted shares of common stock to a related party as payment for interest on loans to the Company for July 2015, at a cost basis of $0.05 per share.

 

On September 30, 2015, the Company issued 641,200 restricted shares of common stock to a related party as payment for interest on loans to the Company for August 2015, at a cost basis of $0.05 per share.

On September 30, 2015, the Company issued an aggregate 1,850,000 restricted shares of common stock to three shareholders at a cost basis of $0.10 per share pursuant to a three subscription agreements dated between August 11, 2015 and September 4, 2015.

Subsequent Issuances

 

On November 5, 2015, the Company issued 641,200 restricted shares of common stock to a related party as payment for interest on loans to the Company for September 2015, at a cost basis of $0.05 per share.

 

On December 31, 2015, the Company issued 1,282,400 restricted shares of common stock to a related party as payment for interest on loans to the Company for October and November 2015, at a cost basis of $0.05 per share. Additionally, the Company issued an aggregate 200,000 restricted shares of common stock to two shareholders at a cost basis of $0.10 per share pursuant to two subscription agreements dated between December 3, 2015 and December 14, 2015, and 96,071 restricted shares of common stock as compensation to a consultant for services rendered to the Company between April 1, 2015 and September 30, 2015. The shares were valued at the average trading price over the period of service, which approximated fair value, in the amount of $12,750.

 

Purchases of Equity Securities by the Small Business Issuer and Affiliated Purchasers

 

None.

 

ITEM 6. SELECTED FINANCIAL DATA

 

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

 

The following discussion should be read in conjunction with our audited financial statements and notes thereto included herein. We caution readers regarding certain forward looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. 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 necessarily based upon estimates 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, or our behalf. We disclaim any obligation to update forward-looking statements.

 

 12 

 

Results of Operations

 

Total revenue for the years ended September 30, 2015 and 2014 was $113,022 and $179,494, respectively. The decrease in revenue is due to a reduction in orders from our major distributor. Cost of goods sold for the year ended September 30, 2015 was $117,306 as compared to $115,663 for the year ended September 30, 2014, resulting in gross profits of $(4,284) and $63,831 for the years ended September 30, 2015 and 2014, respectively. The negative gross margin for the year ended September 30, 2015 is primarily due to a write-off of obsolete inventory in the amount of $21,697.

 

Operating expenses in the year ended September 30, 2015 amounted to $1,111,593 as compared to $1,168,929 for the year ended September 30, 2014. The reduction in operating expenses is due to decreases in consulting and legal fees.

 

The net loss for the year ended September 30, 2015 was $4,740,684 as compared to $17,082,226 for the year ended September 30, 2014. The decrease in net loss is primarily the result of a loss from warrants exercised by a related party during the year ended September 30, 2014.

 

Liquidity and Capital Resources

 

Our balance sheet as of September 30, 2015 reflects $41,745 in cash and cash equivalents. 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. At this time, our Company does not have a commitment from any broker/dealer to provide additional financing, and does not have sufficient working capital to support operations for the next twelve months. 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 year ended September 30, 2015, the Company used $740,849 in cash from operating activities compared with $738,598 cash used in the year ended September 30, 2014. From the year ended September 30, 2014 to September 30, 2015 there was an increase in officer salaries, marketing consultants and dues and subscriptions which were partially offset by reductions in cash payments for consulting fees and travel.

 

Cash Flow from Investing Activities

 

During the years ended September 30, 2015 and 2014, the Company used $6,710 and $16,000 in cash for investing activities, respectively. The decrease in cash used for investing activities is due to purchasing less property and equipment.

 

Cash Flow from Financing Activities

 

During the year ended September 30, 2015, the Company received $746,722 in cash from financing activities. This consisted of $475,322 in net financing from notes payable and $271,400 in proceeds from the issuance of stock for cash. In comparison, during the year ended September 30, 2014, the Company received $777,238 in cash from financing activities. This consisted of $1,356,500 in net financing from notes payable, $25,000 in proceeds from the issuance of stock for cash less $604,262 in payments for the repurchase of common stock and options

 

 13 

 

Going Concern

 

We have not attained profitable operations and are dependent upon obtaining financing to maintain existing operations. For these reasons, there is substantial doubt about our ability to continue as a going concern. Our accompanying consolidated financial statements 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.

 

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.

 

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.

 

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.

 

Contractual Obligations

 

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 7A. 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.

 

 14 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  

 

AIRWARE LABS CORP.

 

INDEX TO FINANCIAL STATEMENTS

 

SEPTEMBER 30, 2015

 

Financial Statements   Page
Reports of Independent Registered Public Accounting Firms   F-1
Consolidated Balance Sheets as of September 30, 2015 and September 30, 2014   F-3
Consolidated Statements of Operations for the years ended September 30, 2015 and September 30, 2014   F-4
Consolidated Statements of Stockholders’ Deficit for the years ended September 30, 2015 and September 30, 2014   F-5
Consolidated Statements of Cash Flows for the years ended September 30, 2015 and September 30, 2014   F-6
Notes to Financial Statements   F-7

 

 

 

  

 15 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Airware Labs Corp.

We have audited the accompanying consolidated balance sheet of Airware Labs Corp. as of September 30, 2015, and the related statements of operations, stockholders’ deficit, and cash flows for the year then ended. Airware Labs Corp.’s management is responsible for these consolidated financial statements. 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 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 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 also includes 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, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

We were not engaged to examine management’s assertion about the effectiveness of Airware Labs Corp.’s internal control over financial reporting as of September 30, 2015 and, accordingly, we do not express an opinion thereon.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Airware Labs Corp. as of September 30, 2015 and the results of its operations and 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 financial statements, the Company has incurred operating losses, has incurred negative cash flows from operations and has a working capital deficit. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan regarding these matters is also described in Note 2 to the financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

D. Brooks and Associates CPA’s, P.A.
West Palm Beach, FL
March 4, 2016  
   

  

 

  

 F-1 

 

 

To the Board of Directors and
Stockholders of Airware Labs Corp.

 

We have audited the accompanying consolidated balance sheets of Airware Labs Corp. as of September 30, 2014 and 2013, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years then ended. Airware Labs Corp.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our 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 also includes 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, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Airware Labs Corp. as of September 30, 2014 and 2013, and the results of its operations and its cash flows for each of the years 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 losses from operations since inception and requires additional funds for future operating activities that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 Respectfully submitted,

 

 

Weinberg & Baer, LLC

Baltimore, MD

December 29, 2014

 

 F-2 

 

 

AIRWARE LABS CORP. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2015 AND 2014

 

   2015  2014
           
ASSETS          
Current Assets:          
Cash and cash equivalents  $41,745   $42,582 
Accounts receivable   530    3,137 
Inventory   45,457    71,614 
Deposits   —      10,000 
Prepaid expenses and other current assets   8,476    66,205 
Total current assets   96,208    193,538 
           
Other Assets:          
Property and equipment, net   14,070    20,039 
Intangible assets, net   —      292,402 
Deposits   2,387    2,387 
Investment in Breathe Active, LLC   —      290 
Total Assets  $112,665   $508,656 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
Current Liabilities:          
Accounts payable  $1,640,327   $1,639,529 
Accrued interest - related parties   38,849    32,076 
Accrued interest   1,644    1,244 
Accrued expenses   138,057    72,172 
Note payable to former officer   47,500    —   
Convertible notes payable - current portion   5,000    27,678 
Convertible notes payable to related parties - current portion, net of discount   20,000    1,324,659 
Total current liabilities   1,891,377    3,097,358 
           
Accrued interest to related parties   —      106 
Note payable to former officer   —      47,500 
Convertible notes payable to related parties, less current portion   3,206,000    —   
   Total liabilities   5,097,377    3,144,964 
           
Commitments and Contingencies          
           
Stockholders' Deficit:          
Common stock, par value $.0001 per share, 200,000,000 shares authorized; 72,210,283 and 62,256,379 shares issued and outstanding at September 30, 2015 and 2014, respectively   7,221    6,226 
Common stock to be issued, 290,000 shares, par value $.0001   29    —   
Additional paid-in capital   31,843,635    29,452,379 
    Accumulated deficit   (36,835,597)   (32,094,913)
      Total stockholders' deficit   (4,984,712)   (2,636,308)
           
Total Liabilities and Stockholders' Deficit  $112,665   $508,656 

 

 

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

 F-3 

 

AIRWARE LABS CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED SEPTEMBER 30, 2015 AND 2014

 

 

 

   2015  2014
           
Revenues, net  $113,022   $179,494 
Cost of products sold   117,306    115,663 
Gross profit (loss)   (4,284)   63,831 
           
Operating expenses:          
General and administrative   869,649    962,155 
Sales and marketing   241,944    206,774 
Total operating expenses   1,111,593    1,168,929 
           
Loss from operations   (1,115,877)   (1,105,098)
           
Other income (expense):          
Interest income   —      289 
Forgiveness of debt   —      11,867 
Induced note conversion expense   —      (2,697)
Interest expense   (1,126)   (16,682)
Interest expense - related parties   (2,960,027)   (1,348,471)
Loss on deposits   (21,529)   —   
Valuation loss - common stock warrants   —      (707,400)
Loss on impairment of intangible assets   (249,180)   —   
Loss on extinguishment of debt   (392,945)   —   
Loss on warrants exercised   —      (13,914,034)
Total other income (expense)   (3,624,807)   (15,977,128)
           
Loss before income taxes   (4,740,684)   (17,082,226)
           
Income tax expense   —      —   
           
Net loss  $(4,740,684)  $(17,082,226)
           
Basic and diluted net loss per common share  $(0.07)  $(0.34)
           
Basic and diluted weighted average common          
     shares outstanding   66,406,701    49,742,031 

 

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

 F-4 

 

 

AIRWARE LABS CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT

FOR THE YEARS ENDED SEPTEMBER 30, 2015 AND 2014

 

   Common Stock   Additional
Paid-in
   Common
Stock
to be
   Accumulated      
   Shares   Amount   Capital   Issued   (Deficit)   Total 
Balance at September 30, 2013   38,129,100   $3,813   $12,071,023   $—     $(15,012,687)  $(2,937,851)
Issuance of stock for cash   125,000    12    24,988    —      —      25,000 
Exchange of shares for services   795,142    79    160,149    —      —      160,228 
Shares issued in settlement of accounts payable   1,282,388    129    315,219    —      —      315,348 
Exchange of shares for interest expense   5,165,228    517    258,385    —      —      258,902 
Shares issued for conversion of notes payable   20,000    2    7,694    —      —      7,696 
Stock options issued for services   —      —      56,119    —      —      56,119 
Stock options repurchased   —      —      (2,500)   —      —      (2,500)
Warrants issued for services   —      —      2,238    —      —      2,238 
Exercise of warrants - related party   22,457,143    2,246    15,717,754    —      —      15,720,000 
Discount of convertible notes - related party   —      —      1,402,000    —      —      1,402,000 
Shares issued for purchase of assets   300,000    30    40,470    —      —      40,500 
Stock repurchased and cancelled   (6,017,622)   (602)   (601,160)   —      —      (601,762)
Net loss   —      —      —      —      (17,082,226)   (17,082,226)
Balance at September 30, 2014   62,256,379    6,226    29,452,379    —      (32,094,913)   (2,636,308)
Issuance of stock for cash   2,100,000    210    271,161    29    —      271,400 
Exchange of shares for services   498,271    50    85,951    —      —      86,001 
Shares issued in settlement of accounts payable   78,100    7    19,517    —      —      19,524 
Exchange of shares for interest expense - related party   7,277,533    728    1,051,251    —      —      1,051,979 
Stock options issued for services   —      —      68,438    —      —      68,438 
Warrants issued for services   —      —      3,993    —      —      3,993 
Discount of convertible notes - related party   —      —      498,000    —      —      498,000 
Warrants issued for debt extinguishment - related party   —      —      392,945    —      —      392,945 
Net loss   —      —      —      —      (4,740,684)   (4,740,684)
Balance at September 30, 2015   72,210,283   $7,221   $31,843,635   $29   $(36,835,597)  $(4,984,712)

 

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

 F-5 

 

AIRWARE LABS CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED SEPTEMBER 30, 2015 AND 2014

 

   2015  2014
           
Operating Activities:          
Net loss  $(4,740,684)  $(17,082,226)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   64,480    65,751 
Common stock issued/obligated for services   86,001    476,576 
Options and warrants issued for services   72,431    58,357 
Loss on impairment of intangible assets   249,180    —   
Interest expense from amortization of debt discount   1,901,341    1,075,878 
Induced conversion expense   —      2,697 
Stock issued for payment of interest on convertible notes - related party   1,051,979    258,902 
Exchange of sales proceeds for mold   (8,290)   —   
Loss on extinguishment of debt   392,945    —   
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    31,882 
     Inventory   26,157    (20,191)
     Prepaid expenses   57,729    (55,515)
     Deposits   10,000    (9,987)
     Accounts payable   20,323    (228,676)
     Accrued interest   7,067    12,925 
     Accrued expenses   65,885    53,615 
Net Cash Used in Operating Activities   (740,849)   (738,598)
           
Investing Activities:          
     Purchases of property and equipment   (6,710)   (16,000)
Net Cash Used in Investing Activities   (6,710)   (16,000)
           
Financing Activities:          
     Stock issued for cash   271,400    25,000 
     Proceeds from convertible notes payable - related party   498,000    1,402,000 
     Repayment of convertible notes payable   —      (27,322)
     Repayment of notes payable   (22,678)   (18,178)
     Options re-purchased   —      (2,500)
     Stock re-purchased   —      (601,762)
Net Cash Provided by Financing Activities   746,722    777,238 
           
Net Increase (Decrease) in Cash   (837)   22,640 
           
Cash - Beginning of Year   42,582    19,942 
           
Cash - End of Year  $41,745   $42,582 
           
Supplemental disclosure of cash flow information:          
Interest paid in cash  $292   $2,500 
Income taxes paid in cash  $—     $—   
           
Non-cash investing and financing activities:          
Stock issued for convertible notes  $—     $5,000 
Debt discount on note payable, related party  $498,000   $1,402,000 
Stock issued in settlement of accounts payable  $19,524   $315,348 
Stock issued to acquire intangible assets and property  $—     $39,500 
Warrants issued to related party for convertible note modification  $392,945   $—   
Credit towards manufacturing mold from factory  $8,290   $—   

 

 

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

 

 F-6 

 

 

AIRWARE LABS CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 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.

 

Principals of Consolidation

The accompanying consolidated financial statements include the accounts of Airware Labs Corp and its wholly owned subsidiary, Airware Holdings, Inc. Intercompany balances and transactions have been eliminated.

 

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, estimates for customer returns, the fair value of common stock and the estimated fair value of stock options and warrants.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments purchased with a remaining maturity of three months or less to be cash equivalents.

 

Accounts Receivable

 

The Company follows the allowance method of recognizing uncollectible accounts receivable. The allowance method recognizes bad debt expense based on a review of the individual accounts outstanding and the Company’s prior history of uncollectible accounts receivable. As of September 30, 2015 and 2014, no allowance was established for potentially uncollectible accounts receivable as none was deemed necessary. During the years ended September 30, 2015 and 2014, the Company had no write-offs of receivables. The Company had sales returns totaling $31,177 and $20,709 for the years ended September 30 2015 and 2014, respectively. Additionally, an allowance for sales returns in the amount of $13,000 was established during the year ended September 30, 2015. The Company’s policy is to record finance charges on outstanding delinquent accounts receivable only if they are collected. Accounts receivable are generally unsecured.

 

Inventory

 

Inventory is mostly held by a third party, consists of finished goods and is stated at the lower of cost, determined by the first-in, first-out method, or market.

 

Property and Equipment

 

Property and equipment are recorded at cost. Depreciation is provided for on the straight-line method, over the estimated useful lives of the assets. Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Betterments or renewals are capitalized when incurred. Gains and losses on the disposition of property and equipment are recorded in the period incurred. Production molds owned by the Company are capitalized and are included in manufacturing equipment. Pre-production design and development costs are expensed as incurred.

 

The estimated useful lives of property and equipment are:

 

Manufacturing equipment 2-3 years
     
Office furniture and equipment 5-7 years

 

 F-7 

 

Intangible Assets

Intangible assets consist of patents and intellectual property and are amortized over the period that the Company believes best reflects the time frame in which the economic benefits will be consumed. The Company evaluates intangible assets with definite lives for recoverability when events or circumstances indicate that these assets might be impaired. The Company recognized a loss on impairment of intangible assets of $249,180 and $0 for the years ended September 30, 2015 and 2014, respectively.

Income Taxes

 

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.

 

On an on-going basis, the Company assesses the likelihood that the deferred tax assets will be recovered from future taxable income. At September 30, 2015 and 2014, it was believed that the recovery of the deferred tax assets was less than likely and therefore, a full valuation allowance was established.

 

Interest relative to income taxes is charged to interest expense and penalties are charges to general and administrative costs if there are any assessments. No interest or penalties relative to income taxes have been recognized during the years ended September 30, 2015 or 2014.

 

The Company files income tax returns in the U.S. federal jurisdiction, and the State of Arizona. The Company is subject to U.S. federal, state, and local income tax examinations by tax authorities. All periods beginning on or after January 1, 2012 are open to examination by taxing authorities. The Company believes it has no tax positions for which the ultimate deductibility is highly uncertain.

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 returns and co-operative advertising costs.

 

Fair Value of Financial Instruments

 

The carrying value of the Company’s financial instruments, consisting of cash, accounts payable, convertible notes payable to third parties, and related party notes payable to former officer, approximate fair value due to their short term to maturity.  The carrying value of the Company’s related party convertible debt approximates fair value due to the terms that are similar to current market rates.

Net Loss Per Share

 

Basic earnings per share does not include dilution and is computed by dividing loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects 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 years ended September 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 September 30, 2015 and 2014, there were total shares of 42,492,512 and 33,753,341, respectively, 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.

 F-8 

 

Shipping and Handling

Shipping and handling costs associated with the shipment of products to the customer are recorded as costs of goods sold and totaled $11,495 and $11,950 for the years ended September 30, 2015 and 2014, respectively.

Advertising Costs

Advertising costs are charged to expense when incurred.  Total advertising expense recognized during the years ended September 30, 2015 and 2014 were $11,950 and $6,883, respectively. Advertising expense is included in selling and marketing expenses on the accompanying consolidated statements of operations.

Stock-Based Compensation

All share-based payments to employees, including grants of employee stock options, are expensed based on their estimated fair values at grant date, in accordance with ASC 718. Compensation expense for stock options is recorded over the vesting period using the estimated fair value on the date of grant, as calculated using the Black-Scholes model. We classify all share-based awards as equity instruments and recognize the vesting of the awards ratably over their respective terms.

 

Recent Accounting Pronouncements

There have been no recently issued accounting pronouncements that have had or are expected to have a material impact on the Company’s financial statements.

Note 2 - Going Concern

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

The Company’s ability to meet its cash requirements in the next year is dependent upon obtaining additional 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 as a result there is substantial doubt the Company will be able to continue as a going concern. The accompanying consolidated 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.

 

Note 3 - Property and Equipment, Net

The following represents a summary of our property and equipment:

   September 30,
   2015  2014
Manufacturing equipment  $61,500   $62,500 
Office furniture and equipment   21,678    21,678 
    83,178    84,178 
Less: accumulated depreciation   (69,108)   (64,139)
   $14,070   $20,039 

 

 

Depreciation expense was $20,968 and $29,080 for the years ended September 30, 2015 and 2014, respectively.

 

Note 4 - Intangible Assets

The Company’s intangible assets relate to the Company’s patents and intellectual property. For the Company’s Air product line, these assets were amortized over the remaining life of the original patent, which was 7.25 years as of September 30, 2014. At September 30, 2014, the net carrying value of the Air patents was calculated as follows:

Gross carrying amount  $481,337 
Less: accumulated amortization   (224,655)
   $256,682 

 

 

For the year ended September 30, 2015, management deemed these amounts to be fully impaired and recorded a loss on impairment of $222,168.

 

On July 23, 2014, the Company entered into an Asset Acquisition Agreement whereby it purchased a patent related to a line of beauty products that the Company plans to produce and market. This patent was amortized over the remaining life of the original patent, which was 3.9 years as of September 30, 2014. At September 30, 2014, the net carrying value of the beauty patent was calculated as follows:

 

Gross carrying amount  $38,000 
Less: accumulated amortization   (2,280)
   $35,720 

 

For the year ended September 30, 2015, management deemed these amounts to be fully impaired and recorded a loss of $26,723.

 

Amortization expense was $43,511 and $36,671 for the years ended September 30, 2015 and 2014, respectively.

 

 F-9 

 

Note 5 - Convertible Notes Payable

 

Convertible notes payable consist of the following:

   September 30,
   2015  2014
8.00% note payable, due August 22, 2012, convertible into common stock at $.50 per share, interest payments are due at maturity, unsecured, in default.  $5,000   $5,000 

6.50% note payable, due November 26, 2011, convertible into common stock at $2 per share, interest payments are due annually, unsecured. Terms amended in March 2013 to interest at 4.25%, with $4,000 monthly payments of principal and interest. During the years ended September 30, 2015 and 2014, the Company repaid convertible notes payable in the amount of $22,678 and $27,322, respectively.

   —      22,678 
    5,000    27,678 
Less current portion   (5,000)   (27,678)
   $—     $—   

 

 

Note 6 - Notes Payable to Former Officer

 

Notes payable to a former officer consists of the following:

   September 30,
   2015  2014
Note payable bearing interest at 0.27%, due August 1, 2016, interest due at maturity, unsecured  $47,500   $47,500 

 

 

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

 

Note 7 - Convertible Notes Payable to Related Parties

 

Convertible notes payable to related parties consist of the following:

   September 30,
   2015  2014
12% note payable net of unamortized debt discount of $0  and $1,403,341, at September 30, 2015 and  2014, respectively, due September 30, 2017, convertible to common stock at $.10 per share, interest payments are due monthly.  During the year ended 2015, the Company drew $498,000 against this note.  Additionally, on August 31, 2015 the maturity date was extended from September 30, 2015 to September 30, 2017. Debt is secured by substantially all of the assets of the Company.  $3,206,000   $1,304,659 
8.00 % note payable due August 26, 2012, convertible to common stock at $.50 per share, interest payments are due at maturity, unsecured, in default.   20,000    20,000 
    3,226,000    1,324,659 
Less current portion   (20,000)   (1,324,659)
   $3,206,000   $—   

 

 

Interest expense on the convertible notes payable to related parties (including amortization of debt discount of $1,901,341 and $1,075,878, respectively) was $2,958,299 and $1,348,266 for the years ended September 30, 2015 and 2014, respectively. Interest expense on the line of credit was settled via the issuance of 7,277,533 shares stock during the year ended September 30, 2015.

 

On August 31, 2015, the Company entered into an allonge to the convertible note to related parties through which the maturity date was extended by two years to September 30, 2017. In consideration for this extension, the Company granted 3,500,000 common stock warrants. The modification was accounted for as an extinguishment and the Company recorded a loss on extinguishment of debt of $392,945 based on the fair value of the warrants. The fair value of the warrants was estimated using a Black Scholes model on the following assumptions:

 

Expected stock price volatility   28.96%
Expected dividend yield    0.00%   
Risk-free interest rate    1.54%   
Warrant term   10 years

 

The future minimum payment of the convertible notes payable due to related parties for each of the following years and in the aggregate:

 

Years ending September 30,   Amount
2016    $              20,000   
2017    $         3,206,000   

 

 F-10 

 

Note 8 - Related Party Transactions

 

As detailed in Notes 7 and 8, the Company has a note payable to its former President, a convertible note payable to a former advisory board member and another convertible note with an entity that owns 58.4% of our outstanding shares.

On December 5, 2013, the Company entered into a share re-purchase agreement with the former President to buy back 7,567,622 shares of common stock held by him and entities under his control.  Other outside investors were granted the opportunity to participate in this purchase, with 1,550,000 shares being purchased directly from the former President by others, and 6,017,622 being re-purchased by the Company and cancelled.  Upon completion of this transaction on December 17, 2013, our former President no longer has any ownership in the Company.

 

As disclosed in Note 12, on October 4, 2013, the Company granted a total of 583,333 stock options to officers and a Board member. Additionally, on September 5, 2014, the Company granted a total of 783,333 stock options to officers, significant consultants and a Board member.

 

On February 5, 2014, our primary debt holder and a 58.4% shareholder submitted Warrant Exercise Notices pursuant to which it exercised all of its 26,200,000 outstanding warrants. The holder elected to use the cashless exercise option provided for in the warrants, which resulted in the issuance of 22,457,143 shares of common stock. Additionally, during the year ended September 30, 2015, the Company borrowed an additional $498,000 against the convertible secured note and issued 7,277,533 shares of stock in payment of interest on the convertible note.

The Company paid $87,500 during the years ended September 30, 2015 and 2014 to a company owned by its CFO for her services as CFO. Additionally, we granted 0 and 200,000 options to our CFO directly for the years ended September 30, 2015 and 2014, respectively.

The Company paid $15,624 during the year ended September 30, 2015 to a company owned by its President for his services as President. Additionally, we granted 500,000 options to our President directly during the year ended September 30, 2015.

During the years ended September 30, 2015 and 2014, the Company paid zero cash for interest on the related party debt.

 

Note 9 - Income Taxes

 

The Company’s provision for income tax (benefit) expense from operations consists of the following:

 

   For the years ended September 30,
   2015  2014
Current:          
   Federal and State  $—     $—   
Deferred:   1,794,000    534,000 
   Less valuation allowance   (1,794,000)   (534,000)
Recognized tax benefit  $—     $—   

 

 

The following table summarizes the significant differences between the U.S. federal statutory tax rate and the Company’s effective tax rate for financial statement purposes for the years ended September 30, 2015 and 2014:

   For the years ended September 30,
   2015  2014
       
U.S. federal statutory tax rate   34%   34%
State taxes   4.612%   4.612%
Decrease in valuation allowance   (38%)   38%
Non-deductible items   (0.612%)   (0.612%)
Totals   0%   0%

 

The tax effects of temporary differences that give rise to deferred tax assets and liabilities as of September 30, 2015 and 2014 are summarized as follows:

   For the years ended September 30,
   2015  2014
       
Net operating loss carryforwards  $13,990,000   $12,571,000 
Valuation allowance   (13,990,000)   (12,571,000)
Deferred tax assets, net  $—     $—   

 F-11 

 

Note 10 - Commitments and Contingencies

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 the Company’s stock price at the anniversary date of the agreement. As discussed in Note 12, per this agreement the Company issued a three-year warrant to purchase 172,078 shares at $.14 on December 23, 2013. Additionally, the Company issued another three-year warrant to purchase 145,510 shares at $.13 on December 22, 2014. The Company recorded the fair value of the warrants, totaling $3,993 and $2,338 for the years ended September 30, 2015 and 2014, respectively, as consulting fees.

 

On December 27, 2011, the Company was named as a defendant in a lawsuit alleging a default on two notes payable totaling $75,000 plus accrued interest. Ultimately, a judgment for $92,001 was entered against the Company as a result of this lawsuit. Per a later settlement agreement, the Company made monthly payments of $4,000 against this judgment with interest due on the remaining balance of 4.25% per annum. The notes and accrued interest are reflected in the Company’s consolidated balance sheets in convertible notes payable as of September 30, 2014 in the amount of $22,678. During the year ended September 30, 2015, this settlement was paid in full.

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 to communicate with the note holders to request extensions or conversion, but has been unsuccessful in doing so. The full balance on these notes are included in current liabilities.

On September 20, 2012, the Company entered into an agreement with a company owned by its CFO for her services as CFO on a contract basis in exchange for a fixed monthly fee. $87,500 was paid for each of the years ending September 30, 2015 and 2014 per this agreement. Additionally, stock options with a fair value of $0 and $7,469 for the years ended September 30, 2015 and 2014, respectively, were granted as additional compensation directly to the CFO.

 

On July 16, 2013, the Company entered into a Severance Agreement with its Chief Executive Officer pursuant to which he will be entitled to the following severance benefits: (i) the Company shall pay his base salary ($200,000 as of September 30, 2015) for a period of 12 months following termination without cause; (ii) he shall be paid any earned and unpaid bonus due; and, (iii) and all unvested stock-based compensation shall vest as of the date of termination.

 

On January 6, 2014, the Company entered into a license agreement with Eastar Industries, Co. (“Eastar”), 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 agreed to establish a joint venture company in Hong Kong or 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. As of September 30, 2015, the joint venture has yet to be established. During the years ended September 30, 2015 and 2014 the Company had sales to Eastar in the amounts of $1,855 and $6,435, respectively.

The Company entered into an office lease agreement commencing June 1, 2014 and expiring August 31, 2017. As part of the lease agreement, a concession of the first three months’ rent was provided. Total rent to be paid over the course of the lease is being expensed ratably over the period of the entire lease, creating a deferred rent liability of $4,648 as of September 30, 2015. Rent expense was $26,517 and $24,807 for the years ended September 30, 2015 and 2014, respectively. Future minimum lease payments under this agreement total $27,487 for 2016 and $25,703 for 2017.

 

On July 23, 2014, the Company entered into an asset acquisition agreement. The agreement includes a liquidated damages clause in the amount of $20,000 should the Company not move forward with product development within 12 months of the agreement date. This amount is reflected in accrued expenses on the Company’s balance sheet as of September 30, 2015.

 

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 September 30, 2015, totaling $30,000, have been made timely, satisfying the agreement in full.

 

On August 17, 2015, the Company entered into an agreement with a company owned by its President for his services as President on a contract basis in exchange for a fixed monthly fee. $15,624 was paid during the year ended September 30, 2015 per this agreement. Additionally, stock options with a fair value of $32,545 were granted as additional compensation directly to the President in the year ended September 30, 2015.

 

During the year ended September 30, 2015, the Company incurred $12,750 in expense related to a consultant that was ultimately settled by issuing 96,071 shares of stock. This amount is included in accrued expenses at September 30, 2015.

 

The Company sells the majority of its products through a distributor. 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 September 30, 2015 and 2014. The likelihood that the Company’s estimate of the accrued product warranty claims will materially change in the near term is considered remote.

 

 F-12 

 

Note 11 - Stockholders’ Deficit

 

Common Stock

  

 

Number of Shares

of Common Stock

 Balance at September 30, 2013   38,129,100 
 Issuance of stock for cash (1)   125,000 
 Shares issued for conversion of notes payable (2)   20,000 
 Exchange of shares for interest expense (2)   5,165,228 
 Exchange of shares for services (3)   795,142 
 Shares issued for exercise of warrants (4)   22,457,143 
 Shares issued for conversion of accounts payable (5)   1,282,388 
 Shares issued for asset purchase (6)   300,000 
 Shares repurchased from former officer (7)   (6,017,622)
 Balance at September 30, 2014   62,256,379 
 Issuance of stock for cash (8)   2,100,000 
 Exchange of shares for interest expense (9)   7,277,533 
 Exchange of shares for services (10)   498,271 
 Shares issued for conversion of accounts payable (11)   78,100 
 Balance at September 30, 2015   72,210,283 

 

(1) On July 7, 2014, the Company sold 125,000 shares for $25,000 through a private placement.

(2) On March 3, 2014, the holder of a convertible note elected to convert $5,000 of principal with interest into common stock at a preferred rate of $.25 per share, rather than the $.50 per share amount stated in the original note. This resulted in the issuance of 20,000 shares for the note conversion and 3,200 shares for the accrued interest.

During the year ended September 30, 2014, the Company issued 5,162,028 shares of stock in payment of interest totaling $258,101 on the primary debt holders convertible note.

(3) During the year ended September 30, 2014, the Company issued 795,142 shares of common stock for services. The shares were valued at the average trading price over the period of service, which approximated fair value, in the amount of $160,228.

(4) On February 5, 2014, the primary debt holder submitted Warrant Exercise Notices pursuant to which it exercised all of its 26,200,000 outstanding warrants. They elected to use the cashless exercise option provided for in the warrants, which resulted in the issuance of 22,457,143 shares of common stock.

(5) On February 28, 2014, the Company issued 1,207,388 shares of common stock to two vendors in satisfaction of accounts payable of $301,847. On July 17, 2014, the Company issued 75,000 shares of stock to a vendor in partial satisfaction of $28,148 in accounts payable.

 

(6) On July 23, 2014, the Company entered into an asset acquisition agreement pursuant to which 300,000 shares of common stock were issued.

 

(7) On December 5, 2013, the Company entered into a share re-purchase agreement with the former President to buy back 7,567,622 shares of common stock held by him and entities under his control.  Other outside investors were granted the opportunity to participate in this purchase, with 1,550,000 shares being purchased directly from the former President by others, and 6,017,622 being re-purchased and cancelled by the Company for cash consideration of $601,762.

 

(8) On March 9, 2015, the Company sold 250,000 shares for $50,000 through a private placement.

 

Between August 11, 2015 and September 4, 2015, the Company sold 1,850,000 shares for $185,000 through private placements.

 

(9) During the year ended September 30, 2015, the Company issued 7,277,533 shares of stock in payment of interest totaling $363,877 on the primary debt holders convertible note.

(10) During the year ended September 30, 2015, the Company issued 498,271 shares of common stock for services. The shares were valued at the average trading price over the period of service, which approximated fair value, in the amount of $86,001.

(11) On July 9, 2015 the Company issued 78,100 shares of stock to a vendor in satisfaction of accounts payable totaling $19,524.

 

 F-13 

 

Warrants:

 

Warrant activity for the years ended September 30, 2015 and 2014 follows:

 

  

Common Shares

Issuable Upon

Exercise of Warrants

  Exercise Price of Warrants  Date
Issued
 

Expiration
Date

Balance of Warrants at September 30, 2013   27,170,464                

Issued per distribution agreement (1)

   172,028   $0.14    12/23/2013   12/22/2016

Issued under a private placement memorandum (2)

   25,000   $0.40    7/2/2014   6/1/2016

Issued under a private placement memorandum (2)

   50,000   $0.60    7/2/2014   6/1/2016

Issued under a private placement memorandum (2)

   25,000   $0.80    7/2/2014   6/1/2016

Warrants exercised (3)

   (26,200,000)               

Expired warrants

   (525,000)               
Balance of Warrants at September 30, 2014   717,492                

Issued per distribution agreement (4)

   145,510   $0.13    12/22/2014   12/22/2017

Issued under a private placement memorandum (5)

   750,000   $0.25    8/12/2015   8/15/2016

Issued under a private placement memorandum (5)

   125,000   $0.25    8/19/2015   8/15/2016

Issued under a private placement memorandum (5)

   50,000   $0.25    9/8/2015   8/15/2016

Stockbridge issued as part of convertible agreement (6)

   3,500,000   $0.10    8/31/2015   8/31/2020

Expired warrants

   (300,000)               
 Balance of Warrants at September 30, 2015   4,988,002                

 

 

(1) As discussed in Note 11, on December 23, 2013, the Company issued a three-year warrant at $.14 to purchase 172,028 shares of stock per a distribution agreement.

 

(2) On July 2, 2014, the Company issued stock purchase warrants as part of stock subscription agreements.

 

(3) On February 5, 2014, Stockbridge submitted Warrant Exercise Notices pursuant to which it exercised all of its 26,200,000 outstanding warrants. Stockbridge elected to use the cashless exercise option provided for in the warrants, which resulted in the issuance of 22,457,143 shares of common stock.

 

(4) As discussed in Note 11, on December 22, 2014, the Company issued a three-year warrant at $.13 to purchase 145,510 shares of stock per a distribution agreement.

 

(5) Between August 12, 2015 and September 8, 2015, the Company issued stock purchase warrants as start of stock subscription agreements.

 

(6) As discussed in Note 9, on August 31, 2015, the Company issued a five-year warrant to Stockbridge for the extension of the maturity date on the line of credit. The Company recorded the fair value of the warrants, totaling $392,945, as a loss on extinguishment of debt for the year ending September 30, 2015.

 

 F-14 

 

The following is a summary of the Company’s warrant activity for the years ended September 30, 2015 and 2014:

 

      

 

 

 

 

Warrants

    

 

Weighted

Average

Exercise

Price

    Weighted Average Remaining Contractual Life in Years 
                  
 Balance of Warrants at September 30, 2013    27,170,464   $0.12    4.62 
 

   Granted

    272,028   $0.31    2.02 
    Exercised    (26,200,000)  $0.10      
    Expired    (525,000)  $1.00      
 

Balance of Warrants at September 30, 2014

    717,492   $0.43    1.35 
 

   Granted

    4,570,510   $0.13    4.02 
    Exercised    —             
    Expired    (300,000)  $0.41      
 

Balance of Warrants at September 30, 2015 - outstanding

    4,988,002   $0.16    3.75 
 

Balance of Warrants at September 30, 2015 - exercisable

    4,988,002   $0.16    3.75 

 

 

Stock Options:

 

On October 4, 2013, the Company granted 433,333 stock options to corporate officers and 150,000 to a Board member. The options are exercisable at $.11 per share with a ten year term. The options for the Board member vested immediately, the others vest equally over three years.

 

On December 5, 2014, the Company repurchased 200,000 options from a former consultant for $2,500 as part of a settlement agreement.

 

On September 5, 2014, the Company granted 433,333 stock options to corporate officers, 200,000 stock options to a marketing consultant and product designer, and 150,000 stock options to a Board member. The options are exercisable at $.25 per share with a ten year term. The options for the Board member vested immediately, all others vest equally over three years.

 

On April 2, 2015, the Company entered into an agreement with an option holder through which his option to purchase 200,000 shares with an exercise price of $.50, was cancelled and he was granted a new option to purchase the same number of shares at a reduced price of $.10. The Company recognized an expense of $3,640 in the year ended September 30, 2015 as a result of this stock option grant.

 

On August 17, 2015, the Company granted 500,000 stock options to a corporate officer. The options are exercisable at $.25 per share with a ten year term. The options will vest equally over three years.

 

The Company determines the fair value of stock options issued on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used for determining the fair value of the options granted during the years ended September 30, 2015 and 2014:

 

  For the year ended September 30,
  2015   2014
Expected stock price volatility 32.78-32.90%   31.18-36.96%
       
Expected dividend yield 0.00%   0.00%
       
Risk-free interest rate 1.92-2.16%   1.41-1.69%
       
Option life 10.00 years   10.00 years
       
Stock-based compensation recognized $68,438   $56,119
       
Unrecognized compensation expense to be recognized in future periods $75,116   $74,000
       

 

We have recently become a public company and common stock transactions were too infrequent, therefore we could not practicably estimate the expected volatility of our own stock. Accordingly, we have substituted the historical volatility of a relevant comparable company that is publicly traded and does business within the industry we operate.

 

The following is a summary of stock option activity for the years ended September 30, 2015 and 2014:

  

Number of
Stock Options

  Weighted
Average
Exercise Price
  Weighted Average Remaining Contractual Term in Years  Aggregate
Intrinsic Value
 Balance of Options at September 30, 2013    4,727,844   $0.37    5.66   $(1,040,126)
    Granted    1,366,666   $0.19    10.00    (70,500)
    Exercised    —      —      —      —   
    Forfeited/Cancelled    (200,000)  $0.50    —      —   
 Balance of Options at September 30, 2014    5,894,510   $0.33    5.89   $(1,061,012)
    Granted    700,000   $0.21    10.00    (43,000)
    Exercised    —      —      —      —   
    Forfeited/Cancelled    (1,200,000)  $0.38    —      —   
 Balance of Options at September 30, 2015    5,394,510   $0.27    6.15   $(485,506)
 

Vested at September 30, 2015

    3,466,730                

 

 

 F-15 

 

Note 12 - Customer Rebates

 

As part of an agreement with its domestic distributor, the Company agreed to provide free product to assist in promotional efforts by the distributor. This free product was recognized as credits on future orders as placed. During the years ended September 30, 2015 and 2014, this resulted in $0 and $74,648, respectively, being recognized as customer credits against revenue and $0 and $14,238, respectively, in samples expense. No further credit remains to be granted per this agreement.

 

Note 13 - Concentrations

 

The Company generally sells through a limited number of large distributors. The Company invoices the distributors directly as opposed to the ultimate retail store. Consequently, the Company’s sales are to a small number of customers. For the years ended September 30, 2015 and 2014, sales to our major distributor was approximately 65% and 72%, respectively, of our total sales.

 

The Company’s products are manufactured by a factory in China. The ability of the Company to meet product order deadlines would be significantly impacted if the factory were to permanently cease operations for reasons outside of our control. During the years ended September 30, 2015 and 2014, the Company purchased 100% and 34%, respectively, of their products from this factory.

 

Note 14 - Subsequent Events

 

On October 15, 2015 the Company entered into an agreement with a patent attorney to provide intellectual property services as in-house patent counsel. The term of the agreement is one year. Per the agreement, he will be paid cash compensation of $2,500 per month as well as monthly stock option grants.

On November 5, 2015, the Company issued 641,200 restricted shares of common stock to a related party as payment for interest on loans to the Company for September 2015, at a cost basis of $0.05 per share.

On December 31, 2015, the Company issued 1,282,400 restricted shares of common stock to a related party as payment for interest on loans to the Company for October and November 2015, at a cost basis of $0.05 per share. Additionally, the Company issued an aggregate 200,000 restricted shares of common stock to two shareholders at a cost basis of $0.10 per share pursuant to two subscription agreements dated between December 3, 2015 and December 14, 2015, and 96,071 restricted shares of common stock as compensation to a consultant for services rendered to the Company between April 1, 2015 and September 30, 2015. The shares were valued at the average trading price over the period of service, which approximated fair value, in the amount of $12,750.

On January 22, 2016, the Company entered into an Allonge to the convertible note held by our primary debt holder, who is a related party, by which our line of credit was increased by $200,000 and the conversion price of the outstanding principal balance was adjusted to $.08 from $.10.

 F-16 

 

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

 

None

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Based on an evaluation as of the date of the end of the period covered by report, our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as required by Exchange Act Rule 13a-15. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted 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 in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

During the year ended September 30, 2015, management identified the following weaknesses, which were deemed to be material weaknesses in internal controls:

 

1.Due to the size of the Company and available resources, there are limited personnel to assist with the accounting and financial reporting function, which results in a lack of segregation of duties.
2.During the year ended September 30, 2015, the Company made payments totaling $26,529 to an overseas vendor which were ultimately written off and forfeited. Accordingly, management determined the controls around proper review and acceptance of vendors, prior to disbursing cash, were not sufficient to prevent such losses.
3.As part of our year end procedures, we identified and recorded a complete impairment of our intangible assets. As a result, management deemed the controls around the review and identification of such matters to be inadequate.
4.The Company identified several related party transactions as part of the year end procedures, which were not previously disclosed.

 

Changes in Internal Control and Financial Reporting

 

Our management, including our principal executive officer and principal financial officer, 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.

 

ITEM 9B. OTHER INFORMATION.

 

None.

 

 40 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Identification of Directors and Executive Officers and Term of Office

 

The following table sets forth the names and ages of our current directors and executive officers. Our Board of Directors appoints our executive officers. Each director of the Company serves for a term of one year or until the successor is elected at the Company's annual shareholders' meeting and is qualified, subject to removal by the Company's shareholders. Each officer serves, at the pleasure of the Board of Directors, for a term of one year and until the successor is elected at the annual meeting of the Board of Directors and is qualified. There are no family relationships among our directors or executive officers. None of our directors or officers has been affiliated with any company that has filed for bankruptcy within the last five years. The Company is not aware of any proceedings to which any of the Company’s officers or directors, or any associate of any such officer or director, is a party adverse to the Company or any of the Company’s subsidiaries or has a material interest adverse to it or any of its subsidiaries.

 

Name Age   Position
Jeffrey Rassas 53   Chief Executive Officer and Director
Jessica Smith 37   Chief Financial Officer, Secretary and Treasurer
Dr. Daniel E. Cohen 62   President, Chief Medical Officer, and Director
Ronald L. Miller Jr. 51   Director

 

Background and Business Experience

 

The business experience during the past five years of the person presently listed above as an Officer or Director of the Company is as follows:

 

Jeffrey Rassás.  Mr. Rassás served as CEO and President at YouChange Holdings Corp. (publicly traded/YCNG) from 2008 to 2012. Mr. Rassás served as President and CEO of Global Alerts, holding company for Earth911.com and Pets911.com.  As CEO, Jeffrey led the team that acquired Earth911.com, Pets911.com and AMBERalert.com from a local Arizona company in 2006, whereupon executing a new strategy; recruiting a new management team and successfully executing the company’s plan led to several of the divisions achieving national success and distinction and significantly higher values, and the successful sale of AMBERalert.com. Prior to Global Alerts, Mr. Rassás served as Co-chairman and CEO of ImproveNet, Inc. (publicly traded/IMPV), which he acquired through a merger in 2002.  Rassás’ strategic vision and execution led to industry recognition of the company as “Best of Web” by Money Magazine.  In 2005, he sold the company to IAC/InterActiveCorp (IACI), the holding company of many popular websites such as LendingTree, Ask.com, Match.com, Citysearch.com, ServiceMagic.com, and Ticketmaster, delivering a substantial return on shareholder equity.   From 1997-2001, Mr. Rassás served as founder, CEO, and Chairman of the Board of publicly traded EBIZ Enterprises, a Linux solutions provider where he expanded company operations, yielding revenues in excess of $58 million. In addition, Mr. Rassás raised over $20 million dollars and took the company public in 1998.   A two-time finalist for Ernst & Young’s Entrepreneur of the Year award, Mr. Rassás has been a guest speaker at Thunderbird, the School of Global Management, serves on several outside boards including Executive Chairman of PSIOH/Timefire (a Virtual Reality content developer start-up).

 

Jessica Smith. Ms. Jessica Smith, CPA has been practicing accounting since graduating from Arizona State University in 2000. Ms. Smith started her career with Arthur Andersen, LLP and moved on to working with several companies in the private sector before starting her own accounting practice in 2008. Ms. Smith currently services a number of small and large local businesses with their financial accounting needs. Ms. Smith is a member of several organizations, including the American Institute of Certified Public Accountants, the Arizona Society of Certified Public Accountants and the National Association of Tax Preparers.

 

Dr. Daniel E. Cohen MD. Dr. Dan Cohen co-founded CNS Inc. a developer and marketer of hi-tech medical equipment (brainwave monitors and sleep disorders diagnostics) and consumer products in 1982. CNS was best known for the Breathe Right® nasal strip and FiberChoice™ chewable fiber supplement. It was acquired by GlaxoSmithKline in 2006 for $566 million. Dr. Cohen also co-founded Round River Research Corp. in 1997 to study the healing and psycho-spiritual effects of synchronized sounds, vibrations and electromagnetic fields. He holds numerous patents related to EEG signal processing, physiologic analysis algorithms and additional utility patents related to synchronized sound, vibration and electromagnetic fields and their effect on the body and mind. Dr. Cohen has a BS from Penn State University and MD from Temple Medical School. He trained in Neurology at the University of Minnesota Hospitals and Clinic and is a Diplomat of the American Board of Psychiatry and Neurology. While presently not practicing clinical neurology, he remains a board-certified neurologist.

 

Ronald L. Miller, Jr. Mr. Miller has served as Vice President, Chief Financial Officer, and Secretary of Modern Round Entertainment Corporation, or Modern Round, since December 2015.  Mr. Miller has been a principal of a predecessor and current subsidiary of Modern Round since February 2014 and has served as its Chief Financial Officer since April 2015.  Mr. Miller also has served as a director and Chairman of the Audit Committee of Quest Resource Holding Corporation since October 2012.  Mr. Miller served as a director of one of Quest’s predecessors, Earth911, from July 2010 to October 2012.  Mr. Miller served as Chief Executive Officer of Southwest Capital Partners, LLC, an investment banking firm, from September 2009 to March 2015.  He served as a Managing Director of CKS Securities LLC, an investment banking firm, from February 2010 to December 2011.  Mr. Miller served as Vice Chairman of Miller Capital Markets, LLC, a Scottsdale, Arizona headquartered boutique investment banking firm from May 2009 to August 2009.  He served as Chief Executive Officer of Alare Capital Partners, LLC, a Scottsdale-based investment banking and strategic advisory firm, from September 2005 to May 2009.  From 2001 to 2005, Mr. Miller served as a Managing Director of The Seidler Companies Incorporated, an investment banking firm and member of the NYSE.  Mr. Miller served from 1998 to 2001 as a Senior Vice President and was instrumental in the opening of the Phoenix, Arizona office of Wells Fargo Van Kasper.  From 1994 to 1998, Mr. Miller served as Senior Vice President of Imperial Capital, and from 1993 to 1994, was associated with the Corporate Finance Department of Ernst & Young.  Mr. Miller began his career in the M&A department of PaineWebber, Inc.

 

 41 

 

Identification of Significant Employees

 

We have no significant employees other than our officers and directors.

 

Family Relationship

 

We currently do not have any officers or directors of our Company who are related to each other.

 

Potential Conflicts of Interest

 

The Board of Directors has not established a nominating committee. The Board is of the opinion that such committee is not necessary since the Company has only two directors, and to date, such directors have been performing the functions of such committee. Thus, there is a potential conflict of interest in that our directors and officers have the authority to determine issues concerning management compensation and nominations. We are not aware of any other conflicts of interest with any of our executive officers or directors.

 

Involvement in Certain Legal Proceedings

 

During the past ten years no director, executive officer, promoter or control person of the Company has been involved in the following:

 

  (1) A petition under the Federal bankruptcy laws or any state insolvency law which was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;

 

  (2) Such person was convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);

 

  (3) Such person was the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities:

 

    i.  Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;

 

    ii.   Engaging in any type of business practice; or

 

    iii.  Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws;

 

  (4) Such person was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph (f)(3)(i) of this section, or to be associated with persons engaged in any such activity;

 

  (5) Such person was found by a court of competent jurisdiction in a civil action or by the Commission to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended, or vacated;

 

  (6) Such person was found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated;

 

  (7) Such person was the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:

 

    i.  Any Federal or State securities or commodities law or regulation; or

 

    ii.  Any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or

 

    iii.  Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

 

  (8) Such person was the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

 42 

 

Code of Ethics

 

The Company has not adopted a code of ethics that applies to its principal executive officers, principal financial officers, principal accounting officers or controller, or persons performing similar functions. We anticipate that we will adopt a code of ethics when we increase the number of our directors and officers, or the number of employees.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who beneficially own more than ten percent of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of change in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten percent stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us under Rule 16a-3(e) during the year ended September 30, 2015, Forms 5 and any amendments thereto furnished to us with respect to the year ended September 30, 2015, and the representations made by the reporting persons to us, we believe that during the year ended September 30, 2015, our executive officers and directors and all persons who own more than ten percent of a registered class of our equity securities complied with all Section 16(a) filing requirements.

 

 

ITEM 11. EXECUTIVE COMPENSATION

 

Compensation of Officers

 

The following tables set forth certain information about compensation paid, earned or accrued for services by our executive officers in the fiscal years ended September 30, 2015, and September 30, 2014.

 

A summary of cash and other compensation paid in accordance with management consulting contracts for our executives for the most recent two years is as follows:

 

 Name and Principal              Stock Awards  Option Awards(5,6)   Non-Equity Incentive Plan Compensation  Nonqualified Deferred Compensation Earnings  All other compensation  Total
Position  Title  Year  Salary ($)  Bonus ($)  ($)  ($)  ($)  ($)  ($)  ($)
(a)     (b)  (c)  (d)  (e)  (f)  (g)  (h)  (i)  (j)
Jeffrey Rassas(1)  CEO and Chairman   2015   $200,769   $0   $0   $0    0    0    0   $200,769 
   of Directors    2014   $161,538   $0   $0   $24,897    0    0    0   $171,925 
Jessica Smith(2)  CFO, Secretary   2015   $87,500   $0   $0   $0    0    0    0   $87,500 
   and Treasurer   2014   $87,500   $0   $0   $7,469    0    0    0   $90,616 
Dr. Daniel   President and   2015   $15,624   $0   $0   $32,545    0    0    0   $48,169 
Cohen(3)  Director   2014   $0   $0   $0   $0    0    0    0   $0 
Ronald L. Miller,  Director   2015   $0   $0   $0   $0    0    0    0   $0 
Jr.      2014   $0   $0   $0   $4,674    0    0    0   $4,674 
Dr. Lorrie Former   2015   $0   $0   $0   0    0    0    0   $0 
Henderson (4)  COO    2014   $42,656   $0   $38,438   0    0    0    0   $81,094 

 

Notes to Summary Compensation Table:

 

(1)On July 16, 2013, the Company entered into a Severance Agreement (the “Agreement”) with Jeffrey Rassas, the Company’s Chief Executive Officer (“Mr. Rassas”) pursuant to which Mr. Rassas will be entitled to the following severance benefits: (i) the Company shall pay to Mr. Rassas his base salary for a period of 12 months following termination without cause; (ii) Mr. Rassas shall be paid any earned and unpaid bonus due; and, (iii) and all unvested stock-based compensation held by Mr. Rassas shall vest as of the date of termination. The preceding description of the Agreement is a brief summary of its terms and does not purport to be complete, and is qualified in its entirety by reference to the Severance Agreement, a copy of which was filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the Commission on July 16, 2013 and is incorporated herein by reference.
(2)On September 20, 2012, the Company entered into an agreement with a company owned by its CFO for her services as CFO on a contract basis in exchange for a fixed monthly fee.
(3)On August 17, 2015, the Company entered into that certain Consulting Agreement with Dr. Daniel Cohen (“Dr. Cohen”) pursuant to which he shall provide consulting services to the Company for a term of one year, unless earlier terminated, in exchange for a consulting fee in the form of an annual salary of One Hundred Twenty Five Thousand Dollars ($125,000.00) and 500,000 total stock options to purchase shares of common stock. The options are exercisable at $0.25 per share and vest over the next four years. The company has calculated the estimated fair market value of the options granted using the Black-Scholes Option Pricing model and the following assumptions: stock price at valuation, $.18, expected term of 10 years, exercise price of $.25, a risk free interest rate of 2.16%, a dividend yield of 0% and a volatility of 32.78%.
(4)Dr. Lorrie Henderson resigned from his position as Chief Operating Officer of the Company on May 21, 2014.
(5)On October 4, 2013, Jeffrey Rassas, Jessica Smith and Ronald L. Miller, Jr. were granted 333,333, 100,000 and 150,000 options to purchase shares of common stock, respectively. The options are exercisable at $.11 per share of common stock over a ten year term. The options for Ronald L. Miller, Jr. vested immediately, all others vest equally over the next three years. The Company has calculated the estimated fair market value of the options granted using the Black-Scholes Option Pricing model and the following assumptions: stock price at valuation, $.08, expected term of 10 years, exercise price of $.11, a risk free interest rate of 1.41%, a dividend yield of 0% and a volatility of 36.96%.
(6)On September 5, 2014, Jeffrey Rassas, Jessica Smith and Ronald L. Miller, Jr. were granted 333,333, 100,000 and 150,000 options to purchase shares of common stock, respectively. The options are exercisable at $.25 per share of common stock over a ten year term. The options for Ronald L. Miller, Jr. vested immediately, all others vest equally over the next three years. The Company has calculated the estimated fair market value of the options granted using the Black-Scholes Option Pricing model and the following assumptions: stock price at valuation, $.16, expected term of 10 years, exercise price of $.25, a risk free interest rate of 2.46%, a dividend yield of 0% and a volatility of 32.97%.

 

Other than the foregoing, the Company has no agreement that provides for payment to executive officers at, following, or in connection with the resignation, retirement or other termination, or a change in control of Company or a change in any executive officer's responsibilities following a change in control.

 

 

 43 

 

Outstanding Equity Awards at Fiscal Year-End

 

The table below summarizes the outstanding equity awards to our executive officers as of September 30, 2015.

 

OPTION AWARDS

Name

 

Number of Common Shares Underlying Unexercised Options

(#)

Exercisable

Number of Common Shares Underlying Unexercised Options

(#)

Unexercisable

Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)

Option Exercise Price

($)

Option Expiration Date
Jeffrey Rassas 666,666 333,334 nil $0.30 1/25/2023
  111,111 222,222 nil $0.11 10/4/2023
  111,111 222,222 nil $0.25 9/5/2024
     Total 888,888 777,778 nil
Jessica Smith 66,666 33,334 nil $0.30 1/25/2023
  33,333 66.667 nil $0.11 10/4/2023
  33,333 66,667 nil $0.25 9/5/2024
           
     Total 133,332 166,668 nil
Daniel Cohen 0 500,000 nil $0.25 8/17/2025
           
     Total 0 500,000 nil

 

 

Compensation of Directors

 

As of September 30, 2015, there is no cash compensation paid to directors for their service on our board of directors.

 

Employment Agreements

 

As disclosed in footnote 1 of the Notes to Summary Compensation Table herein, on July 16, 2013, the Company entered into a Severance Agreement with Jeffrey Rassas, the Company’s Chief Executive Officer pursuant to which Mr. Rassas will be entitled to the following severance benefits: (i) the Company shall pay to Mr. Rassas his base salary for a period of 12 months following termination without cause; (ii) Mr. Rassas shall be paid any earned and unpaid bonus due; and, (iii) and all unvested stock-based compensation held by Mr. Rassas shall vest as of the date of termination. The preceding description of the Agreement is a brief summary of its terms and does not purport to be complete, and is qualified in its entirety by reference to the Severance Agreement, a copy of which was filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the Commission on July 16, 2013 and is incorporated herein by reference.

 

Other than the foregoing, the Company has no agreement that provides for payment to executive officers at, following, or in connection with the resignation, retirement or other termination, or a change in control of Company or a change in any executive officer's responsibilities following a change in control.

 44 

 

 

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 lists, as of February 29, 2016, the number of shares of common stock that are beneficially owned by (i) each person or entity known to the Company to be the beneficial owner of more than 5% of the outstanding common stock; (ii) each officer and director of the Company; and (iii) all officers and directors as a group. Information relating to beneficial ownership of common stock by principal shareholders and management is based upon information furnished by each person using “beneficial ownership” concepts under the rules of the Securities and Exchange Commission. Under these rules, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or direct the voting of the security, or investment power, which includes the power to vote or direct the voting of the security. The person is also deemed to be a beneficial owner of any security of which that person has a right to acquire beneficial ownership within 60 days. Under the Securities and Exchange Commission rules, more than one person may be deemed to be a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to which he or she may not have any pecuniary beneficial interest. Except as noted below, each person has sole voting and investment power. 

 

Name and Address of Beneficial Owner,

Directors and Officers:

 

Amount and Nature of Beneficial Ownership

Percentage of Beneficial Ownership (1)

Jeffrey Rassas ICO (2)

Hayjour Family Limited Partnership

12689 N 120th Pl

Scottsdale, AZ 85259

2,888,076 3.88%

Jessica Smith(3)

7377 E Doubletree Ranch Rd Suite 260

Scottsdale, AZ 85258

133,332 0.18%

Daniel Cohen

7377 E Doubletree Ranch Rd Suite 260

Scottsdale, AZ 85258

 

0

 

0.00%

Ronald L. Miller, Jr.(5)

7377 E Doubletree Ranch Rd Suite 260

Scottsdale, AZ 85258

500,023 0.67%
All executive officers and directors as a group (4 people) 3,521,431 4.73%
     
Beneficial Shareholders greater than 5%    

Stockbridge Enterprises LP

7377 E DoubleTree Ranch Rd Suite 200

Scottsdale, AZ 85258

21,643,471 29.08%

Southwest Capital Partners, LLC

7377 E. Doubletree Ranch Rd., Suite 200

Scottsdale, AZ 85258

4,066,000 5.46%

 

  (1)    Applicable percentage of ownership is based on 74,429,954 shares of common stock outstanding on February 29, 2016. Percentage ownership is determined based on shares owned together with securities exercisable or convertible into shares of common stock within 60 days of February 29, 2016, for each stockholder. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.  Shares of common stock subject to securities exercisable or convertible into shares of common stock that are currently exercisable or exercisable within 60 days of February 29, 2016, are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.  Our common stock is our only issued and outstanding class of securities eligible to vote. 
  (2) Jeffrey Rassas is the Company’s CEO and Director. Mr. Rassas’ beneficial ownership includes: 1,999,188 shares of restricted common stock and 888,888 shares issuable upon the exercise of stock options which have vested as of the date of this report.
  (3)

Jessica Smith is the Company’s CFO, Secretary and Treasurer. Ms. Smith’s beneficial ownership includes 133,332 shares issuable upon the exercise of stock options, which have vested as of the day of this report.

  (4) Dr. Daniel Cohen is the Company’s President and Director. Dr. Cohen’s beneficial ownership includes 0 shares issuable upon the exercise of stock options, which have vested as of the day of this report
  (5)

 

 

Ronald L. Miller, Jr. is a Director of the Company. Mr. Miller’s beneficial ownership includes 450,000 shares issuable upon exercise of stock options which have vested as of the day of this report and 50,023 total shares purchased in May 2014. Of these shares 21,250 were purchased by Windsor Westfield Management, LLC and 21,250 shares of common stock were purchased by Chickamauga Enterprises, L.P. Both companies are indirectly controlled by Mr. Miller. The remaining 7,523 shares are held directly by Mr. Miller.

 

Change in Control

 

 There are no present arrangements or pledges of the Company’s securities that may result in a change in control of the Company.

 

 45 

 

 

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

 

Director Independence

 

For purposes of determining director independence, we have applied the definitions set out in NASDAQ Rule 5605(a)(2). The OTCBB on which shares of common stock are quoted does not have any director independence requirements. The NASDAQ definition of “Independent Director” means a person other than an Executive Officer or employee of the Company or any other individual having a relationship which, in the opinion of the Company's Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

 

According to the NASDAQ definition, Jeffrey Rassas and Dr. Daniel Cohen are not independent directors because each is also an executive officer of the Company. According to the NASDAQ definition, Ronald L. Miller is an independent director.

 

Related Party Transactions

 

As detailed in Notes 7 and 8, the Company has a note payable to its former President, a convertible note payable to a former advisory board member and another convertible note with an entity that owns 58.4% of our outstanding shares.

 

On December 5, 2013, the Company entered into a share re-purchase agreement with the former President to buy back 7,567,622 shares of common stock held by him and entities under his control.  Other outside investors were granted the opportunity to participate in this purchase, with 1,550,000 shares being purchased directly from the former President by others, and 6,017,622 being re-purchased by the Company and cancelled.  Upon completion of this transaction on December 17, 2013, our former President no longer has any ownership in the Company.

 

As disclosed in Note 12, on October 4, 2013, the Company granted a total of 583,333 stock options to officers and a Board member. Additionally, on September 5, 2014, the Company granted a total of 783,333 stock options to officers, significant consultants and a Board member.

 

On February 5, 2014, our primary debt holder and a 58.4% shareholder submitted Warrant Exercise Notices pursuant to which it exercised all of its 26,200,000 outstanding warrants. The holder elected to use the cashless exercise option provided for in the warrants, which resulted in the issuance of 22,457,143 shares of common stock. Additionally, during the year ended September 30, 2015, the Company borrowed an additional $498,000 against the convertible secured note and issued 7,277,533 shares of stock in payment of interest on the convertible note.

 

The Company paid $87,500 during the years ended September 30, 2015 and 2014 to a company owned by its CFO for her services as CFO. Additionally, we granted 0 and 200,000 options to our CFO directly for the years ended September 30, 2015 and 2014, respectively.

 

The Company paid $15,624 during the year ended September 30, 2015 to a company owned by its President for his services as President. Additionally, we granted 500,000 options to our President directly during the year ended September 30, 2015.

 

During the years ended September 30, 2015 and 2014, the Company paid zero cash for interest on the related party debt.

 

Other than the foregoing, none of the directors or executive officers of the Company, nor any person who owned of record or was known to own beneficially more than 5% of the Company’s outstanding shares of its Common Stock, nor any associate or affiliate of such persons or companies, has any material interest, direct or indirect, in any transaction that has occurred during the past fiscal year, or in any proposed transaction, which has materially affected or will affect the Company.

 

With regard to any future related party transaction, we plan to fully disclose any and all related party transactions in the following manner:

 

·Disclosing such transactions in reports where required;
·Disclosing in any and all filings with the SEC, where required;
·Obtaining disinterested directors consent; and
·Obtaining shareholder consent where required.

 

Review, Approval or Ratification of Transactions with Related Persons

 

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.

 

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

On January 16, 2015, the Company appointed D. Brooks and Associates CPA’s, P.A. as the Company’s registered independent public accounting firm. Our principal independent accountant during the year ended September 30, 2014 was Weinberg & Baer, LLC. Their pre-approved fees billed to the Company are set forth below:

 

  

For Fiscal Year Ended

September 30, 2015

 

For Fiscal Year Ended

September 30, 2014

Audit Fees  $30,000   $35,000 
Audit-related fees  $Nil   $Nil 
Tax Fees (Paid to Weinberg & Baer LLC)  $1,000   $858 
All other Fees  $Nil   $Nil 
Total  $31,000   $35,858 

 

 Audit Fees

 

During the fiscal year ended September 30, 2015, we incurred approximately $30,000 in fees to our principal independent accountants for professional services rendered in connection with the audit and review of our financial statements for fiscal year ended September 30, 2015.

 

During the fiscal year ended September 30, 2014, we incurred approximately $35,000 in fees to our principal independent accountants for professional services rendered in connection with the audit and review of our financial statements for fiscal year ended September 30, 2014.

 

Audit-Related Fees

 

The aggregate fees billed during the fiscal years ended September 30, 2015 and 2014 for assurance and related services by our principal independent accountants that are reasonably related to the performance of the audit or review of our financial statements (and are not reported under Item 9(e)(1) of Schedule 14A) was $NIL and $NIL, respectively.

 

Tax Fees

 

The aggregate fees billed during the fiscal years ended September 30, 2015 and 2014 for professional services rendered by our tax accountant for tax compliance, tax advice and tax planning were $1,000 and $858, respectively. Tax services performed by Weinberg & Baer, LLC were pre-approved by our audit committee.

 

All Other Fees

 

The aggregate fees billed during the fiscal years ended September 30, 2015 and 2014 for products and services provided by our principal independent accountants (other than the services reported in Items 9(e)(1) through 9(e)(3) of Schedule 14A) was $NIL and $NIL, respectively.

 

PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

 

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.

 

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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: March 4, 2016 By: /s/ Jeffrey Rassas  
 

Name:  Jeffrey Rassas

Title:    Chief Executive Officer and Director

 

 Date: March 4, 2016 By: /s/ Jessica Smith  
 

Name:  Jessica Smith

Title:    Chief Accounting and Financial Officer

 

 Date: March 4, 2016 By: /s/ Dr. Daniel Cohen  
 

Name:  Dr. Daniel Cohen

Title:    President and Director

   

 

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.

 

  Airware Labs Corp.
   
 Date: March 4, 2016 By: /s/ Jeffrey Rassas  
 

Name:  Jeffrey Rassas

Title:    Chief Executive Officer and Director

  

 Date: March 4, 2016 By: /s/ Dr. Daniel Cohen  
 

Name:  Dr. Daniel Cohen

Title:    President and Director

 

 Date: March 4, 2016 By: /s/ Ronald L. Miller, Jr.  
 

Name:  Ronald L. Miller, Jr.

Title:    Director

 

 

 

48