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 8399 East Indian School Road, Suite 202, Scottsdale, AZ 85251. 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.
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 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 allergies, and athletic enthusiasts throughout the United States, Canada 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 life, health, the wellbeing of people, and promote good breathing. The developing line of our breathing products addresses a wide range of issues, including sleeping disorders, headaches, nausea, congestion, allergies, snoring, and travel-related illnesses. Using the latest in cutting-edge technology and equipment, and advised by physicians, engineers and scientists, the materials, services, and products of Airware Labs are designed as educational tools and products for the general public. Airware products and services, such as AIR® by Airware Labs, provide consumers around the world with safe and effective methods to control their own personal environment. AIR® filter products contain 3M filters for allergy sufferers and for mass-transit travelers. Other AIR® products help with congestion, insomnia, headaches, nausea and snoring.
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 only manufactures Airware products. Airware’s corporate headquarters are located in Scottsdale, Arizona and house 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 entire 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.
In June of 2012, Quest secured orders from many regional and national grocery and drug chains to carry several of the AIR® products. Additionally, 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. Airware and Quest continue to increase product placement and recently expanded into Canada in the Fall Season of 2013. Airware has plans to implement an online marketing program to provide increased visibility to the AIR® product line, clinical studies and traffic to retail partners. Airware plans on recruiting and hiring a marketing veteran to assume the position of Chief Marketing Officer to lead this online rollout, which includes social media, video production and viral distribution, affiliate marketing, search and content.
Business Opportunity & Product Solutions
Breathing is the most important of basic human functions and accounts for 70% of the body's waste removal. The 21,600 breaths taken by people daily are all opportunities to impact overall health as unobstructed nasal breathing increases oxygen intake, promotes detoxification and helps with cellular rejuvenation.
According to the research study conducted by Kline & Company in November 2011, the market for natural remedies has grown at a compounded annual growth rate of 5.9% per year from 2009 to 2011, and according to Global Industry Analysts, Inc. is expected to reach $115 billion by 2015. Information from the press release also detailed that 40% of consumers were using more natural over-the-counter (“OTC'S”) than they had in the year previously, at the time of the 2011 report.
Despite the general economic downturn, consumers continue to demonstrate their interest in and demand for natural ways to improve their health. As such, with an entire line of AIR® products available, Airware sees a great opportunity to pursue such business based on vendor demand and the following facts with the associated AIR® solution:
Americans currently spend over $34 billion annually on alternative medicine
25% of the population suffers from allergies, spending $5.6 billion annually for medications that treat rather than prevent allergens from entering the system (AIR® Allergy)
$4 billion spent annually for OTC cough/cold medicines, many of which have unpleasant side effects (AIR® Decongest)
Sleep deprivation is a serious and rampant problem, demonstrated by the expected annual sales of OTC sleep aids reaching or exceeding $759 million annually. People who sleep less than 6 hours per night have a 70% higher mortality rate than those sleeping 7-8 hours (AIR® Breathe, AIR® Sleep/Snore)
45% of the population snores, creating a demand for an effective solution to this widespread problem (AIR® Breathe, AIR® Sleep/Snore)
The sale of sports related supplements is rapidly on the rise, growing 22% in 2011, and expected to reach $20 billion in retail sales in 2013 (AIR® Sport)
The sale of nasal strips exceeded $100 million in 2011, though strips are less effective and not discreet (AIR® Breathe)
Recent marketing efforts to promote nasal strips as a lifestyle choice to improve breathing, sleep and overall well-being indicate a need for this type of product for mainstream consumers (AIR® Breathe)
1.9 billion airplane trips are taken every year, and airplane cabin air is a notoriously unhealthy breeding ground for bacteria and viruses. At this time, the only available solution is an uncomfortable, unsightly facemask. The 2003 SARS outbreak demonstrated widespread exposure as far as 7 rows away from an infected individual (AIR® Travel)
The AIR® nasal dilator is made from FDA-approved, latex-free/adhesive-free hypoallergenic medical grade material and has passed both Cytotoxicity and an intracutaneous reactivity testing. The product is discreet, positioned on the inner nose, just at the nostrils edge, gently lifting and supporting the nasal valve passages, and opening airways. Unlike nasal strips, whose sales exceeded $100M in 2011, the AIR® product with its 20 patents can be worn all day and night in comfort, without altering appearance.
Two Airware Labs products, AIR® Allergy and AIR® Travel, are manufactured with 3M's Filtration Media. The two products, which are the only of their kind in the marketplace, offer a higher level of efficacy due to this strategic inclusion of the 3M filters. AIR® Allergy with 3M Filtration Media and AIR® Travel with 3M Filtration Media capture 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 travel-borne illnesses. AIR® Allergy and AIR® Travel are the only proactive, non-medical products available to mass consumers that contain a 3M Filter. This filter helps with preventing the introduction of allergy causing contaminants, which is the most effective way to decrease symptoms such as runny nose and sneezing. The product is worn discreetly inside the nose, allowing day use in addition to night.
Our 3M™ Air Filter Media 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 and AIR® Travel products is the first use of the technology in this format.
Products
We have developed the following four product lines, which are described in detail below:
· Breathe Products
· Filters Products
· Essentials Products
· Sport Products
BREATHE PRODUCTS
AIR® Breathe is a globally patented FDA exempt Class 1 medical device, made from soft, medical-grade material. Air® Breathe is an adhesive-free nasal breathing aid that provides instant relief for congestion and snoring caused by nasal constriction. AIR® fits comfortably and discreetly inside the nose, opening the nasal valve, and increasing airflow up to 40%. This breakthrough breathing technology is designed to allow consumers to take advantage of their powerful nasal system for optimal health.
Air® Breathe
Experience the benefits of better breathing with Air® Breathe:
Increases airflow 38% more than nasal strips
Drug-free, adhesive-free
Instantly relieves nasal congestion
Clinically proven to reduce snoring
Discreet enough for daytime use
Soft, comfortable, and nearly invisible
Latex-free
FILTERS PRODUCTS
AIR® Filters (Allergy and Travel) provide the enhanced breathing provided by AIR® Breathe with an innovative 3M Filter. This discreet, personal nasal filter traps allergens and other airborne contaminants, such as bacteria and viruses, without reducing airflow.
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
Air® Travel
Air® Travel is a discreet personal filter that helps protect you from inhaling the bacteria and viruses commonly found in airplanes, trains and other forms of mass transit. Air® Travel fits just inside the nose and uses filtration media from 3M to put a barrier between you and airborne germs. Air® Travel is also lightly infused with a blend of premium essential oils that are shown to help provide antimicrobial protection.
Relax and enjoy the ride with Air® Travel:
Helps reduce the inhalation of common bacteria and viruses
Filtration media from 3M
Easy to breathe through
Soft, comfortable and discreet
Individually wrapped and easy to pack
Latex-free
ESSENTIALS PRODUCTS
AIR® Essentials (Sleep/Snore, Nausea, Headache and Decongest) are infused with therapeutic essential oils specifically formulated to provide drug-free relief to common ailments and increase athletic performance.
Sleep/Snore
Air® Essentials Sleep/Snore provides instant, drug-free relief for congestion and snoring caused by nasal constriction. It fits discreetly and comfortably just inside the nose to gently open nasal passages and increase airflow 38% more than nasal strips. Air® Essentials 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® Essentials Sleep/Snore:
Clinically proven to increase airflow 38% more than nasal strips
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
Nausea
Air® Essentials Nausea provides fast, drug-free relief for a queasy stomach. By gently opening your nasal passages, Air® Essentials Nausea naturally increases airflow, helping reduce queasiness and calm nausea. Air® Essentials Nausea is also infused with a soothing ginger essential oil blend that is shown to help ease motion and altitude sickness, and reduce vomiting.
Breathe better. Feel better with Air® Essentials Nausea:
Clinically proven to increase airflow 38% more than nasal strips
Fast-acting and convenient
An effective, non-drowsy alternative to nausea medications
Infused with a soothing ginger essential oil blend
Fits just inside the nose. Soft, comfortable and discreet
Latex-free
Headache
Air® Essentials Headache provides fast, drug-free relief for headaches. By gently opening your nasal passages, Air® Essentials Headache naturally increases airflow to help reduce stress and manage pain quickly. Air® Essentials Headache is also infused with a soothing peppermint essential oil blend that is shown to help reduce headache pain.
Breathe better. Feel better with Air® Essentials Headache:
Clinically proven to increase airflow 38% more than nasal strips
Fast-acting and convenient
Aspirin- and acetaminophen-free
Infused with a soothing peppermint essential oil blend
Fits just inside the nose. Soft, comfortable and discreet
Latex-free
Decongest
Air® Essentials Decongest provides instant, drug-free relief for congestion caused by colds or allergies. It fits discreetly in the nose to gently open nasal passages and increase airflow 38% more than nasal strips. Air® Essentials Decongest is also infused with a soothing eucalyptus essential oil blend that is shown to help reduce congestion from colds and allergies.
Breathe better. Feel better with Air® Essentials Decongest:
Clinically proven to increase airflow 38% more than nasal strips
Instantly helps reduce congestion
Drug-free
Discreet enough for daytime use
Clinically proven to reduce snoring
Soft, comfortable and nearly invisible
Latex-free
SPORT PRODUCTS
Air® Sport is infused with therapeutic essential oils specifically formulated to provide drug-free relief to common ailments and increase athletic performance.
Air® Sport
Air® Sport is a performance enhancing breathing aid that dramatically increases oxygen to fuel every cell in your body. Air® Sport fits discreetly in the nose to gently open nasal passages and increase airflow 38% more than nasal strips. Air® Sport is also infused with an energizing blend of premium essential oils to support a focused, intense, pumped up workout.
Fuel your body. Fuel your workout with Air® Sport:
Dramatically increases oxygen intake and nitric oxide production
Improved endurance, muscle strength and vascularity
Clinically proven to increase airflow 38% more than nasal strips
Infused with a scientific blend of citrus and peppermint essential oils
Speeds up metabolism to aid in weight loss
Caffeine-free & drug-free
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.
ITEM 1A.
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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
Our principal offices are located at 8399 E. Indian School Rd., Suite 202, Scottsdale, AZ 85251. We currently rent this space for $2,477 per month. The lease expires on June 6, 2014. We believe that this space is adequate for our current and immediately foreseeable operating needs.
ITEM 3.
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 November 7, 2011 the Company was named as a defendant in a lawsuit alleging a default on a note payable of $50,000 plus accrued interest. The note and accrued interest are reflected in the Company’s Balance Sheet as of September 30, 2012. During the year ended September 30, 2013, the Note Holder elected to convert his outstanding balance including accrued interest with modified conversion terms.
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 Notes Payable and Convertible Notes Payable as of September 30, 2013 and 2012.
On July 26, 2012, the Company was named as a Defendant in a lawsuit alleging patent infringement. The Company believes the claims were without merit. After the Company vigorously defended the action, the plaintiff moved to dismiss its own claims, and the Court entered judgment in the Company’s favor. The Court also denied the Company’s request for reimbursement of its attorneys’ fees; the Company retains the right to appeal that decision.
On January 22, 2013, David Dolezal (“Mr. Dolezal”), a former officer and director of Airware Labs Corp., filed a Complaint against Airware Labs Corp. in the Superior Court of Arizona in Maricopa County, Case No. CV2013-004194, with regard to allegedly unpaid wages from Airware Labs Corp. Mr. Dolezal sought monetary damages for his claims. On December 11, 2013, the Parties filed a Stipulation for Dismissal and intend to dismiss this lawsuit with prejudice.
On December 5, 2013, the Company entered into a share re-purchase agreement with former officer Mr. David Dolezal to buy back 7,567,622 shares of common stock held by Mr. Dolezal 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 Mr. Dolezal by others, and 6,017,622 being re-purchased by the Company. Upon completion of this transaction on December 17, 2013, Mr. Dolezal no longer has any ownership in the Company.
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.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
PART II
ITEM 5.
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 since we began trading in 2012, based on our fiscal year end September 30. These prices represent quotations between dealers without adjustment for retail mark-up, markdown or commission and may not represent actual transactions.
Record Holders
As of December 31, 2013, there were 32,658,545 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.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
On July 16, 2013, the Company issued 120,600 shares of restricted common stock for payment of interest on loans to the corporation for the month of June 2013, at a cost basis of $0.10 per share.
On August 30, 2013, the Company issued 111,869 restricted shares of common stock for consulting services rendered to the company, at a cost basis of $0.402 per share.
On September 5, 2013, the Company issued 665,768 restricted shares of common stock to an existing shareholder pursuant to a Conversion Notice dated August 7, 2013.
On September 26, 2013, the Company issued 238,096 restricted shares of common stock as payment for principal and interest on a 6.5% Convertible Promissory Note, pursuant to a Conversion Notice dated September 19, 2013.
On September 30, 2013, the Company issued 281,400 restricted shares of common stock for payment of interest on loans to the corporation for the months of July and August 2013, at a cost basis of $0.086 per share.
On September 30, 2013, the Company issued 24,131 restricted shares of common stock for consulting and accounting services, at a cost basis of $0.38 per share.
On September 30, 2013, the Company issued 225,000 restricted shares of common stock for marketing services rendered to the Company, at a cost basis of $0.40 per share.
On September 30, 2013, the Company issued 5,000 restricted shares of common stock for marketing services rendered to the Company, at a cost basis of $0.50 per share.
Subsequent Issuances
On October 9, 2013, the Company issued 255,867 restricted shares of common stock as payment for interest on loans to the Company for September 2013, at a cost basis of $0.057 per share.
On December 10, 2013, the Company issued 291,200 restricted shares of common stock as payment for interest on loans to the Company for November 2013, at a cost basis of $0.05 per share.
Purchases of Equity Securities by the Small Business Issuer and Affiliated Purchasers
None.
ITEM 6.
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.
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.
Results of Operations
Total revenue for the years ended September 30, 2013 and 2012 was $341,991 and $892,187, respectively. The reduction in revenue is due in part to customer rebates given in the form of free goods marketing for Walgreens totaling $395,415 for the year ended September 30, 2013 compared to $137,774 for the year ended September 30, 2012. Cost of goods sold for the year ended September 30, 2013 was $143,822 as compared to $387,793 for the year ended September 30, 2012, resulting in gross profits of $198,169 and $504,394 for the years ended September 30, 2013 and 2012, respectively.
Operating expenses in the year ended September 30, 2013 amounted to $1,592,751 as compared to $4,285,773 for the year ended September 30, 2012. The decrease in expenses is primarily the result of a decrease of $2,998,061 in payroll expenses, which was $112,067 for the year ended September 30, 2013 as opposed to $3,110,127 for the year ended September 30, 2012. The decrease in payroll expenses was primarily due to stock compensation paid to Officers of the Company in the year ended September 30, 2012.
The net loss for the year ended September 30, 2013 was $3,325,069 as compared to $4,100,518 for the year ended September 30, 2012.
Liquidity and Capital Resources
Our balance sheet as at September 30, 2013 reflects $19,942 in cash and cash equivalents. We intend to raise the balance of our cash requirements for the next 12 months (approximately $5,000,000) from private placements or a registered public offering (either self-underwritten or through a broker-dealer). Additionally, we have the Stockbridge secured bridge note to draw from, which as of December 31, 2013 has an available balance of $998,000. If we are unsuccessful in raising enough money through future capital-raising efforts, we may review other financing possibilities such as bank loans. At this time, our Company does not have a commitment from any broker/dealer to provide additional financing. There is no assurance that any additional financing will be available or if available, on terms that will be acceptable.
Cash Flow from Operating Activities
During the year ended September 30, 2013, the Company used $353,544 in cash for operating activities compared with $966,175 for the year ended September 30, 2012. The decrease in cash used for operating activities is primarily due to collecting prior year’s receivables.
Cash Flow from Investing Activities
During the years ended September 30, 2013 and 2012, the Company used $35,534 and $94,875 in cash for investing activities, respectively. The decrease in cash used for investing activities is primarily due to the elimination of notes receivable from related parties.
Cash Flow from Financing Activities
During the year ended September 30, 2013, the Company received $407,620 in cash from financing activities. This consisted of $240,678 in net financing from notes payable, $398,875 in proceeds from the issuance of stock for cash net of amounts paid to raise equity and $231,933 in net repayment of factoring accounts payable and accounts receivable. This compares with $870,433 during the year ended September 30, 2012 which consisted of $308,500 in net financing from notes payable, $325,000 in proceeds from the exercise of warrants, $5,000 in proceeds from the issuance of stock for cash and $231,933 in net proceeds from factoring accounts payable and accounts receivable.
Going Concern
We have not attained profitable operations and are dependent upon obtaining financing to pursue any extensive acquisitions and activities. For these reasons, our auditors stated in their report on our audited financial statements that they have substantial doubt that we will be able to continue as a going concern without further financing.
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
In addition to the Stockbridge secured bridge note, which as of December 31, 2013 has an available balance of $998,000, 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.
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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AIRWARE LABS CORP.
SEPTEMBER 30, 2013
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2013 and 2012, 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, 2013 and 2012, 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.
As discussed in Note 23 to the financial statements, the 2012 financial statements have been restated to correct a misstatement. Our opinion is not modified with respect to this matter.
Respectfully submitted,
Weinberg & Baer, LLC
Baltimore, MD
December 31,
AIRWARE LABS CORP.
(FORMERLY CROWN DYNAMICS CORP.)
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2013 AND SEPTEMBER 30,
The accompanying notes are an integral part of these financial statements
AIRWARE LABS CORP.
(FORMERLY CROWN DYNAMICS CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2013 AND
The accompanying notes are an integral part of these financial statements.
AIRWARE LABS CORP.
(FORMERLY CROWN DYNAMICS CORP.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 2013 AND
The accompanying notes are an integral part of these financial statements.
AIRWARE LABS CORP.
(FORMERLY CROWN DYNAMICS CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2013 AND
The accompanying notes are an integral part of these financial statements.
AIRWARE LABS CORP.
(FORMERLY CROWN DYNAMICS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.Summary of Significant Accounting Policies and Use of Estimates
Basis of Presentation and Organization
Airware Labs Corp. (“Airware Labs” or the “Company”), formerly Crown Dynamics Corp., is a Delaware corporation. The Company was incorporated under the laws of the State of Delaware on June 15, 2010. On October 26, 2012, the Articles of Incorporation were amended to reflect a name change to Airware Labs Corp. On November 13, 2012, the Board approved a change in fiscal year end from December 31 to September 30.
On March 20, 2012, through an equity exchange agreement, the Company acquired all of the issued and outstanding stock of Airware Holdings, Inc., a Nevada corporation (“Airware”), in exchange for shares of the Company’s newly-issued common stock. Airware Holdings, Inc. was formed in February 2010 and is a non-prescription medical products company. The principal business purpose of the Company is to develop, manufacture and distribute nasal breathing devices. The Company targets prospective customers such as compassionate sleeping partners, individuals with allergies and athletic enthusiasts throughout the United States, Canada and Europe.
The share exchange has been accounted for as a recapitalization reverse merger between Airware Holdings, Inc. and Airware Labs Corp. Airware Holdings, Inc. is the accounting acquirer and Airware Labs Corp. is the accounting acquiree. Consequently, the historical pre-merger financial statements of Airware Holdings, Inc. are now those of the Company. The par value of the stock of Airware Holdings, Inc. of $.001 per share has been adjusted to that of the Company of $.0001 per share with the par value difference charged to paid-in capital. The pre-merger deficit is that of Airware Holdings, Inc. Airware Labs Corp’s pre-merger accumulated deficit has been charged to paid-in capital. The pre-merger Airware Holdings, Inc. outstanding shares have been adjusted to reflect the exchange. The pre-merger outstanding shares of Airware Labs Corp. of 17,725,000 with a par value of $1,773 were included in the issued and outstanding shares of the Company at the date of the merger.
The Company has included the Airware Labs Corp. operations from the date of merger, March 20, 2012, in its Statement of Operations and Statement of Cash Flows for the year ended September 30, 2012.
Since the transaction is considered a reorganization and recapitalization, the guidance in ASC 805-10-15 does not apply for purposes of presenting pro-forma financial information.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates. Significant estimates of the Company include accounting for depreciation and amortization, recoverability of intangible assets, deferred income taxes, accruals and contingencies, the imputed interest rate of the note payable to related party and the fair value of common stock, and the estimated fair value of stock options and warrants.
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, 2013 and 2012, no allowance was established for potentially uncollectible accounts receivable as none was deemed necessary. During the years ended September 30, 2013 and 2012, the Company had no write-offs of receivables. The Company’s policy is to record finance charges on outstanding delinquent accounts receivable only if they are collected. Accounts receivable are generally unsecured.
On June 28, 2012, and effective August 29, 2012, the Company entered into a trade financing, guaranty and advance agreement that allows the Company to factor purchase orders and accounts receivable up to the total amounts of $250,000 and $1,000,000, respectively. The Company will pay a fee equal to 4% for the first 30 days and 1.34% for every ten days thereafter against the face amount of each purchase order advance. The Company will pay a fee equal to 1.75% for the first 30 days and 0.875% for every fifteen days thereafter against the face amount of each accounts receivable advance. Factoring advance amounts are secured by substantially all assets of the Company. As of September 30, 2013 and 2012, the Company had amounts payable for factoring of $0 and $231,933, respectively.
Inventory
Inventory is held by a third party and consists of finished goods and is stated at the lower of cost, determined by the first-in, first-out method, or market. Inventories are determined by physical counts.
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. Depreciation expense for the years ended September 30, 2013 and 2012 amounted to $28,565 and $26,563, respectively.
The estimated useful lives of property and equipment are:
· Manufacturing equipment 2-3 years
· Office furniture and equipment 5-7 years
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 tests those assets for impairment by comparing their respective carrying values to estimates of the sum of the undiscounted future net cash flows expected to result from the assets. If the carrying amount of an asset exceeds the sum of the undiscounted net cash flows expected from that asset, the Company recognizes an impairment loss based on the amount by which the carrying value exceeds the fair value of the asset. Loss on impairment of intangible assets for the years ended September 30, 2013 and 2012 totaled $0 and $72,800, respectively. Amortization expense for the years ended September 30, 2013 and 2012 amounted to $34,391 and $34,391 respectively, and is included in general and administrative expenses on the statements of operations.
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company uses an estimate of the related undiscounted cash flows, excluding interest, over the remaining life of the property and equipment or other long-lived asset in assessing its recoverability. Impairment losses are recognized for the amount by which the carrying amount of the asset(s) exceeds the fair value of the asset(s). The Company primarily employs two methodologies for determining the fair value of a long-lived asset: (i) the amount at which the asset could be bought or sold in a current transaction between willing parties; or (ii) the present value of expected future cash flows grouped at the lowest level for which there are identifiable independent cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Loss on impairment of intangible assets for the years ended September 30, 2013 and 2012 totaled $0 and $72,800, 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, 2013 and 2012 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 has been recognized during the years ended September 30, 2013 or 2012.
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, 2010 are open to examination by taxing authorities. The Company is not currently being audited by any of these entities nor has it been audited. The Company believes it has no tax positions for which the ultimate deductibility is highly uncertain. The Company changed its tax year-end from December 31 to September 30 effective with the January 1, 2013 tax year.
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:
·Delivery has been evidenced by the appropriate signature on the delivery ticket;
·A price per unit has been determined; and
·Collectability has been reasonably assured.
Revenues are recorded net of slotting payments and co-operative advertising costs when applicable.
Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices in active markets for identical assets or liabilities,
Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities,
Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimate of assumptions that market participants would use in pricing the asset or liability.
Fair value accounting has been applied to the valuation of stock-based compensation and warrants issued. The valuation methodologies and inputs used are discussed in the respective footnotes.
Stock Options - We estimate the fair value of stock options using the Black-Scholes valuation model. Significant Level 3 assumptions used in the calculation were determined as follows:
·Expected term is determined under the simplified method using an average of the contractual term and vesting period of the award as appropriate statistical data required to properly estimate the expected term was not available;
·Expected volatility is measured using the historical changes in the market price of our common stock, disregarding identifiable periods of time in which share price was extraordinarily volatile due to certain events that are not expected to recur during the expected term;
·Risk-free interest rate is used to approximate the implied yield on zero-coupon U.S. Treasury bonds with a remaining maturity equal to the expected term of the awards; and
·Forfeitures are based on the history of cancellations of warrants granted by us and our analysis of potential future forfeitures.
Warrants - We estimate the fair value of the warrant liability using Level 3 inputs for the valuation of the warrants using the Black-Scholes valuation model.
Net Loss Per Share
Basic earnings per share does not include dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. Dilutive securities are not included in the weighted average number of shares when inclusion would be anti-dilutive. Due to the net losses for the years ended September 30, 2013 and 2012, 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, 2013 and 2012, there were total shares of 42,593,308 and 8,820,344, respectively issuable upon conversion of notes payable, exercise of warrants and vested options that were not included in the earnings per share calculation as they were anti-dilutive.
Shipping and Handling
Shipping and handling costs associated with the shipment of products to the customer are recorded as costs of goods sold.
Advertising Costs
Advertising costs are charged to expense when incurred. Total advertising expense recognized during the years ended September 30, 2013 and 2012 were $9,127 and $2,994, respectively. Advertising expense is included in selling and marketing expenses on the accompanying statements of operations.
Reclassification
Certain items in the 2012 financial statement presentation have been reclassified to conform to the 2013 presentation. Such reclassifications have no effect on previously reported net (loss).
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.
Principals of Consolidation
The accompanying consolidated financial statements include the accounts of Airware Labs Corp and its wholly owned subsidiary, Airware Holdings, Inc. The Company’s investment in Breathe Active, LLC is accounted for under the equity method. Intercompany balances and transactions have been eliminated.
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.
2.Going Concern
The Company has incurred losses since inception and requires additional funds for future operating activities. The Company’s selling activity has not yet reached a level of revenue sufficient to fund its operating activities. These factors create an uncertainty as to how the Company will fund its operations and maintain sufficient cash flow to operate as a going concern.
In response to these financial difficulties, management is continuing to pursue financing from various sources, including private placements from investors and institutions. Management believes these efforts will contribute toward funding the Company’s activities until sufficient revenue can be earned from future operations. In addition, the Company is seeking additional distribution partners in both domestic and foreign markets. Management believes these combined efforts, if successful, will be sufficient to meet its working capital needs and its currently anticipated expenditure levels for the next year.
The Company’s ability to meet its cash requirements in the next year is dependent upon obtaining this financing and achieving improved sales levels. If this is not achieved, the Company may be unable to obtain sufficient cash flow to fund its operations and obligations, and therefore, may be unable to continue as a going concern. The accompanying financial statements have been prepared on a going concern basis, and accordingly, do not include any adjustments relating to the recoverability and classification of recorded asset amounts; nor do they include adjustments to the amounts and classification of liabilities that might be necessary should the Company be unable to continue operations or be required to sell its assets.
3. Prepaid Expenses and Other Current Assets
4. Property and Equipment, Net
In June 2012, the Company moved to a new office location. At the time of the move, much of the office furniture was sold for $5,800 cash. This resulted in a loss on sale of fixed assets of $48,949. Additionally, at the time of the office move, certain office furniture and equipment items were stolen, resulting in a theft loss of $15,289.
During the year ended September 30, 2013, the Company disposed of production molds that are no longer in service. As the molds were fully depreciated, there was no related gain or loss on disposal. The Company also disposed of certain office equipment that is no longer in use resulting in a loss on disposal of assets of $278 for the year ended September 30, 2013.
5. Intangible Assets
The Company’s intangible assets relate to the Company’s patents and intellectual property. These assets are amortized over the remaining life of the original patent, which is 8.25 years as of September 30, 2013. At September 30, 2013 and 2012 the net carrying value was calculated as follows:
The scheduled amortization to be recognized over the next five years is as follows:
6. Investment in Breathe Active, LLC
On September 28, 2013, the Company entered into an agreement with Breathe Active, LLC (Breathe Active) pursuant to which the Company granted Breathe Active the right to manufacture, use, distribute, sell, advertise and promote the Company’s products. Additionally, the Company will receive royalties on products sold by Breathe Active. As part of this agreement, the Company was granted an 18% non-voting ownership in Breathe Active. The Company issued 1,000,000 stock options as a term of this agreement. Breathe Active had no activities through September 30, 2013.
7. Accrued Expenses
Accrued expenses consist of the following:
8. Notes Payable
Notes payable consists of the following:
Notes payable consists of a note that had gone into default for which a judgment was later filed. The Company is currently making payments on the outstanding balance. See Commitments and Contingencies Footnote 16, for further information.
9. Convertible Notes Payable
Convertible notes payable consist of the following:
During the year ended September 30, 2013, the Company repaid convertible notes payable in the amount of $400,000. Additionally, as discussed in Shareholders’ Deficit Footnote 17, Note Holders with notes totaling $60,000 elected to convert to common stock.
Convertible notes payable includes one note totaling $5,000 which is in default as of September 30, 2013. See Commitments and Contingencies Footnote 16 for further information.
Convertible notes payable also includes a note totaling $50,000 that was in default for which a judgment was later filed. The Company is currently making payments on the outstanding balance. See Commitments and Contingencies Footnote 16 for further information.
The future minimum payment of the convertible notes payable for each of the following years and in the aggregate:
10. Notes Payable to Former Officer
Notes payable to former officer consists of the following:
On December 5, 2013, the Company entered into a revised promissory note with former officer David Dolezal calling for four equal payments to begin on November 1, 2015 and ending August 1, 2016. Interest was reduced from 2.0% to 0.27%.
The future minimum payment of the note payable for each of the following years and in the aggregate:
11. Notes Payable to Related Parties
Notes payable to related parties consists of the following:
Interest expense on the note payable to related party (including amortization of debt discount of $1,500 and $4,500, respectively) was $33,767 and $19,893 for the years ended September 30, 2013 and 2012, respectively.
As discussed further in Convertible Notes Payable to Related Parties Footnote 12, on December 20, 2012 the Company entered into an allonge to a convertible secured bridge note with Stockbridge Enterprises, L.P. that effectively rolled the $121,000 note payable reflected at September 30, 2012 into the bridge note.
12. Convertible Notes Payable to Related Parties
Convertible notes payable to related parties consist of the following:
Convertible notes payable to related parties include one note of $20,000 which was in default as of September 30, 2013. See Commitments and Contingencies Footnote 16 for further information.
On December 20, 2012, the Company entered into a sixth allonge to a convertible secured bridge note with Stockbridge Enterprises, L.P. (Stockbridge) to borrow an additional $606,000 and increase the original note amount from $500,000 to $1,106,000. As a term of this agreement, the Company paid $45,369 of accrued interest on the promissory note dated August 15, 2012 in common stock at $.10 per share. This allonge effectively rolls the August 15, 2012 promissory note for $121,000 into the bridge note, replacing the 10% monthly rate with the 12% per annum interest rate. Additionally, the Company issued a warrant exercisable to purchase 5,000,000 shares of common stock of the Company at $.50 per share for a term of five years. The Company also issued 2,000,000 shares of common stock to Stockbridge.
In connection with the issuance of the sixth allonge, the common stock was valued at $1,125,000, which was its trading price less a 25% discount due to its restricted status. In addition, the warrants were initially valued and accounted for as a warrant liability of $1,068,950. These values were allocated as a discount to the Convertible Note of $1,106,000, with the remainder of $1,087,950 expensed as a financing cost.
On January 18, 2013, the Company entered into a seventh allonge to a convertible secured bridge note with Stockbridge to borrow an additional $60,000 and increase the note amount from $1,106,000 to $1,166,000. As a term of this agreement, the Company issued a warrant exercisable to purchase 600,000 shares of common stock of the Company at $.25 per share for a term of five years. Additionally, the exercise price of the 5,000,000 warrants issued on December 20, 2012 changed from $.50 to $.25. The Company also issued 250,000 shares of common stock to Stockbridge.
In connection with the issuance of the seventh allonge, the common stock was valued at $138,750, which was its trading price less a 25% discount due to its restricted status. In addition, the warrants were initially valued and accounted for as a warrant liability of $203,520. These values were allocated as a discount to the Convertible Note of $182,888, with the remainder of $159,382 expensed as a financing cost.
On February 22, 2013, the Company entered into an eighth allonge to a convertible secured bridge note with Stockbridge to borrow an additional $40,000 and increase the note amount from $1,166,000 to $1,206,000. As a term of this agreement, the Company issued a warrant exercisable to purchase 600,000 shares of common stock of the Company at $.25 per share for a term of five years. The Company also issued 250,000 shares of common stock to Stockbridge.
In connection with the issuance of the eighth allonge, the common stock was valued at $140,625, which was its trading price less a 25% discount due to its restricted status. In addition, the warrants were initially valued and accounted for as a warrant liability of $208,110. These values were allocated as a discount to the Convertible Note of $185,750, with the remainder of $162,985 expensed as a financing cost.
On August 21, 2013, the Company entered into a ninth allonge to a convertible secured bridge note with Stockbridge which provided for up to $3,206,000 principal and a maturity date of September 30, 2015. As a term of this agreement, the Company issued a warrant exercisable to purchase 20,000,000 shares of common stock of the Company at $.10 per share for a term of five years. Additionally, the exercise price of the previously issued warrants from the sixth through eighth allonges changed from $.25 to $.10. Interest payments are due monthly and may be paid in stock at $.05 per share or the lowest closing price during the ten trading days immediately preceding the interest payment, whichever is lower. As of September 30, 2013, the Company has borrowed $100,000 against this additional $2,000,000 line.
In connection with the issuance of the ninth allonge, the warrants were initially valued and accounted for as a warrant liability of $2,415,200. These values were allocated as a discount to the Convertible Note of $1,033,714, with the remainder of $1,381,486 expensed as a financing cost
Interest expense on the convertible notes payable to related parties (including amortization of debt discount of $1,531,134 and $83,862, respectively) was $1,667,006 and $155,116 for the years ended September 30, 2013 and 2012, respectively.
The fair value of the common stock that Stockbridge would receive if it converted all of its convertible note payable would exceed the principal balance of the note by approximately $160,000 as of September 30, 2013.
The Holder of the $145,000 convertible note, which had been in default, elected to convert his note into common stock. During the year ended September 30, 2013, the Note Holder elected to convert his outstanding balance including accrued interest with modified conversion terms, resulting in the issuance of 665,768 shares, and a $104,858 induced conversion expense.
The future minimum payment of the convertible notes payable to related parties for each of the following years and in the aggregate:
13. Rent
The Company entered into a lease agreement commencing June 8, 2012 and expiring June 7, 2013. This lease was later renewed until June 6, 2014. In March 2013, the Company entered into an arrangement to sublease a portion of the office space on a month to month basis, resulting in rental income of $9,829 for the year ended September 30, 2013. Net rent expense was $19,692 and $80,367 for the years ended September 30, 2013 and 2012, respectively.
14. Related Party Transactions
As detailed in Notes Payable to Former Officer Footnote 10, the Company has a note payable to its former President, David Dolezal. Certain convertible notes are with parties related to the Company. These are former officers and significant consultants, as further detailed in Convertible Notes Payable to Related Parties Footnote 12. Certain other related party transactions are detailed in Subsequent Events Footnote 24.
On December 8, 2011, the Company entered into an allonge to a convertible secured bridge note with Stockbridge Enterprises, L.P. (Stockbridge) to reduce the exercise price of all of the Company’s warrants held by Stockbridge from $.25 per share to $.05 per share. At September 30, 2011 Stockbridge held 2,500,000 warrants for the purchase of common stock and 1,083,333 for the purchase of the Company’s Series D Convertible Preferred Stock. As a condition of the allonge, the Company also issued an additional 2,000,000 warrants for the purchase of the Company’s Series D Preferred Stock exercisable at $.05 per share for a term of 5 years. Through March 20, 2012 Stockbridge had accumulated 6,500,000 total warrants for common and preferred stock. As part of the recapitalization, the shares were converted into 3,250,000 shares of common stock. Stockbridge exercised their warrants in full between September 30, 2011 and March 20, 2012 for a total consideration of $325,000.
As discussed in Convertible Notes Payable to Related Parties Footnote 12, the Company has entered into four additional allonges to a convertible secured bridge note with Stockbridge Enterprises, L.P. to borrow an additional $2,706,000 and increase the original note amount from $500,000 to $3,206,000.
As noted in Stockholders’ Deficit Footnote 17, on January 25, 2013 the Company granted stock options to two Officers, a consultant who is a note holder and shareholder, and a Director.
As noted in Commitments and Contingencies Footnote 16, on July 16, 2013, the Company entered into a Severance Agreement with Jeffrey Rassas.
As noted in Stockholders’ Deficit Footnote 17, during the year ended September 30, 2013, the Company issued 1,520,310 shares of stock in payment of interest on the Stockbridge convertible note.
During the years ended September 30, 2013 and 2012, the Company paid Stockbridge $11,008 and $61,008, respectively, in cash for payment of interest on both of their note and convertible notes.
15. Income Taxes
The Company’s provision for income tax (benefit) expense from operations consists of the following:
For the years ended September 30, 2013 and 2012, the effective tax rate differs from the federal statutory rate primarily due to state income taxes, permanent differences, and the change in the valuation allowance as follows:
As of September 30, 2013, the Company has a net operating loss carryforward in the approximate amount of $11,190,000. Utilization of these net operating losses may be limited due to potential ownership changes under Section 382 of the Internal Revenue Code. The net operating loss carryforward is available to offset future federal and state taxable income through September 30, 2032 and September 30, 2017, respectively. The net operating losses would result in a deferred tax asset of approximately $4,320,000 as of September 30, 2013, which amount has been fully reserved through a valuation allowance.
16. Commitments and Contingencies
The Company has agreed to indemnify its officers and directors for certain events or occurrences that may arise as a result of the officers or directors serving in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited.
The Company enters into indemnification provisions under its agreements with other companies in its ordinary course of business, typically with business partners, customers, landlords, lenders and lessors. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities or, in some cases, as a result of the indemnified party’s activities under the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited.
The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of September 30, 2013.
On November 7, 2011, the Company was named as a defendant in a lawsuit alleging a default on a note payable of $50,000 plus accrued interest. The note and accrued interest are reflected in the Company’s Balance Sheet as of September 30, 2012. During the year ended September 30, 2013, the Note Holder elected to convert his outstanding balance including accrued interest with modified conversion terms, resulting in the issuance of 238,096 shares, and a $29,598 induced conversion expense.
On December 22, 2011, the Company entered into a distribution agreement that provides for the issuance of common stock warrants, with an expiration date of 3 years, for the purchase of the Company’s common stock in an amount equal to 15% of the total products purchased by the distributor from the Company at the invoice price against the previous year’s purchases of paid invoices. The warrant price will be equal to the closing price of Airware Labs Corp.’s stock price at the anniversary date of the agreement. As noted in Stockholders’ Deficit Footnote 17, per this agreement the Company issued a three-year warrant to purchase 125,464 shares at $.75.
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 Notes Payable (Footnote 8) and Convertible Notes Payable (Footnote 9) as of September 30, 2013 and 2012.
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 been in communication with the note holders to request extensions or conversion.
On July 26, 2012, the Company was named as a Defendant in a lawsuit alleging patent infringement. The Company believed the claims were without merit. After the Company vigorously defended the action, the plaintiff moved to dismiss its own claims, and the Court entered judgment in the Company’s favor. The Court also denied the Company’s request for reimbursement of its attorneys’ fees; the Company retains the right to appeal that decision.
On April 8, 2013, the Company entered into an exclusive agency agreement with National United Trading and Investment FZ LLC. This is a performance-based agreement to develop new markets in the United Arab Emirates and other Middle Eastern markets of relevance.
On July 16, 2013, the Company entered into a Severance Agreement with Jeffrey Rassas, the Company’s Chief Executive Officer pursuant to which Mr. Rassas will be entitled to the following severance benefits: (i) the Company shall pay to Mr. Rassas his base salary for a period of 12 months following termination without cause; (ii) Mr. Rassas shall be paid any earned and unpaid bonus due; and, (iii) and all unvested stock-based compensation held by Mr. Rassas shall vest as of the date of termination.
On December 5, 2013, the Company entered into a share re-purchase agreement with former officer Mr. David Dolezal to buy back 7,567,622 shares of common stock held by Mr. Dolezal 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 Mr. Dolezal by others, and 6,017,622 being re-purchased by the Company. Upon completion of this transaction on December 17, 2013, Mr. Dolezal no longer has any ownership in the Company.
The Company sells the majority of its products through major distributors. The Company warrants to the distributors that the product will be free from defects in material and workmanship. The Company has determined its product warranty to be immaterial at September 30, 2013 and 2012. The likelihood that the Company’s estimate of the accrued product warranty claims will materially change in the near term is considered remote.
17. Stockholders’ Deficit
Common Stock
As further detailed in Business Combination Footnote 22, the Company issued 21,629,695 shares to effect the business combination with Airware Holdings, Inc. on March 20, 2012. Airware Holdings, Inc. is the accounting acquirer for the purposes of the business combination and has treated the transaction as a recapitalization through a reverse merger process. As a consequence, the common stock of the Company has been restated to reflect the differences in par values of the stock.
(1) In February 2012, the Company sold 20,000 shares, 10,000 post-split, for $5,000.
(2) As further detailed in Footnote 17, Stockholders’ Deficit Warrants,” Stockbridge exercised 6,500,000 warrants between December 12, 2011 and March 20, 2012. They were issued 6,500,000 shares of common stock, or 3,250,000 shares post-split.
(3) During the year ended September 30, 2012, the Company issued 705,213 shares of the Company’s common stock for services. The shares were valued at the cost of the services provided, if known, and at the market value of the stock issued when unknown.
The Company has an obligation to issue an additional 63,731 shares of stock for services performed as of September 30, 2012. This is reflected on the balance sheet, and the cost of these services was recognized during the year-ended September 30, 2012. The shares were issued during the year ended September 30, 2013.
(4) During the year ended September 30, 2012, the Company issued 62,334 shares of the Company’s common stock in exchange for convertible notes of $30,000 and accrued interest of $1,167.
(5) On December 1, 2011, the Company entered into employment agreements with its Chief Executive Officer, Jeffrey Rassas, and its President, David Dolezal, with annual compensation of $150,000 each. In addition, the agreements provided for options to purchase the Company’s common stock for $0.05 per share exercisable over a ten year period. Mr. Rassas’ and Mr. Dolezal’s total options under the agreement were 4,585,122 and 9,170,244 of Airware Holdings, Inc. common stock, respectively. The options were to vest at 25% immediately on December 1, 2011 and 25% per each subsequent three month period thereafter. On March 19, 2012, the Company terminated the aforementioned employment agreements, while leaving the annual compensation in place, and replaced the above noted options with the immediate issuance of common stock of 2,292,561 and 4,585,122 shares, the Airware Labs Corp. share equivalent to the Airware shares provided for in the options under the agreement, to Mr. Rassas and Mr. Dolezal. The Company has valued the stock issued at $.50 per share for a total value of $1,146,281 and $2,292,561 for Mr. Rassas and Mr. Dolezal, respectively. The Company recognized $1,146,281 and $1,610,477 of Mr. Rassas’ and Mr. Dolezal’s total stock award of $1,146,280 and $2,292,561, respectively, as compensation for services for the year ended September 30, 2012. The Company recognized $682,084 for Mr. Dolezal’s stock award in the year ended September 30, 2011.
(6) Under the terms of a Convertible Debenture agreement on June 12, 2012 the Company issued 10,000 shares of the Company’s common stock.
(7) As of the date of the merger, Airware Labs Corp. had 17,725,000 shares outstanding. This includes 100,000 shares for two former directors of the Company that the Company is obligated to issue, and were issued in 2013.
(8) On August 16, 2012, the Company resolved that The Corporation may enter into a Non-Exclusive Licensing Agreement with Zorah Technology, a limited liability company, with offices at 5400 Laurel Springs Pkwy, Suite 107, Suwanee, GA 30024, for non-exclusive rights to Zorah's technology for development and distribution worldwide of Zorah's technologies which include a wireless technology to remotely monitor senior citizens and special needs adults, as well as the development of a transdermal blood sugar monitoring unit, which will allow people to take their blood sugar levels without pricking themselves. This Non-Exclusive Licensing Agreement is meant to modify the existing license agreement originally entered into on January 20, 2012. 200,000 restricted shares of common stock of the Corporation were issued pursuant to the Non-Exclusive Licensing Agreement as payment for the license.
(9) On July 23, 2012, the Company approved a resolution that the Nevada Agency and Transfer Company be authorized by the Board of Directors to cancel and return to treasury 9,000,000 post-split shares of the Company’s common stock held by Chana Zehavi and Amir Rehavi.
On August 23, 2012, the Company entered into an agreement with its former President to modify an existing license agreement with Zorah LLC (“Zorah”) from an exclusive license to a non-exclusive license. Among other requirements of the agreement, the former President agreed to surrender back to the Company 1,125,000 shares of the Company’s common stock.
(10) On October 15, 2012, the Company issued 10,000 shares to Stockbridge Enterprises, L.P. as a condition of a promissory note dated August 15, 2012.
On December 20, 2012, the Company issued 2,000,000 shares of stock to Stockbridge as part of the terms of the sixth allonge to the convertible secured bridge note.
On January 18, 2013, the Company issued 250,000 shares to Stockbridge as a condition of a seventh allonge to the convertible secured bridge note.
On February 22, 2013, the Company issued another 250,000 shares to Stockbridge as a condition of the eighth allonge to the convertible secured bridge note.
(11) Between December 7, 2012 and June 26, 2013, the Company sold 1,735,000 shares for $433,750 through private placements.
(12) On December 7, 2012, a holder of a delinquent convertible note elected to convert to stock at a preferred rate of $.50 per share, rather than the post-split amount of $1.00 per share stated in the original note. This resulted in the issuance of 20,000 shares. On March 22, 2013, the Company issued an additional 2,788 shares in payment of accrued interest.
On August 7, 2013, a holder of a delinquent convertible note payable to related party elected to convert to stock at a preferred rate of $.25 per share, rather than the post-split amount of $2.00 per share stated in the original note. This resulted in the issuance of 580,000 shares for the note conversion and 85,768 shares for the accrued interest.
On September 19, 2013, a holder of a delinquent convertible note elected to convert to stock at a preferred rate of $.25 per share, rather than the post-split amount of $10.00 per share stated in the original note. This resulted in the issuance of 200,000 shares for the note conversion and 38,096 shares for the accrued interest.
During the year ended September 30, 2013, the Company issued 1,520,310 shares of stock in payment of interest on the Stockbridge convertible note.
(13) During the year ended September 30, 2013, the Company issued 1,470,600 shares of the Company’s common stock for services. The shares were valued at the cost of the services provided, if known, and at the market value of the stock issued when unknown. This included 63,731 shares of stock previously obligated at September 30, 2012.
As of September 30, 2013 and 2012, the Company has not declared dividends on its stock.
Warrants:
Warrants issued, as originally granted by the Company, are as follows:
(1) On December 14, 2009, the Company entered into a Securities Purchase Agreement (Agreement) with Stockbridge Enterprises to purchase a $500,000 convertible secured bridge note. On October 26, 2010, the Company entered into an allonge to the secured convertible bridge note to extend the due date through September 30, 2011. The Company issued 500,000 (pre-reverse split) warrants for the purchase of the common stock under terms of the allonge.
On August 30, 2011, the Company entered into an allonge to the secured convertible bridge note to extend the due date through September 30, 2012. The Company issued 1,000,000 (pre-reverse split) warrants for the purchase of the Company’s Series D Convertible Preferred Stock, which immediately vested and agreed to issue an additional 1,000,000 warrants that would vest at the rate of 83,333 (pre-reverse split) warrants per month through August 30, 2012.
On December 8, 2011, the Company entered into an allonge to a convertible secured bridge note with Stockbridge Enterprises, L.P. (Stockbridge) to reduce the exercise price of all of the Company’s warrants held by Stockbridge from $.25 per share to $.05 per share. As a condition of the allonge, the Company also issued an additional 2,000,000 warrants for the purchase of the Company’s stock exercisable at $.05 per share for a term of 5 years. Through March 20, 2012 Stockbridge had accumulated 6,500,000 total warrants for common and preferred stock. Stockbridge exercised their warrants in full between December 12, 2011 and March 20, 2012 for a total consideration of $325,000.
(2) On March 20, 2012, the Company entered into a share exchange agreement with Airware Holdings, Inc. As part of this merger, all stock, options and warrants of Airware Holdings, Inc. were subject to a one-for-two split. All outstanding warrants at March 20, 2012 were split and exercise prices doubled.
(3) On January 24, 2012, the Company entered into a promissory note agreement. As a term of this agreement, 10,000 warrants were to be issued on the stated maturity date of March 8, 2012. This agreement was later modified to reflect that 20,000 warrants were to be issued. Because this agreement was modified subsequent to the merger, these warrants were not subject to the one-for-two split.
(4) As noted in Related Party Transactions Footnote 14, on December 20, 2012, the Company issued a warrant for the purchase of 5,000,000 shares with an exercise price of $.50 and a term of five years. Per later allonges, this exercise price was reduced from $.50 to $.25, and then to $.10.
(5) As discussed in Commitments and Contingencies Footnote 16, on December 22, 2012, the Company issued a three-year warrant at $.75 to purchase 125,464 shares of stock per a distribution agreement.
(6) On January 18, 2013, the Company issued to Stockbridge a warrant for the purchase of 600,000 shares with an exercise price of $.25 and a term of five years. Per a later allonge, this exercise price was reduced from $.25 to $.10.
(7) On February 22, 2013, the Company issued a warrant to Stockbridge for the purchase of 600,000 shares with an exercise price of $.25 and a term of five years. Per a later allonge, this exercise price was reduced from $.25 to $.10.
(8) On June 25 and June 26, 2013, the Company issued stock purchase warrants as part of stock subscription agreements.
(9) On August 22, 2013, the Company issued a warrant to Stockbridge for the purchase of 20,000,000 shares with an exercise price of $.10 and a term of five years.
The following is a summary of the Company’s warrants that are outstanding and exercisable at September 30, 2013, adjusted to post-merger amounts and exercise prices:
Stock Options:
On April 20, 2011, the Company reserved 1,550,000 shares of its common stock for the granting of 550,000 stock options for the purchase of the Company’s common stock, to a former officer of the Company and 500,000 each to two former Senior Advisory Board Members of the Company. At the date of the grant, these options were exercisable at $.25 per share of common stock over a 10 year term. After the merger and the one-for-two split, the number of options is now 775,000, with an exercise price of $.50.
On August 10, 2011, the Company reserved 1,400,000 shares of its common stock for the granting of 1,400,000 stock options to a former employee and three consultants to the Company. The option grant was effective as of July 19, 2011 with the options vesting over one year in quarterly increments commencing on October 17, 2011 and continuing each quarter from that date forward. At the date of the grant, these options were exercisable at $.25 per share of common stock over a five year term. After the merger and the one-for-two split, the number of options is now 700,000, with an exercise price of $.50.
On April 30, 2012, the Company settled a disputed amount due to a consultant for services performed during the year ended September 30, 2011. As a result of the settlement, the Company agreed to issue the consultant 52,844 options to purchase the Company’s common stock. The options are exercisable at $.25 per share over a ten year term.
On January 25, 2013, the Company reserved 1,700,000 shares of its common stock for the granting of 1,100,000 stock options for the purchase of the Company’s common stock to corporate officers, 450,000 to a significant consultant, and 150,000 shares to a Board member. The options are exercisable at $.30 per share of common stock over a ten year term. The options for the Board member vested immediately, all others vest equally over the next three years.
On May 20, 2013, the Company reserved 250,000 shares of its common stock for the granting of stock options to a consultant. The options are exercisable at $.26 per share over a three year term. 50,000 options vested immediately, with the remaining options vesting after the completion of specified benchmarks.
On September 5, 2013, the Company reserved 250,000 shares of its common stock for the granting of stock options to a consultant. The options are exercisable at $.28 per share over a three year term. 50,000 options vested immediately, an additional 100,000 will vest on September 5, 2014, and the remaining options will vest on September 5, 2015.
As discussed further in Investment in Breathe Active, LLC Footnote 6, on September 28, 2013, the Company reserved 1,000,000 shares of its common stock for the granting of stock options in exchange for an investment in Breathe Active, LLC. 500,000 of the options vested immediately and are exercisable at $.25 per share with a term of 1.33 years. The remaining 500,000 options vest at the attainment of certain specified benchmarks and are exercisable at $.50 with a term of 1.33 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 year ended September 30, 2013:
(1) 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.
(2) The dividend rate that will be paid out on the underlying shares during the expected term of the options. The Company has not paid dividends on its common stock and currently has no plans to do so in the future; as such the dividend rate will be zero percent.
(3) The risk free interest rate is equal to the rate available on United States Treasury Notes as of the grant date of the option with a remaining term equal to the expected term.
The fair value of options granted during the year ended September 30, 2013 was:
It is the Company’s policy to reserve shares for options granted at the time of the grant. The Company reserves shares from its authorized but unissued shares available.
The total fair value of shares vested during the years ended September 30, 2013 and 2012 was $47,372 and $66,500, respectively. The weighted-average grant-date fair value of the options granted during the year ended September 30, 2013 was $.05. As of September 30, 2013, the balance of unearned stock-based compensation to be expensed in future periods related to unvested share-based awards, as adjusted for expected forfeitures, was approximately $116,000.
18. Fair Value of Financial Instruments
Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, convertible notes payable, notes payable, and warrant liability. We do not believe that we are exposed to significant interest, currency, or credit risks arising from these financial instruments. The fair values of these financial instruments approximates their carrying values using Level 3 inputs, based on their short maturities or, for long-term debt based on borrowing rates currently available to us for loans with similar terms and maturities. Gains and losses recognized on changes in fair value of convertible notes and warrant liability are reported in other income (expense). Our initial warrant valuation was measured at fair value by applying the Black-Scholes option valuation model, which utilizes Level 3 inputs. The assumptions used in the Black-Scholes option valuation for the warrants are as follows:
The risk free interest rate is based on United States Treasury rates with maturity dates approximating the expected term of the warrants. At the time of the initial warrant valuation, we had 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 grant date fair value of the initial warrant valuations described above was as follows:
The September 30, 2013 valuation was measured at fair value by utilizing the quoted market price for our common stock less a 25% discount due to the restricted status of the stocks associated with the warrants. These inputs of (i) publicly traded market price less discount for restrictions and (ii) Black-Scholes option valuation model provided a reasonable basis for valuation for the warrants as of September 30, 2013. Based on that valuation using the $0.11 discounted market price (closing market price of $0.15 less 25% discount) and assumptions used in the Black-Scholes option valuation model of: exercise price of $0.10, volatility of 35.63%, risk free interest rate of 1.39%, expected term of 4.9 years, and expected dividend yield of 0% the warrants had a net number value of $1,098,566.
The following table summarizes the warranty liability valuation for the year ended September 30, 2013:
19. Significant Customer
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.
20. Significant Supplier
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.
21. Customer Rebates
On July 5, 2012, the Company entered into an agreement with its domestic distributor to participate in promotions offering free product. There would be two programs, the first one offering the Air® Allergy product, and the second offering Air® Sleep Snore. At the time of the agreement, the quantity of free goods coupons that would be redeemed was unknown. For the first program, the Company recognized the free products via customer credits, totaling $137,774, as a reduction to revenue for the year ended September 30, 2012. Additionally, the Company recognized $29,988 in samples expense, which is reflected in Sales and Marketing on the Statements of Operations, in the year ended September 30, 2012.
The second program was more successful, resulting in giving away more product. The Company recognized $275,659 in customer credits as a reduction to revenue related to this program for the year ended September 30, 2013. The Company recognized $64,593 in samples expense in the year ended September 30, 2013.
As part of a separate agreement with its domestic distributor, the Company agreed to provide free product to assist in promotional efforts by the distributor. This free product would be recognized as credits on future orders as they are placed. During the year ended September 30, 2013, this resulted in $119,756 being recognized as customer credits against revenue and $22,841 in samples expense. An additional $74,648 in credit remains to be granted against future orders as they are placed per this agreement.
22. Business Combination
On March 20, 2012, the Company entered into a share exchange agreement with Airware Holdings, Inc. to exchange 21,629,695 of its newly-issued shares of common stock in exchange for 43,259,390 of the issued and outstanding shares and preferred stock of Airware Holdings, Inc., to exchange 1,100,000 Class A and B warrants of the Company for 2,160,000 Class A and B warrants of Airware Holdings, Inc., to exchange 1,475,000 options to purchase the Company’s common stock, at $.50 per share for 2,950,000 options to purchase Airware Holdings, Inc. common shares at $.25 per share and to exchange 52,844 options to purchase the Company’s common stock, at $.25 per share for 52,844 options to purchase Airware Holdings, Inc. common shares at $.25 per share.
The Company has accounted for the business combination with Airware Holdings, Inc. as the accounting acquirer and a recapitalization of Airware Holdings, Inc. through a reverse merger. The net loss from Airware Labs Corp., the acquiree, from operations of $19,144 is included in the Company’s Statement of Operations for the year ended September 30, 2012.
The Company has recorded the assets of Airware Labs Corp. the acquiree of $123 at book value, the estimated fair value and liabilities of $39,806 at their book value. The $39,806 consists of accounts payable to an entity controlled by an Airware Labs Corp. shareholder. This accounts payable amount was ultimately forgiven. 	
23. Restatement
During 2013, the Company discovered that common stock that was thought to have been issued as payment for an outstanding invoice from 2011 was never issued. Due to late payment of this invoice, the Company also incurred interest that was not recorded. Accordingly, the Company restated its previously issued 2012 financial statements as follows:
In addition, the number of issued and outstanding shares of common stock has been restated as follows:
The restatement did not materially affect earnings per share.
24. Subsequent Events
As discussed in Notes Payable to Former Officer Footnote 10, on December 5, 2013, the Company entered into a revised promissory note with former officer David Dolezal calling for four equal payments to begin on November 1, 2015 and ending August 1, 2016. Interest was reduced from 2.0% to 0.27%.
As discussed in Commitments and Contingencies Footnote 16, on December 5, 2013, the Company entered into a share re-purchase agreement with former officer Mr. David Dolezal to buy back all stock holdings held by Mr. Dolezal and entities under his control. Upon completion of this transaction on December 17, 2013, Mr. Dolezal no longer has any ownership in the Company.
Subsequent to year end, the Company borrowed an additional $902,000 against the convertible secured note with Stockbridge (see Footnote 12). The total currently drawn on the note is $2,208,000.
On November 5, 2013, the Company entered into an agreement with Ramirez Advisors Inter-National, LLC to serve as an advisor to the Company as it pertains to the possible manufacturing of various Company products in Mexico as well as possible business opportunities for Company products in the Mexican market. Additionally, Ramirez Advisors Inter-National, LLC will use its best efforts to locate distributors in Mexico City for the Company's filtration product line given the high levels of pollution in this region.
On December 16, 2013, the Company entered into a 90 day consulting agreement with Mr. Chase Herschman. Mr. Herschman has been engaged to assist with the Marketing efforts of the Company. Mr. Herschman will develop and market virally several video segments demonstrating how to properly use the Company's AIR Product line as well as benefits and science supporting efficacy. It is anticipated that Mr. Herschman will accept a position as Marketing Director once the 90 day period has expired provided both parties agree that the terms and the goals set for the 90 day period were achieved.
End of Notes to Financial Statements
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On March 20, 2012, the Company executed a Share Exchange Agreement (the "Agreement") with Airware Holdings, Inc., a Nevada corporation (“Airware”). Prior to the Agreement, Weinberg & Baer, LLC (“W&B”) was the Company’s registered independent public accountant and Semple, Marchal & Cooper (SM&C) was Airware’s registered independent public accountant. After the closing of the Agreement, Airware was deemed to be the accounting acquirer and selected W&B as the Company’s registered independent accountant. SM&C was not selected as the registered independent public accountant for the Company, but had been Airware’s registered independent public accountant prior to the closing of the Agreement.
Other than the disclosure of uncertainty regarding the ability for Airware to continue as a going concern which was included in Airware’s accountant’s report on the financial statements for the years ended September 30, 2011, and 2010, SM&C’s reports on the financial statements of Airware for the years ended September 30, 2011, and 2010, did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. For the two most recent fiscal years and any subsequent interim period through March 20, 2012, SM&C disclosed the uncertainty regarding the ability of Airware to continue as a going concern in its accountant’s report on the financial statements.
In connection with the audit of the financial statements of Airware as of September 30, 2011, and 2010, and through March 20, 2012, there were no disagreements on any matter of accounting principles or practices, financial statement disclosures, or auditing scope or procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with SM&C's opinion to the subject matter of the disagreement.
In connection with the audited financial statements of Airware for the years ended September 30, 2011, and 2010, there have been no reportable events with Airware as set forth in Item 304(a)(1)(v) of Regulation S-K.
Prior to March 20, 2012, Airware did not consult with W&B regarding (1) the application of accounting principles to specified transactions, (2) the type of audit opinion that might be rendered on Airware’s financial statements, (3) written or oral advice was provided that would be an important factor considered by Airware in reaching a decision as to an accounting, auditing or financial reporting issues, or (4) any matter that was the subject of a disagreement between Airware and its predecessor auditor as described in Item 304(a)(1)(iv) or a reportable event as described in Item 304(a)(1)(v) of Regulation S-K.
The Company provided a copy of the foregoing disclosures to SM&C prior to the date of the filing of a Current Report on Form 8-K regarding the change in the Company’s registered independent public accountant (the “Form 8-K”) and requested that SM&C furnish it with a letter addressed to the Securities & Exchange Commission stating whether or not it agreed with the statements in the Form 8-K. A copy of the letter furnished in response to that request was filed as Exhibit 16.1 to the Form 8-K as filed with the SEC on November 13, 2012.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
	We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2013. Based on the evaluation of these disclosure controls and procedures, and in light of the material weaknesses found in our internal controls over financial reporting, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of September 30, 2013, using the criteria established in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").
	A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of September 30, 2013, the Company determined that there were control deficiencies that constituted material weaknesses, as described below.
1. We did not maintain appropriate cash controls - As of September 30, 2013, the Company has not maintained sufficient internal controls over financial reporting for the cash process, including failure to segregate cash handling and accounting functions. Alternatively, the effects of poor cash controls were mitigated by the fact that the Company had limited transactions in their bank accounts.
2. We did not implement appropriate information technology controls - As at September 30, 2013, the Company retains copies of all financial data and material agreements; however, there is no formal procedure or evidence of normal backup of the Company’s data or off-site storage of the data in the event of theft, misplacement, or loss due to unmitigated factors.
	Accordingly, the Company concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.
	
As a result of the material weaknesses described above, management has concluded that the Company did not maintain effective internal control over financial reporting as of September 30, 2013, based on criteria established in Internal Control-Integrated Framework issued by COSO.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting identified in connection with our evaluation we conducted of the effectiveness of our internal control over financial reporting as of September 30, 2013, that occurred during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this annual report.
Continuing Remediation Efforts to Address Deficiencies in Company’s Internal Control over Financial Reporting
Once the Company has maintained a steady business and has sufficient personnel available, then our Board of Directors, in particular and in connection with the aforementioned deficiencies, will establish the following remediation measures:
1.We will appoint additional personnel to assist with the preparation of the Company’s monthly financial reporting, including preparation of the monthly bank reconciliations.
2.We will institute a policy for off-site data storage.
ITEM 9B.
ITEM 9B. 	OTHER INFORMATION.
None.
PART III
ITEM 10.
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.
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 Chairman of the Board of BuildProof.com, and is a regular speaker at technology trade events around the nation.
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. In addition to pursuing continuing education required of all CPAs, Ms. Smith is also 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. Lorrie Henderson. Dr. Lorrie Henderson, PhD, MBA, has over 25 years of leadership experience in the fields of Medical/Healthcare/Behavioral Health. He has held the top leadership positions of President/Chief Executive Officer, Chief Operating Officer, Executive Vice-President, and Executive Director. Dr. Henderson has grown multiple organizations in both size and margin through a combination of executing acquisitions and organic growth. Dr. Henderson has served on multiple national boards and has conducted research, as well as published and presented numerous scientific peer-reviewed journal articles on a variety of topics. Dr. Henderson earned his bachelor’s degree from Florida Atlantic University, his master’s degree from Florida International University, a Ph.D. from Barry University in Florida, and an MBA, summa cum laude, from Jones International University. Currently, Dr. Henderson leads AirWare Labs as Chief Operating Officer, Southwest Spine and Sports and MU Medical as the Chief Operating Officer/Chief Financial Officer and is President/CEO of LGH, LLC. From 2011 to 2012 he was Executive Director of AHRC in New York City. From 2010 to 2011 he served as Executive Director of ChildHelp in Scottsdale, Arizona. From 2008 to 2010 he was Chief Clinical Officer and Senior Vice-President of Devereux Foundation in Villanova, Pennsylvania,, and from 2002 to 2008, Chief Executive Officer/Chief Operating Officer/Executive Vice President of KidsPeace, Orefield, Pennsylvania.
Ronald L. Miller, Jr. Mr. Miller has served as the Chief Executive Officer of Southwest Capital Partners, LLC, an investment banking firm, since September 2009. He is a director and Chairman of the Audit Committee of Quest Resource Holding Corporation, an environmental consulting company. Mr. Miller served as a Managing Director of CKS Securities LLC, an investment banking firm, from February 2010 to December 2011. He served as Vice Chairman of Miller Capital Markets, LLC, a Scottsdale, Arizona headquartered boutique investment banking firm from May 2009 to August 2009. Mr. Miller served as Chief Executive Officer of Alare Capital Partners, LLC, a Scottsdale-based investment banking and strategic advisory firm. Previous executive positions included serving as Managing Director with The Seidler Companies Incorporated, a Los Angeles-based investment banking firm and member of the NYSE, and opening the Phoenix, Arizona office of Wells Fargo Van Kasper. He held a senior position with Imperial Capital and was associated with the Corporate Finance Department of Ernst & Young. He began his career in the M&A department of PaineWebber, Inc. Mr. Miller earned a BBA from The University of Georgia and a MBA with honors from The Georgia Institute of Technology.
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.
Auditors
Weinberg and Baer, LLC an independent registered public accounting firm, is our auditor.
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.
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, 2013, Forms 5 and any amendments thereto furnished to us with respect to the year ended September 30, 2013, and the representations made by the reporting persons to us, we believe that during the year ended September 30, 2013, 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.
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, 2013, and September 30, 2012.
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:
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 January 25, 2013 (the “Grant Date”) Jeffrey Rassas, Jessica Smith and Ron Miller were granted 1,000,000, 100,000 and 150,000 options to purchase shares of common stock, respectively. The options are exercisable at $.30 per share of common stock over a ten year term. The options for Ron Miller 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, $.23 (January 25, 2013 stock price discounted by 25%), expected term of 10 years, exercise price of $.30, a risk free interest rate of 1.98%, a dividend yield of 0% and a volatility of 34.91%.
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.
Outstanding Equity Awards
The table below summarizes the outstanding equity awards to our executive officers as of September 30, 2013.
Compensation of Directors
As of September 30, 2013, there is no cash compensation paid to directors for their service on our board of directors.
Employment Agreements
None.
ITEM 12.
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 December 31, 2013, 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.
(1) Applicable percentage of ownership is based on 32,658,545 shares of common stock outstanding on December 31, 2013. Percentage ownership is determined based on shares owned together with securities exercisable or convertible into shares of common stock within 60 days of December 31, 2013, 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 December 31, 2013, 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, President, and Director. Mr. Rassas’ beneficial ownership includes: 2,192,561 shares of restricted common stock and 333,333 shares issuable upon the exercise of stock options, which vest on January 25, 2014.
(3) Jessica Smith is the Company’s CFO, Secretary and Treasurer. Ms. Smith’s beneficial ownership includes 33,333 shares issuable upon the exercise of stock options, which vest on January 25, 2014.
(4) Dr. Lorrie Henderson is the Company’s’ Chief Operating Officer.
(5) Ron Miller is a Director of the Company. Mr. Miller’s beneficial ownership includes 300,000 shares issuable upon exercise of stock options.
(6) Barry Monheit’s beneficial ownership includes: 1,000,000 shares of common stock held personally is his name and 1,000,000 shares of common stock held by the Monheit Family Trust. Mr. Monheit has investment and voting control over the common shares beneficially owned by the Monheit Family Trust.
Change in Control
There are no present arrangements or pledges of the Company’s securities which may result in a change in control of the Company.
ITEM 13.
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 is not an independent director because he is also an executive officer of the Company. According to the NASDAQ definition, Ron Miller is an independent director.
Related Party Transactions
As detailed in Notes Payable to Former Officer Footnote 10 to the Financial Statements, the Company has a note payable to its former President, David Dolezal. Certain convertible notes are with parties related to the Company. These are former officers and significant consultants, as further detailed in Convertible Notes Payable to Related Parties Footnote 12. Certain other related party transactions are detailed in Subsequent Events Footnote 24.
On December 8, 2011, the Company entered into an allonge to a convertible secured bridge note with Stockbridge Enterprises, L.P. (Stockbridge) to reduce the exercise price of all of the Company’s warrants held by Stockbridge from $.25 per share to $.05 per share. At September 30, 2011 Stockbridge held 2,500,000 warrants for the purchase of common stock and 1,083,333 for the purchase of the Company’s Series D Convertible Preferred Stock. As a condition of the allonge, the Company also issued an additional 2,000,000 warrants for the purchase of the Company’s Series D Preferred Stock exercisable at $.05 per share for a term of 5 years. Through March 20, 2012 Stockbridge had accumulated 6,500,000 total warrants for common and preferred stock. As part of the recapitalization, the shares were converted into 3,250,000 shares of common stock. Stockbridge exercised their warrants in full between September 30, 2011 and March 20, 2012 for a total consideration of $325,000.
As discussed in Convertible Notes Payable to Related Parties Footnote 12 to the Financial Statements, the Company has entered into four additional allonges to a convertible secured bridge note with Stockbridge Enterprises, L.P. to borrow an additional $2,706,000 and increase the original note amount from $500,000 to $3,206,000.
As noted in Stockholders’ Deficit Footnote 17 to the Financial Statements, on January 25, 2013 the Company granted stock options to two Officers, a consultant who is a note holder and shareholder, and a Director.
As noted in Commitments and Contingencies Footnote 16 to the Financial Statements, on July 16, 2013, the Company entered into a Severance Agreement with Jeffrey Rassas.
As noted in Stockholders’ Deficit Footnote 17 to the Financial Statements, during the year ended September 30, 2013, the Company issued 1,520,310 shares of stock in payment of interest on the Stockbridge convertible note.
During the years ended September 30, 2013 and 2012, the Company paid Stockbridge $11,008 and $61,008, respectively, in cash for payment of interest on both of their note and convertible notes.
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.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Our principal independent accountant is Weinberg & Baer, LLC. Their pre-approved fees billed to the Company are set forth below:
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
*Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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.