NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
1.
Summary of Significant Accounting Policies and Use of Estimates
Basis of
Presentation and Organization
Airware Labs Corp. (“Airware Labs”
or the “Company”), formerly Crown Dynamics Corp., is a Delaware corporation. The Company was incorporated under the
laws of the State of Delaware on June 15, 2010. On October 26, 2012, the Articles of Incorporation were amended to reflect a name
change to Airware Labs Corp.
On March 20, 2012, through an equity exchange
agreement, the Company acquired all of the issued and outstanding stock of Airware Holdings, Inc., a Nevada corporation (“Airware”),
in exchange for shares of the Company’s newly-issued common stock. Airware Holdings, Inc. was formed in February 2010 and
is a non-prescription medical products company. The principal business purpose of the Company is to develop, manufacture and distribute
breathing solutions that address major respiratory challenges impacting human health.
Unaudited Interim Financial Statements
The interim condensed consolidated financial
statements of the Company as of June 30, 2016 and 2015, and for the periods then ended, are prepared in accordance with the instructions
to Form 10-Q. Accordingly, the accompanying condensed consolidated financial statements and notes thereto do not reflect all disclosures
required under accounting principles generally accepted in the United States (U.S. “GAAP”). However, in the opinion
of management, the interim financial statements include all adjustments, consisting of only normal recurring adjustments, necessary
to present fairly the Company’s financial position as of June 30, 2016 and the results of its operations and its cash flows
for the periods ended June 30, 2016 and 2015. These results are not necessarily indicative of the results expected for the fiscal
year ended September 30, 2016.
Principles of Consolidation
The accompanying condensed consolidated financial
statements include the accounts of Airware Labs Corp and its wholly owned subsidiary, Airware Holdings, Inc. Intercompany balances
and transactions have been eliminated.
Accounting Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.
Actual results could materially differ from those estimates. Significant estimates of the Company include accounting for depreciation
and amortization, deferred income taxes, accruals and contingencies, inventory reserves, estimates for customer returns, the fair
value of common stock and the estimated fair value of stock options and warrants.
Cash and Cash Equivalents
The Company considers all highly liquid instruments
purchased with a remaining maturity of three months or less to be cash equivalents.
Inventory
Inventory is mostly held by a third
party, consists of finished goods and is stated at the lower of cost, determined by the first-in, first-out method, or market.
During the three months ended June 30, 2016, the Company established a reserve of $20,000 for inventory which will likely expire
before we are able to sell it.
Property and Equipment
Property and equipment are recorded at cost.
Depreciation is provided for on the straight-line method, over the estimated useful lives of the assets. Maintenance and repairs
that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Betterments
or renewals are capitalized when incurred. Gains and losses on the disposition of property and equipment are recorded in the period
incurred. Production molds owned by the Company are capitalized and are included in manufacturing equipment. Pre-production design
and development costs are expensed as incurred.
The estimated useful lives of property and
equipment are:
•
|
Manufacturing equipment
|
2-3 years
|
•
|
Office furniture and equipment
|
5-7 years
|
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:
|
•
|
A
price per unit has been determined; and
|
|
•
|
Collectability
has
been reasonably assured.
|
Revenues are recorded net of returns and co-operative advertising
costs.
Income Taxes
The Company accounts for income taxes under
FASB ASC 740,
Income Taxes
. Deferred income tax assets and liabilities are determined based upon differences between
financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Net Loss per Share
Basic earnings per share does not include dilution
and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an
entity. Dilutive securities are not included in the weighted average number of shares when inclusion would be anti-dilutive. Due
to the net losses for the periods ended June 30, 2016 and 2015, basic and diluted loss per common share were the same, as the effect
of potentially dilutive securities would have been anti-dilutive.
As of June 30, 2016, there were total
shares of 54,139,483 issuable upon conversion of notes payable and the exercise of warrants and options that were not included
in the earnings per share calculation as they were anti-dilutive.
2.
Going Concern
The Company has incurred losses
since inception and requires additional funds for future operating activities. The Company’s selling activity has not reached
a level of revenue sufficient to fund its operating activities. These factors create an uncertainty as to how the Company will
fund its operations and maintain sufficient cash flow to operate as a going concern. The combination of these factors, among others,
raise substantial doubt about the Company’s ability to continue as a going concern.
The Company’s ability to meet its cash
requirements in the next year is dependent upon obtaining additional financing and achieving improved sales levels. If this is
not achieved, the Company may be unable to obtain sufficient cash flow to fund its operations and obligations, and as a result
there is substantial doubt the Company will be able to continue as a going concern. The accompanying condensed consolidated financial
statements have been prepared on a going concern basis, and accordingly, do not include any adjustments relating to the recoverability
and classification of recorded asset amounts; nor do they include adjustments to the amounts and classification of liabilities
that might be necessary should the Company be unable to continue operations or be required to sell its assets.
3. Convertible Note Payable
The Company has a convertible note payable
with a principal balance of $5,000, which was due on August 22, 2012, is unsecured, carries an interest rate of 8% and is convertible
to common stock at $.50 per share.
4. Note Payable to Former Officer
The Company has a note payable with an original
principal balance of $47,500 due to a former officer, which was due on August 1, 2016, is
unsecured
and carries an interest rate of 0.27%. On December 5, 2013 the Company revised the terms of the Note calling for four equal payments
to begin on November 1, 2015 and ending August 1, 2016. As part of this revision, the interest rate was reduced from 2% to 0.27%.
The Company defaulted on the final payment due, see note 10. The following represents future minimum payments due on the outstanding
balance:
Principal
balance at June 30, 2016
|
|
$
|
11,875
|
|
Less
current portion
|
|
|
(11,875
|
)
|
|
|
$
|
—
|
|
5. Convertible Notes Payable to
Related Parties
Convertible notes payable to related
parties consist of the following:
12% note payable net of unamortized debt discount of $149,481, due September 30, 2017, convertible to common stock at $.08 per share, interest payments are due monthly and may be made in common stock with a conversion price of $.05 per share. Debt is secured by substantially all of the assets of the Company.
|
|
$
|
3,256,519
|
|
The Company has a note payable due to a former advisory board member, which bears interest at 8%, was due August 26, 2012 and is convertible to common stock at $.50 per share. Interest payments were due at maturity and the note is unsecured.
|
|
|
20,000
|
|
Less current portion
|
|
|
(20,000
|
)
|
|
|
$
|
3,256,519
|
|
On January 22, 2016, the Company entered
into an Allonge to the convertible note held by our primary debt holder by which our line of credit was increased by $200,000
and the conversion price of the outstanding principal balance was adjusted to $.08 from $.10. In accordance with ASC 470-50, the
Company evaluated the modification of the debt under the terms of the newest allonge and determined the revised terms resulted
in an extinguishment of debt. Accordingly, the difference between the reacquisition price of the debt and the net carrying
amount of the extinguished debt was recognized in current income. A loss in the amount of $1,122,100 was recorded on the
debt extinguishment.
6. Related Party Transactions
As detailed in Notes 4 and 5, the Company
has a note payable to its former President, a convertible note payable to a former advisory board member and another convertible
note with an entity that owns a majority of our outstanding shares. The Company repaid $35,625 of the note payable to former officer
during the nine months ended June 30, 2016.
During the nine months ended June 30,
2016, the Company recorded $59,055 in expense for fees due to a company owned by its CFO for her services as CFO. Of this amount¸
$44,472 has been paid.
During the nine months ended June 30,
2016, the Company recorded $93,744 in expense for fees due to a company owned by its President for his services as President. Of
this amount, $52,080 has been paid.
During the nine months ended June 30, 2016,
the Company paid zero cash for interest on the related party debt.
7. Commitments and Contingencies
On December 22, 2011, the Company entered
into a distribution agreement that provides for the issuance of common stock warrants, with an expiration date of 3 years, for
the purchase of the Company’s common stock in an amount equal to 15% of the total products purchased by the distributor from
the Company at the invoice price against the previous year’s purchases of paid invoices. The warrant price will be equal
to the closing price of Airware Labs Corp.’s stock price at the anniversary date of the agreement. During the nine months
ended June 30, 2016, the Company issued a warrant to purchase 252,124 shares of common stock at $.08 per share to this distributor.
On January 6, 2014, the Company entered into
a license agreement with Eastar Industries, Co. (“Eastar”), pursuant to which the Company granted Eastar an exclusive
license to sell its products in China for a term of five years in exchange for a royalty equal to 18% of gross profits generated
by the sales of products in China. Additionally, the Company and Eastar agreed to establish a joint venture company in Hong Kong
or Shanghai which will be assigned Eastar’s rights under the agreement and of which 18% of the joint venture will be owned
by the Company. As of June 30, 2016, the joint venture has yet to be established.
The Company entered into an office lease agreement
commencing June 1, 2014 and expiring August 31, 2017. As part of the lease agreement, a concession of the first three months’
rent was provided. Total rent to be paid over the course of the lease is being expensed ratably over the period of the entire lease,
creating a deferred rent liability of $3,065 as of June 30, 2016.
On August 17, 2015, the Company entered into
an agreement with a company owned by its President for his services as President on a contract basis in exchange for a fixed monthly
fee. A total of $93,744 was recorded as expense during the nine months ended June 30, 2016 per this agreement, of which $52,080
has been paid.
The Company sells the majority of its products
through major distributors. The Company warrants to the distributors that the product will be free from defects in material and
workmanship. The Company has determined its product warranty to be immaterial at June 30, 2016. The likelihood that the Company’s
estimate of the accrued product warranty claims will materially change in the near term is considered remote.
8. Stockholders’ Deficit
Common Stock
During the nine months ended June 30, 2016,
the Company issued 4,534,887 shares of common stock in payment of September 2015 through March 2016 interest totaling $226,724
on the primary debt holders convertible note.
On December 31, 2015, the Company issued 200,000
shares of common stock per subscription agreements totaling $20,000. The Company received net proceeds of $18,000, net of issuance
costs of $2,000 paid as a capital marketing fee. As part of these stock subscriptions, 100,000 warrants to purchase common stock
at $.25 were also issued.
On December 31, 2015, the Company issued 96,071
shares of common stock for the payment of consulting services rendered to the Company between April 1, 2015 and September 30, 2015.
The shares were valued at the average trading price over the period of service, which approximated fair value, in the amount of
$12,750.
During the quarter ended December 31, 2015,
the company received $45,500 towards the purchase of 227,500 shares of common stock. Net proceeds amounted to $36,400 after the
issuance costs of $9,100 paid as a capital marketing fee. This was part of a subscription agreement totaling $375,000. These shares,
as well as others paid for per the same subscription agreement totaling 517,500, were issued on March 15, 2016.
On March 15, 2016, the Company issued 100,000
shares of common stock per a subscription agreement for $10,000. The Company received net proceeds of $9,000, net of issuance costs
of $1,000 paid as a capital marketing fee. As part of this stock subscription, 50,000 warrants to purchase common stock at $.25
were also issued.
On April 7, 2016, the Company issued 75,917
shares of common stock for the payment of services rendered to the Company between October 1, 2015 and February 29, 2016. The shares
were valued at the closing price on the various vendor invoice dates, in the amount of $18,485.
Warrants
The balance of warrants outstanding for purchase of the Company’s
common stock as of June 30, 2016 is as follows:
|
Common
Shares
Issuable
Upon
Exercise
of Warrants
|
Exercise
Price of Warrants
|
Date
Issued
|
Expiration
Date
|
Balance
of Warrants at September 30, 2015
|
4,988,002
|
|
|
|
|
|
|
|
|
Issued under a private placement
memorandum (1)
|
50,000
|
$0.25
|
12/3/2015
|
12/3/2017
|
|
|
|
|
|
Issued under a private placement
memorandum (1)
|
50,000
|
$0.25
|
12/14/2015
|
12/14/2017
|
|
|
|
|
|
Issued per distribution agreement
(2)
|
252,124
|
$0.08
|
12/22/2015
|
12/22/2018
|
|
|
|
|
|
Issued
under a private placement memorandum (1)
|
50,000
|
$0.25
|
1/28/2016
|
1/28/2018
|
|
|
|
|
|
Expired warrants
|
(125,464)
|
|
|
|
|
|
|
|
|
Balance of Warrants
at June 30, 2016
|
5,264,662
|
|
|
|
(1) During
the nine months ended June 30, 2016, the company issued stock purchase warrants as part of stock subscription agreements.
(2) On December 22, 2015, the Company issued
a three-year warrant at $.08 to purchase 252,124 shares of common stock per a distribution agreement.
Stock Options
The Company had the following options outstanding at June 30, 2016:
|
Common
Shares
Issuable
Upon
Exercise
of Options
|
Exercise
Price of Options
|
Date
Issued
|
Expiration
Date
|
Balance of options at September
30, 2015
|
5,394,510
|
|
|
|
|
|
|
|
|
Options granted to consultant
(1)
|
26,786
|
$0.25
|
11/1/2015
|
11/1/2025
|
|
|
|
|
|
Options granted to consultant
(1)
|
75,000
|
$0.25
|
12/1/2015
|
12/1/2025
|
|
|
|
|
|
Options
granted to consultant (1)
|
57,692
|
$0.25
|
1/1/2016
|
1/1/2026
|
|
|
|
|
|
Options
granted to consultant (1)
|
50,000
|
$0.25
|
2/1/2016
|
2/1/2026
|
|
|
|
|
|
Options
granted to consultant (1)
|
62,500
|
$0.25
|
3/1/2016
|
3/1/2026
|
|
|
|
|
|
Options
granted to officers and board member (2)
|
583,333
|
$0.15
|
3/8/2016
|
3/8/2026
|
|
|
|
|
|
Balance of Options at June
30, 2016
|
6,249,821
|
|
|
|
(1) On October 15, 2015, the Company entered
into an agreement with a patent attorney to provide intellectual property services as in-house patent counsel. Per the agreement,
he received monthly stock option grants. He was to receive $7,500 per month in stock option grants, and the quantity of stock options
issued monthly was determined by the closing price on the last day of the month. These services were suspended as of February 29,
2016.
(2) On March 8, 2016, the Company granted a
total of 583,333 stock options for the purchase of the Company’s common stock. Included in this amount, 433,333 stock options
were granted to corporate officers and 150,000 stock options to a Board member. The options are exercisable at $.15 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.
During the three and nine month periods ended
June 30, 2016, $8,524 and $54,481, respectively, was expensed for the pro-rata vesting of stock-based compensation. As of June
30, 2016, the balance of unrecognized compensation cost related to non-vested stock-based compensation to be expensed in future
periods was $65,461.
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 nine months ended June 30, 2016:
Expected stock price volatility
|
32.96-33.53%
|
|
|
|
|
Expected dividend yield
|
0.00%
|
|
|
|
|
Risk-free interest rate
|
1.83-2.27%
|
|
|
|
|
Option life
|
10.00 years
|
|
9. 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. For both the three and nine months ended June 30, 2016, sales to
two distributors was approximately 92% of our total sales.
10. Subsequent Events
On July 28, 2016, the Company entered
into an Allonge to the convertible note held by our primary debt holder by which our line of credit was increased by $100,000.
The Company issued a warrant to purchase 2,000,000 shares of common stock at $.05 according to the terms of this Allonge.
As of August 1, 2016, the Company defaulted
on the final $11,875 payment payable on the loan to a former officer.
On August 16, 2016, the Company issued
2,740,494 shares of common stock to our primary debt holder as payment for interest on loans to the Company for April through July
2016. The Company also issued 104,258 shares of common stock for the payment of consulting services rendered to the Company between
October 1, 2015 and June 30, 2016. The shares were valued at the average trading price over the period of service, which approximated
fair value, in the amount of $13,500.
End of Notes to Financial Statements