UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

---

 FORM 10-Q

---

 

 

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

For the quarterly period ended December 31, 2013

 

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

For the transition period from:

 

Commission File Number 000-54730

 

AIRWARE LABS CORP.

(Exact name of registrant as specified in its charter)

 

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

 

8399 E. Indian School Rd., Suite 202

Scottsdale, AZ 85251

(Address of principal executive offices)

 

(480) 463-4246

(Registrant’s telephone number)

 

 

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

☑Yes     ☐ No

 

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

 

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

 

Large accelerated filer           ☐	Accelerated filer ☐
Non-accelerated filer             ☐	Smaller reporting company ☑

 

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

☐ Yes  ☑ No

 

As of February 10, 2014, there were 33,437,462 shares of the registrant’s $0.0001 par value common stock issued and outstanding.

 

AIRWARE LABS CORP. AND SUBSIDIARY

TABLE OF CONTENTS

		Page
PART 1.	FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	12
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	14
ITEM 4.	CONTROLS AND PROCEDURES	14
PART II.	OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	15
ITEM 1A.	RISK FACTORS	15
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	16
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	16
ITEM 4.	MINE SAFETY DISCLOSURES	16
ITEM 5.	OTHER INFORMATION	16
ITEM 6.	EXHIBITS	16

 

Special Note Regarding Forward-Looking Statements

 

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

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

PART I - FINANCIAL INFORMATION 

 

ITEM 1. CONDENSED FINANCIAL STATEMENTS

 

		Page
INDEX		F-1
Unaudited Consolidated Balance Sheet as of December 31, 2013 and Audited Consolidated Balance Sheet as of September 30, 2013		F-2
Unaudited Consolidated Statements of Operations for the Three Months Ended December 31, 2013 and 2012		F-3
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2013 and 2012		F-4
Notes to Condensed Financial Statements (Unaudited)		F-5

 

F-1

AIRWARE LABS CORP. AND SUBSIDIARY

(FORMERLY CROWN DYNAMICS CORP.)

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2013 AND SEPTEMBER 30, 2013

 

	As of		As of
	December 31,		September 30,
	2013		2013
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$              96,667		$            19,942
Accounts receivable	29,283		35,019
Inventory	54,644		51,423
Deposits	39,360		-
Prepaid expenses	8,211		10,690
Total current assets	228,165		117,074
Other Assets:
Property and equipment, net	24,947		31,619
Intangible assets, net	282,475		291,072
Deposits	2,400		2,400
Investment in Breathe Active, LLC	290		290
Total Assets	$          538,277		$        442,455
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current Liabilities:
Accounts payable	$      1,891,480		$     1,868,205
Accrued interest - related parties	19,105		12,793
Accrued interest	6,384		6,441
Accrued expenses	70,777		18,554
Notes payable	6,870		18,178
Convertible notes payable - current portion	44,565		32,773
Convertible notes payable to related parties - current portion, net of discount	25,000		25,000
Total current liabilities	2,064,181		1,981,944
Accrued interest to related parties	10		1,267
Notes payable to former officer	47,500		47,520
Convertible notes payable, less current portion	10,435		22,227
Convertible notes payable to related parties, less current portion, net of discount	361,589		228,782
Warrant liability	1,805,966		1,098,566
Total liabilities	4,289,681		3,380,306
Commitments and Contingencies
Stockholders' (Deficit):
Common stock, par value $.0001 per share, 200,000,000 and 200,000,000 shares authorized; 32,952,452 and 38,129,100 shares issued and outstanding at December 31, 2013 and September 30, 2013, respectively	3,295		3,813
Additional paid-in capital	12,427,232		12,071,023
Accumulated (deficit)	(16,181,931)		(15,012,687)
Total stockholders' (deficit)	(3,751,404)		(2,937,851)
Total Liabilities and Stockholders' (Deficit)	$          538,277		$          442,455

 

 

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

F-2

AIRWARE LABS CORP. AND SUBSIDIARY

(FORMERLY CROWN DYNAMICS CORP.)

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2013 AND 2012

(Unaudited)

 

		Three Months Ended
		December 31,		December 31,
		2013		2012
Revenues, net		$              10,706		$             79,198
Cost of products sold		4,545		47,529
Gross profit		6,161		31,669
Operating expenses
General and administrative		266,785		281,231
Sales and marketing		14,694		43,956
Total expenses		281,479		325,187
(Loss) from operations		(275,318)		(293,518)
Other income (expense)
Interest income		289		-
Forgiveness of debt		20
Induced note conversion expense		-		(9,300)
Interest expense		(186,835)		(81,813)
Valuation (loss) - common stock warrants		(707,400)		-
Total other income (expense)		(893,926)		(91,113)
(Loss) before income taxes		(1,169,244)		(384,631)
Income tax expense		-		-
Net (loss)		$       (1,169,244)		$       (384,631)
Basic and diluted net (loss) per common share		$                (0.03)		$             (0.01)
Basic and diluted weighted average common shares outstanding		37,647,160		30,547,439

 

 

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

F-3

AIRWARE LABS CORP. AND SUBSIDIARY

(FORMERLY CROWN DYNAMICS CORP.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2013 AND 2012

(Unaudited)

		Three Months Ended
		December 31,		December 31,
		2013		2012
Operating Activities:
Net (loss)		$        (1,169,244)		$     (384,631)
Adjustments to reconcile net (loss) to net cash (used in) operating activities:
Depreciation and amortization		15,269		13,662
Common stock issued/obligated for services		-		-
Options and warrants issued for services		15,905		-
Interest expense from amortization of debt discount		132,807		8,743
Induced conversion expense		-		9,300
Stock issued for interest expense		42,048		45,369
Forgiveness of debt		(20)		-
Valuation (gain)/expense - common stock warrants		707,400		-
Changes in operating assets and liabilities:
Accounts receivable		5,736		559,871
Inventory		(3,221)		(31,900)
Prepaid expenses		2,479		49,011
Deposits		(39,360)		(5,000)
Accounts payable		23,275		(38,652)
Accrued interest		4,998		(25,385)
Accrued expenses		52,223		(37,256)
Net Cash Provided by (Used in) Operating Activities		(209,705)		163,132
Investing Activities:
Purchases of property and equipment		-		(35,534)
Net Cash (Used in) Investing Activities		-		(35,534)
Financing Activities:
Stock issued for cash		-		20,000
Proceeds from convertible notes payable		902,000		485,000
Repayment of convertible notes payable		-		(400,000)
Repayment of notes payable		(11,308)		-
Options re-purchased		(2,500)		-
Stock re-purchased		(601,762)		-
Proceeds from factored accounts receivable		-		265,939
Repayment of factored accounts receivable note		-		(451,079)
Net Cash Provided by (Used in) Financing Activities		286,430		(80,140)
Net (Decrease) Increase in Cash		76,725		47,458
Cash - Beginning of Period		19,942		1,400
Cash - End of Period		$        96,667		$     48,858
Supplemental disclosure of cash flow information:
Interest paid in cash		$             692		$     46,986
Non-cash investing and financing activities:
Stock issued for convertible notes		-		10,000
Debt discount on note payable, related party		-		1,500
Warrants issued to related party for convertible note modification		-		100

 

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

F-4

AIRWARE LABS CORP.

(FORMERLY CROWN DYNAMICS CORP.)

NOTES TO 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 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. were included in the issued and outstanding shares of the Company at the date of the merger.

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. Inter-company balances and transactions have been eliminated upon consolidation.

 

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.

 

Unaudited Interim Financial Statements

 

The interim consolidated financial statements of the Company as of December 31, 2013 and 2012, and for the periods then ended, are unaudited. However, in the opinion of management, the interim financial statements include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the Company’s financial position as of December 31, 2013 and 2012 and the results of its operations and its cash flows for the periods then ended. These results are not necessarily indicative of the results expected for the fiscal year ended September 30, 2014. The accompanying financial statements and notes thereto do not reflect all disclosures required under accounting principles generally accepted in the United States (U.S. “GAAP”).

 

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 December 31, 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 December 31, 2013, there were total shares of 51,563,308 issuable upon conversion of notes payable, exercise of warrants and options that were not included in the earnings per share calculation as they were anti-dilutive.

2. Going Concern 

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. Convertible Notes Payable

 

Convertible notes payable consist of the following:

 

8.00% notes payable, due August 22, 2012, convertible to common stock at $.50 per share, interest payments are due at maturity, unsecured		$	5,000
6.50% note payable, due November 26, 2011, convertible to common stock at $2 per share, interest payments are due annually, unsecured. Terms amended in March 2013 to interest at 4.25%, with $4,000 monthly payments of principal and interest			50,000
			55,000
Less current portion			(44,565	)
		$	10,435

 

4. Notes Payable to Former Officer

 

Notes payable to former officer consists of the following:

 

0.27% note payable, due August 1, 2016, interest due at maturity, unsecured

$

47,500

 

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%.

 

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 $1,846,411, due September 30, 2015, convertible to common stock at $.10 per share, interest payments are due monthly.  Debt is secured by substantially all of the assets of the Company		$	361,589
8.00 % note payable due February 28, 2014, convertible to common stock at $.50 per share, interest payments are due at maturity, unsecured			5,000
8.00 % note payable due August 26, 2012, convertible to common stock at $.50 per share, interest payments are due at maturity, unsecured			20,000
			386,589
Less current portion			(25,000	)
		$	361,589

 

On August 21, 2013, the Company entered into a ninth allonge to a convertible secured bridge note with Stockbridge Enterprises, L.P. (“Stockbridge”) which provided for up to $3,206,000 principal and a maturity date of September 30, 2015. As of December 31, 2013, the Company has borrowed $1,002,000 against this additional $2,000,000 line.

 

6. Warrant Liability

 

The warrant liability as of December 31, 2013 was revalued 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 December 31, 2013. Based on that valuation using the $0.15 discounted market price (closing market price of $0.20 less 25% discount) and assumptions used in the Black-Scholes option valuation model of: exercise price of $0.10, volatility of 32.04%, risk free interest rate of 1.75%, expected term of 4.65 years, and expected dividend yield of 0%, the warrants had a net number value of $1,805,966.

 

7. Related Party Transactions

 

As detailed in Notes Payable to Former Officer Footnote 4, the Company has a note payable to its former President and Executive Chairman, David Dolezal.

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.

 

As discussed in Convertible Notes Payable to Related Parties Footnote 5, the Company has a convertible secured bridge note with Stockbridge. During the three months ended December 31, 2013, the Company borrowed $902,000 against this note.

 

8. Commitments and Contingencies

 

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

 

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

The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2013.

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.

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 as of December 31, 2013.

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 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.

 

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 December 31, 2013. The likelihood that the Company’s estimate of the accrued product warranty claims will materially change in the near term is considered remote.

 

9. Stockholders’ Deficit

 

Common Stock

 

During the three months ended December 31, 2013, the Company issued 840,974 shares of stock in payment of interest on the Stockbridge convertible note.

 

As further detailed in Related Party Transactions Footnote 7, on December 5, 2013, the Company entered into a share re-purchase agreement with former officer Mr. David Dolezal and re-purchased 6,017,622 shares of common stock held by Mr. Dolezal and entities under his control.

 

Warrants

 

The balance of warrants outstanding for purchase of the Company’s common stock as of December 31, 2013 is as follows:

 

	Common Shares Issuable Upon Exercise of Warrants	Exercise Price of Warrants	Date Issued	Expiration Date
Issued under a private placement memorandum	250,000	$1.00	4/26/2011	4/25/2014
Issued under a private placement memorandum	50,000	$1.00	4/27/2011	4/26/2014
Issued under a private placement memorandum	25,000	$1.00	4/28/2011	4/27/2014
Issued under a private placement memorandum	200,000	$1.00	5/03/2011	5/02/2014
Issued for financing expense	20,000	$0.25	3/08/2012	3/07/2017
Issued under a consultant settlement agreement	40,000	$0.50	4/30/2012	4/29/2015
Issued as part of convertible agreement	5,000,000	$0.10	12/20/2012	12/19/2017
Issued per distribution agreement	125,464	$0.75	12/22/2012	12/21/2015
Issued as part of convertible agreement	600,000	$0.10	1/18/2013	1/17/2018
Issued as part of convertible agreement	600,000	$0.10	2/22/2013	2/21/2018
Issued under a private placement memorandum	140,000	$0.40	6/25/2013	6/25/2015
Issued under a private placement memorandum	120,000	$0.40	6/26/2013	6/26/2015
Stockbridge issued as part of convertible agreement	20,000,000	$0.10	8/22/2013	8/22/2018
Balance of Warrants at December 31, 2013	27,170,464

 

Stock Options

The Company had the following options outstanding at December 31, 2013:

 

	Common Shares Issuable Upon Exercise of Options	Exercise Price of Options	Date Issued	Expiration Date
Options granted to former officer & two former senior advisory board members	775,000	$0.50	4/20/2011	4/19/2021
Options granted to former employee and three consultants	700,000	$0.50	7/19/2011	7/18/2016
Options granted under a consultant agreement settlement	52,844	$0.25	4/30/12	4/29/22
Options granted to Board member	150,000	$0.30	1/25/2013	1/24/2023
Options granted to employee and two consultants	1,550,000	$0.30	1/25/2013	1/24/2023
Options granted to medical advisory board member	250,000	$0.26	5/20/2013	5/19/2016
Options granted to consultant	250.000	$0.28	9/5/2013	9/4/2016
Options issued for investment in Breathe Active, LLC	500,000	$0.25	9/28/2013	12/31/2014
Options issued for investment in Breathe Active, LLC	500,000	$0.50	9/28/2013	12/31/2014
Options re-purchased by Company (1)	(200,000)
Options granted to Board member (2)	150,000	$0.11	10/4/2013	10/3/2023
Options granted to Officers (3)	433,333	$0.11	10/4/2013	10/3/2023
Balance of Options at December 31, 2013	5,111,177

 

(1) On December 5, 2013, per an Agreement and Mutual Release of Claims with a former consultant, the Company paid $2,500 in return for the relinquishment of the consultant’s stock options.

 

(2) On October 4, 2013, the Company granted stock options to a Board member. These options are immediately vested, have an exercise price of $.11 and have a term of 10 years.

 

(3) On October 4, 2013, the Company granted stock options to two officers. These options have an exercise price of $.11 and a term of 10 years. The options vest evenly over the next three years on the anniversary of the grant date, unless there is a change in corporate control, then the options vest immediately.

 

10. Subsequent Events

 

On January 28, 2014, the Company entered into an agreement (the “Acorn Agreement”) with Acorn Management Partners, LLC (“Acorn”) to perform certain financial advisory, business development and professional relations services (the “Acorn Services”). Under the terms of the Acorn Agreement and in exchange for the performance of the Acorn Services by Acorn, the Company shall pay to Acorn an aggregate of $115,000 USD in cash plus a variable number of shares of the restricted common stock of the Company. The Acorn Agreement shall expire on January 27, 2015, unless terminated earlier in accordance with its terms.

 

Subsequent to December 31, 2013, the Company borrowed an additional $100,000 against the convertible secured note with Stockbridge to fund marketing efforts. The total currently drawn on the note is $2,308,000.

 

On February 5, 2014, Stockbridge exercised 26,200,000 warrants to purchase stock.  They elected to use the cashless exercise formula, which will result in the issuance of 22,457,143 shares of common stock of the Company.

 

 

End of Notes to Financial Statements

 

F-10

ITEM 2.

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

 

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

 

The following discussion should be read in conjunction with our unaudited consolidated financial statements and related notes and other financial data included elsewhere in this report. See also the notes to our consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended September 30, 2013.

 

Results of Operations

 

Total revenue for the three months ended December 31, 2013 was $10,706, as compared to $79,198 for the three months ended December 31, 2012. Our revenue for the quarter does not reflect approximately $120,000 in orders received during the quarter ended December 31, 2013 that were not fulfilled until the next quarter and will be reported in the financial statements for the quarter ended March 31, 2014. Operating expenses in the quarter ended December 31, 2013 amounted to $281,479 as compared to $325,187 for the quarter ended December 31, 2012. The decrease in expenses is a result of the reductions in payroll expenses and sales and marketing expenses. This is partially offset by increases in legal fees.

 

The net loss for the quarter ended December 31, 2013 was $1,169,244 as compared to $384,631 for the quarter ended December 31, 2012. This is primarily due to valuation expense and additional interest expense of $707,400 and $186,835, respectively, for the quarter ended December 31, 2013, compared to $0 and $81,813 for the quarter ended December 31, 2012.

 

Liquidity and Capital Resources

 

Our balance sheet as at December 31, 2013 reflects $96,667 in cash and cash equivalents as compared to $19,942 as at September 30, 2013. We intend to raise the balance of our cash requirements for the next 12 months from private placements or a registered public offering (either self-underwritten or through a broker-dealer). Additionally, we have the Stockbridge secured bridge note to draw from, which as of February 7, 2014 has an available balance of $898,000. 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 three months ended December 31, 2013, the Company’s operating activities used $209,705 in cash as compared to $163,132 provided by operating activities for the three months ended December 31, 2012. The increase in cash used for operating activities is primarily due to decreased revenue resulting in limited receivables and related collections.

 

Cash Flow from Investing Activities

 

During the three month periods ended December 31, 2013 and 2012, the Company used $0 and $35,534 respectively, in cash for investing activities. The decrease in cash used for investing activities is primarily due to there not being any purchases of fixed assets in the three months ended December 31, 2013.

 

Cash Flow from Financing Activities

 

During the three months ended December 31, 2013, the Company received $286,430 in cash from financing activities. This consisted of $890,692 in net financing from notes payable less $604,262 in payments for the re-purchase of common stock and options. This compares with $80,140 used during the three months ended December 31, 2012 which was from net proceeds from convertible notes payable of $85,000, stock issued for cash of $20,000, and net repayments for factoring accounts payable and accounts receivable of $185,140.

 

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.

 

Future Financings

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

Off-Balance Sheet Arrangements

 

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

 

Critical Accounting Policies

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

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

Recently Issued Accounting Pronouncements

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

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 4.

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management carried out an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act"). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were not effective as December 31, 2013, due to the material weaknesses resulting from controls not being designed and in place to ensure that all disclosures required were originally addressed in our financial statements.

 

Changes in Internal Control over Financial Reporting

 

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

 

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

 

PART II - OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

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

 

On 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 December 31, 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 have dismissed 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 1A.

RISK FACTORS

 

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

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

1.

Quarterly Issuances:

 

On 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 $0.05 per share.

 

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

 

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

 

2.

Subsequent Issuances:

 

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

 

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

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

N/A.

 

ITEM 5.

OTHER INFORMATION

 

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.

 

ITEM 6.

EXHIBITS

 

 

Exhibit
Number	Description of Exhibit
3.01(a)	Articles of Incorporation		Filed with the SEC on May 12, 2011 as part of our Registration Statement on Form S-1/A.
3.01(b)	Certificate of Amendment to Articles of Incorporation dated October 26, 2012		Filed with the SEC on November 13, 2012 as part of our Current Report on Form 8-K
3.02	Bylaws		Filed with the SEC on May 12, 2011 as part of our Registration Statement on Form S-1/A.
10.01	Patent Sale Agreement		Filed with the SEC on May 12, 2011 as part of our Registration Statement on Form S-1/A.
10.02	License Agreement between Crown Dynamics Corp. and Zorah LLC		Filed with the SEC on January 20, 2012 on Form 8-K.
10.03	Share Exchange Agreement between Crown Dynamics Corp. and Airware Dated March 20, 2012		Filed with the SEC on March 26, 2012 on Form 8-K.
10.04	Professional Relations and Consulting Agreement between Acorn Management Partners, LLC and Airware Labs Corp. dated January 28, 2014		Filed herewith.
31.01	Certification of Principal Executive Officer Pursuant to Rule 13a-14		Filed herewith.
31.02	Certification of Principal Financial Officer Pursuant to Rule 13a-14		Filed herewith.
32.01	CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act		Filed herewith.
32.02	CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act		Filed herewith.
99.1	Crown Dynamics Corp. Subscription Agreement		Filed with the SEC on May 12, 2011 as part of our Registration Statement on Form S-1/A.
101.INS*	XBRL Instance Document		Filed herewith.
101.SCH*	XBRL Taxonomy Extension Schema Document		Filed herewith.
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document		Filed herewith.
101.LAB*	XBRL Taxonomy Extension Labels Linkbase Document		Filed herewith.
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document		Filed herewith.
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document		Filed herewith.

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

 

SIGNATURES

 

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

 

	AIRWARE LABS CORP.
Date: February 14, 2014	By:	/s/  Jeffrey Rassas
	Name:                    Jeffrey Rassas
	Title:                      Chief Executive Officer and Director
Date: February 14, 2014	By ;	/s/  Jessica Smith
	Name :                   Jessica Smith
	Title :                     Chief Accounting and Financial Officer

 

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

 

 

Date:  February 14, 2014	By:	/s/  Jeffrey Rassas
	Name:   Jeffrey Rassas Title: Chief Executive Officer and Director
Date:   February 14, 2014	By:	/s/  Jessica Smith
	Name: Jessica Smith Title: Chief Accounting and Financial Officer
Date:   February 14, 2014	By:	/s/  Ronald L.Miller, Jr.
	Name: Ronald L. Miller, Jr. Title: Director