Item 9 Labs Corp. - Quarter Report: 2013 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 FORM 10-Q

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

For the quarterly period ended June 30, 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)

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 August 5, 2013, there were 36,792,277 shares of the registrant’s $0.0001 par value common stock issued and outstanding.

AIRWARE LABS CORP.

TABLE OF CONTENTS

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

AIRWARE LABS CORP.

BALANCE SHEETS

AS OF JUNE 30, 2013 AND SEPTEMBER 30, 2012

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

AIRWARE LABS CORP.

STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2013 AND 2012

(Unaudited)

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

AIRWARE LABS CORP.

STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED JUNE 30, 2013 AND 2012

(Unaudited)

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

AIRWARE LABS CORP.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

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 and the United Kingdom.

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.

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 financial statements of the Company as of June 30, 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 June 30, 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, 2013. 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”).

Earnings 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, 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 June 30, 2013, there were total shares of 21,120,808 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.

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).

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. In addition, the Company has introduced an expanded product line and has had positive response to the product from a number of large potential customers. Management believes these efforts will contribute toward funding the Company’s activities until sufficient revenue can be earned from future operations. 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:

4. Notes Payable to Former Officer

Notes payable to former officer consists of the following:

5. Convertible Notes Payable to Related Parties

Convertible notes payable to related parties consist of the following:

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.

For accounting purposes, the Company has valued the shares issued for the sixth allonge at $.10 per share, resulting in a debt discount of $200,000 to be amortized over the remainder of the loan period. For the quarter and nine months ended June 30, 2013, this resulted in debt discount expense of $64,286 and $135,715, respectively.

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.

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.

For accounting purposes, the Company has valued the shares issued for the seventh and eighth allonges at $.10 per share, resulting in a debt discount of $50,000 to be amortized over the remainder of the loan period. For the quarter and nine months ended June 30, 2013, this resulted in debt discount expense of $22,226 and $27,774, respectively.

The Company is in discussions with the holder of the $145,000 convertible note which is currently in default.  The note holder has tentatively agreed to convert, and conversion terms are being negotiated.

6. 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.

As discussed in Convertible Notes Payable to Related Parties Footnote 5, the Company has entered into three additional allonges to a convertible secured bridge note with Stockbridge Enterprises, L.P. to borrow an additional $706,000 and increase the original note amount from $500,000 to $1,206,000.

As noted in Stockholders’ Deficit Footnote 8, on January 25, 2013 the Company granted stock options to an employee, two consultants and a director.

7. Commitments and Contingencies

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

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

The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of June 30, 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 June 30, 2013. The Company is working towards settling the litigation.

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 8, 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 a two notes payable totaling $75,000 plus accrued interest. Ultimately, a judgment was entered against the Company as a result of this lawsuit. The Company has entered into a payment plan. The notes and accrued interest are reflected in the Company’s Balance Sheet as of June 30, 2013.

The Company is in default on three notes payable totaling $170,000. 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 believes the lawsuit is without merit and is vigorously defending the action.  The case was transferred from New York to Arizona.  The parties are in the process of conducting discovery, and the Court has construed the disputed terms of the claims at issue.  Trial is scheduled for March 4, 2014.

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

On December 1, 2012, the Company entered into a consulting agreement with Accounting & Finance Personnel for staffing and management consulting services. The monthly fee for these services is $1,861 for a term of one year.

On February 25, 2013, the Company entered into an engagement agreement with Bridgewater Capital Corporation (Bridgewater) to act as placement agent and financial advisor. One objective of the agreement is a capital raise through equity or debt financing, of up to $5 million. The proceeds from a capital raise will be used primarily for marketing the Company’s products with the intended result of increasing sales through our distributors and retailers.

On March 28, 2013, the Company entered into an advisory agreement with Bridgewater Capital Corporation (Bridgewater). Bridgewater will assist the Company with strategic direction and partnerships as well as identifying potential acquisition opportunities. This agreement calls for payment of one million shares of stock over a six month period. This stock is distributed monthly based on performance and the agreement is cancelable at any time with no additional shares due.

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 April 22, 2013, the Company entered into a consulting agreement with Mr. Charles Immel, an individual with extensive experience in the healthcare sector at the executive level. Mr. Immel has been engaged to develop and conduct a market assessment as well as pilot programs with healthcare professionals using the filtered line of products. This agreement is intended to quantify and develop a market in the healthcare sector to aid in the cross-protection of healthcare workers and ailing patients.

In May 2013, the Company renewed the lease at their current office location. The renewal commenced June 7, 2013, expires on June 6, 2014, and the monthly lease payment is $2477.

8. Stockholders’ Deficit

Common Stock

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 7, 2012, a holder of a delinquent $10,000 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 her original note. On March 22, 2013, the company issued an additional 2,788 shares in payment of accrued interest.

On December 7, 2012, the Company issued 39,600 shares of stock for services performed in the fiscal year ended September 30, 2012. These shares were listed as an obligation to issue equity as of September 30, 2012 and the expense for the services was recognized in the fiscal year ended September 30, 2012.

Between December 7, 2012 and June 26, 2013, the Company sold 1,735,000 shares for $433,750 through private placements.

As further detailed in Convertible Notes Payable to Related Parties Footnote 5, on December 20, 2012, the Company issued 2,453,690 shares of stock to Stockbridge as part of the terms of an allonge to a convertible secured bridge note.

On February 20, 2013, the Company issued 40,000 shares of stock for the payment of legal services.

As further detailed in Convertible Notes Payable to Related Parties Footnote 5, on February 20, 2013, the Company issued 250,000 shares to Stockbridge Enterprises, L.P. (Stockbridge) as a condition of a seventh allonge to a convertible secured bridge note. On March 22, 2013, the Company issued another 250,000 shares to Stockbridge as a condition of an eighth allonge to a convertible secured bridge note. Additionally, on that same date the Company issued 423,420 shares to Stockbridge in payment of accrued interest on the convertible secured bridge note. On May 7, 2013 the Company issued 120,600 shares of stock to Stockbridge in lieu of a cash payment of interest. Similarly, they issued another 120,600 shares on June 4, 2013 for the same purpose.

As referenced in Commitments and Contingencies Footnote 7, on April 4, 2013, the Company issued 1,000,000 shares of stock for payment to Bridgewater Capital Corporation.

On April 23, 2013, the Company issued 25,000 shares of stock for the payment of consulting services.

Warrants

The balance of warrants outstanding for purchase of the Company’s common stock as of June 30, 2013 is as follows:

(1) As noted in Related Party Transactions Footnote 6, 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 a later allonge, this exercise price was reduced from $.50 to $.25.

(2) As discussed in Commitments and Contingencies Footnote 7, on December 22, 2012, the Company issued a three-year warrant at $.75 to purchase 125,464 shares of stock per a distribution agreement.

(3) As noted in Related Party Transactions Footnote 6, on January 18, 2013, the Company issued a warrant for the purchase of 600,000 shares with an exercise price of $.25 and a term of five years.

(4) As noted in Related Party Transactions Footnote 6, on February 22, 2013, the Company issued a warrant for the purchase of 600,000 shares with an exercise price of $.25 and a term of five years.

(5) On June 25 and June 26, 2013, the Company issued stock purchase warrants as part of stock subscription agreements.

Stock Options

The Company had the following options outstanding at June 30, 2013:

(1) On January 25, 2013, the Company granted stock options to a Board member. These options are immediately vested, have an exercise price of $.30 and have a term of 10 years.

(2) On January 25, 2013, the Company granted stock options to an employee and two consultants. These options have an exercise price of $.30 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.

(3) On May 20, 2013, the Company granted 250,000 stock options to a member of our medical advisory board. 50,000 of these options vested immediately, with the remaining 200,000 shares vesting as certain benchmarks are achieved. As the dates of future performance are unknown, these unvested options have not been expensed in the financial statements. They will be expensed on the vesting dates as stated goals are met. The options that vested immediately were expensed on the grant date.

9. 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.

10. Subsequent Events

In July 2013, the Company entered into an agreement with internet marketing and Search Engine Optimization (SEO) firm Web-Op to increase visibility and awareness of the "AIR" Product line as well as education and online sales.  This is to be implemented through online marketing techniques such as search engine optimization, developed and produced video content, paid searches, relevant web content, and e-commerce.  We selected this group based on its past successes, particularly with health-related products sold direct to consumers.

On July 16, 2013, the Company entered into a Severance Agreement with Jeffrey Rassas, the Company’s Chief Executive Officer. Pursuant to this agreement, 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 Company has been notified by our factory in China that unless we are able to provide firm order commitments, they are considering closure.  The Company owns the production molds, and is in negotiations with another factory in China to take over production.   

End of Notes to Financial Statements

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, 2012.

Results of Operations

Total revenue for the three months ended June 30, 2013 was $673, as compared to $909 for the three months ended June 30, 2012. Our revenue for the quarter does not reflect approximately $220,000 in orders received during the quarter that were not fulfilled until the next quarter. Operating expenses in the quarter ended June 30, 2013 amounted to $581,495 as compared to $429,480 for the quarter ended June 30, 2012. The increase in expenses is a result of approximately $54,000 in sample expenses, additional sales and marketing consultant fees, and increased legal and other consulting fees. This is partially offset by reductions in rent and payroll expenses. The quarter ended June 30, 2013 included over $200,000 in stock-based, non-cash expenses for marketing consultants and other consulting expenses as compared to the quarter ended June 30, 2012, which included $18.000 of such expenses.

The net loss for the quarter ended June 30, 2013 was $719,532 as compared to $554,251 for the quarter ended June 30, 2012.

Liquidity and Capital Resources

Our balance sheet as at June 30, 2013 reflects $29,099 in cash and cash equivalents. During the nine months ended June 30, 2013, we raised $433,750 via private placements. We intend to raise additional cash to fund our ongoing marketing initiatives. 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 financing. There is no assurance that any financing will be available or if available, on terms that will be acceptable.

Cash Flow from Operating Activities

During the nine months ended June 30, 2013, the Company’s operating activities used $323,584 in cash as compared to $655,045 for the nine months ended June 30, 2012. The decrease in cash used for operating activities is primarily due to decreases in payroll and related expenses as well as reduced rent and other office expenses.

Cash Flow from Investing Activities

During the nine month periods ended June 30, 2013 and 2012, the Company used $35,534 and $115,361 respectively, in cash for investing activities. The decrease in cash used for investing activities is primarily due to a decrease in notes receivable from related parties in the nine months ended June 30, 2013 as compared to no change in notes receivable for the same period in 2013.

Cash Flow from Financing Activities

During the nine months ended June 30, 2013, the Company received $386,817 in cash from financing activities. This consisted of $185,000 in net financing from notes payable, $433,750 in proceeds from the issuance of stock for cash less $231,933 in net repayments for factoring accounts payable and accounts receivable. This compares with $592,500 provided during the nine months ended June 30, 2012 which was from net proceeds from convertible notes payable of $185,000, stock issued for cash of $5,000, proceeds from notes payable of $77,500 and proceeds from the exercise of warrants of $325,000.

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.

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.

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 June 30, 2013, due to the material weaknesses resulting from no director qualifying as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K, and controls were not 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

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 June 30, 2013.  The Company is working towards settling the litigation.

On December 27, 2011, the Company was named as a defendant in a lawsuit alleging a default on a two notes payable totaling $75,000 plus accrued interest. Ultimately, a judgment was entered against the Company as a result of this lawsuit. The Company has entered into a payment plan. The notes and accrued interest are reflected in the Company’s Balance Sheet as of June 30, 2013.

On July 26, 2012, the Company was named as a Defendant in a lawsuit alleging patent infringement.  The Company believes the lawsuit is without merit and is vigorously defending the action.  The case was transferred from New York to Arizona.  The parties are in the process of conducting discovery, and the Court has construed the disputed terms of the claims at issue.  Trial is scheduled for March 4, 2014.

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.

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.

On April 4, 2013, the Company issued 1,000,000 shares of restricted common stock pursuant to an Advisory Agreement dated March 28, 2013 at a cost basis of $0.2012 per share.

On April 25, 2013, the Company issued 25,000 shares of restricted common stock pursuant to a Consulting Agreement dated April 17, 2013, at a cost basis of $0.25 per share.

On May 14, 2013, the Company issued 360,000 shares of restricted common stock pursuant to Subscription Agreements entered into by and between the Company and investors, at a cost basis of $0.25 per share.

On May 14, 2013, the Company issued 120,600 shares of restricted common stock for payment of interest on loans to the corporation for the month of April 2013, at a cost basis of $0.10 per share.

On May 30, 2013, the Company issued 200,000 shares of restricted common stock pursuant to the Subscription Agreements entered into by and between the Company and investors, at a cost basis of $0.25 per share.

On June 19, 2013, the Company issued 120,600 shares of restricted common stock for payment of interest on loans to the corporation for the month of May 2013, at a cost basis of $0.10 per share.

On June 26, 2013, the Company issued 260,000 shares of restricted common stock pursuant to the Subscription Agreements entered into by and between the Company and investors, at a cost basis of $0.25 per share.

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.

None.

N/A.

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. This description of the Severance 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 19, 2013, and is incorporated herein by reference.

*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.

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