UVFT UV Flu Technologies Inc (CE)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2016

1.

DESCRIPTION OF BUSINESS

UV Flu Technologies, Inc. (referred to herein as “ Company ” “ we ” , “ us ” , “ our ” and similar terms) was incorporated as Northwest Chariots Incorporated in the State of Nevada, United States of America, on April 4, 2006.  On November 12, 2009, the Company changed its name from Northwest Chariots Incorporated to UV Flu Technologies, Inc. ( “ UV Flu ” ).  The Company ’ s fiscal year end is September 30. We acquired our subsidiary, RxAir Industries, LLC ( “ RxAir ” ), on January 31, 2011.  

2.

GOING CONCERN

The Company ’ s unaudited condensed consolidated financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America ( “ GAAP ” ) and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has had recurring losses from operations, has negative operating cash flows during the period ended March 31, 2016 and has an accumulated deficit of ($5,540,454) as of March 31, 2016. These factors raise substantial doubt about the Company ’ s ability to continue as a going concern for a reasonable period of time. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease or reduce its operations.

In order to continue as a going concern, the Company will need, among other things, additional capital resources. The Company will need to continue to raise funds through the sale of its equity securities to obtain additional operating capital. The Company is dependent upon its ability, and will continue to attempt, to secure additional equity and/or debt financing until the Company can earn revenue and realize positive cash flow from its operations. There are no assurances that the Company will be successful in earning revenue and realizing positive cash flow from its operations. Without sufficient financing it is unlikely that the Company will continue as a going concern. These condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.

3.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The included (a) condensed consolidated balance sheet as of December 31, 2015, which has been derived from audited financial statements, and (b) the unaudited condensed consolidated financial statements as of March 31, 2016 and 2015 of the Company presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission ( “ SEC ” ) for quarterly reports on Form 10-Q and do not include all of the information and footnotes required by GAAP. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Report on Form 10-K for our fiscal year ended September 30, 2015.

In the opinion of management, the interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature necessary for a fair presentation of the results for the interim period presented.  Operating results for the three and six period ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending September 30, 2016.  

Principles of Consolidation

The unaudited condensed consolidated financial statements contain the accounts and activities of UV Flu and RxAir. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with 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 consolidated financial statements, and the reported amounts of net sales and expenses during the reporting period. By their nature, these estimates and assumptions are subject to an inherent degree of uncertainty.  Significant estimates made by management include, among others, provisions for uncollectible receivables and sales returns, warranty liabilities, valuation of inventories, fair value of financial instruments, recoverability of long-lived assets, and valuation of stock-based transactions and realization of deferred tax assets. The Company bases its estimates on historical experience, knowledge of current conditions and the Company ’ s belief of what could occur in the future considering available information. The Company reviews its estimates on an on-going basis. The actual results experienced by the Company may differ materially and adversely from its estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

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Revenue Recognition

The Company recognizes revenue when earned and related costs of sales and expenses when incurred. The Company recognizes revenue in accordance with Financial Accounting Standards Board ( “ FASB ” ) Accounting Standards Codification ( “ ASC ” ) Topic 605. ASC Topic 605 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectability is reasonably assured. Cost of revenue consists of the cost of the purchased goods and labor related to the corresponding sales transaction. When a right of return exists, the Company defers revenues until the right of return expires. Revenues are recognized only when the Company has transferred to the customer the significant risk and rewards of ownership of the goods, title to the products transfers, the amount is fixed and determinable, evidence of an agreement exists, there is reasonable assurance of collection of the sales proceeds, the Company has no future obligations, and the customer bears the risk of loss.  This occurs at the time of shipment (FOB shipping point) of the products from the Company ’ s warehouse and an invoice is prepared. There are no rights of return and exchange is allowed only on defective products. Recognition of revenue is not affected as the right of exchange results in new units being shipped to the customer once defective units have been received by the company and verified as defective.

Reclassifications

Certain reclassifications have been made to the 2015 condensed interim financial statements to conform to the 2016 condensed interim consolidated financial statements presentation. The reclassifications had no effect on net loss or cash flows as previously stated.

Fair Value of Financial Instruments

The Company ’ s financial instruments consist principally of cash, accounts receivable, and accounts payable and accrued expenses and debt instruments.  The Company believes that the carrying values of all financial instruments, approximate their current fair values due to their nature and respective durations.

Credit Risks

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits and accounts receivable. Cash deposits at each financial institution are insured by the Federal Deposit Insurance Corporation ( “ FDIC ” ) up to $250,000. The Company does not have funds in excess of the FDIC insured limits.  

The Company ’ s trade accounts receivable are primarily derived from sales to one customer. The Company performs credit evaluations of its customers ’ financial condition and limits the amount of credit extended when deemed necessary, but generally requires no collateral. The Company believes that the concentration of credit risk in its trade receivables is moderated by its credit evaluation process, relatively short collection terms and the high level of credit worthiness of its customers.  Reserves are maintained for potential credit losses, and such losses historically have not been significant and have been within management ’ s expectations.

Concentrations

The Company ’ s accounts receivable as of March 31, 2016 was concentrated with four customers, representing 87% of gross receivables. A significant reduction in sales to, or the inability to collect receivables from, a significant customer could have a material adverse impact on the Company.

For the three months ended March 31, 2016 and 2015 four and three customers accounted for 87% and 90% of our gross sales, respectively.

For the six months ended March 31, 2016 and 2016 four and two customers accounted for 87% and 60% of our gross sales, respectively.

Inventories

Inventories are stated at the lower of cost or market, with cost being determined using the first-in first-out method all of which are classified as finished goods.

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Property and Equipment

Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes.  The estimated useful live for equipment is five years.

The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors. Based on this assessment there were no impairments needed as of March 31, 2016.

Stock-Based Compensation

The Company grants options to purchase the Company ’ s common stock to employees, directors and consultants under stock option plans. The benefits provided under these plans are stock-based payments that the Company accounts for using the fair value method.

The fair value of each option award is estimated on the date of grant using Black-Scholes that uses assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, expected stock price volatility, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. Expected volatilities are based on the historical volatility of the Company ’ s common stock and other factors. The expected terms of options granted are based on analyses of historical employee termination rates and option exercises. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant. Since the Company does not expect to pay dividends on common stock in the foreseeable future, it estimated the dividend yield to be 0%.

Stock-based compensation expense recognized during a period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest and is amortized under the straight-line attribution method. As stock-based compensation expense is based on awards ultimately expected to vest, it is reduced for estimated forfeitures. The fair value method requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates forfeitures based on historical experience. Changes to the estimated forfeiture rate are accounted for as a cumulative effect of change in the period the change occurred.

Advertising

Advertising costs are expensed as incurred. Advertising costs for the three months ended March 31, 2016 and 2015 were $0 and $63,672, respectively.  These costs were included in general and administrative expenses.

Income Taxes

The Company accounts for income taxes and the related accounts under the liability method. Deferred tax assets and liabilities are determined based on the differences between the consolidated financial statement carrying amounts and the income tax bases of assets and liabilities. A valuation allowance is applied against any net deferred tax asset if, based on available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.  Therefore, the Company has recorded a full valuation allowance against the net deferred tax assets.  

The Company recognizes any uncertain income tax positions on income tax returns at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. There is no unrecognized tax benefits included in the condensed consolidated balance sheet that would, if recognized, affect the effective tax rate.

The Company ’ s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had $0 accrued for interest and penalties on each of the Company ’ s condensed consolidated balance sheets at March 31, 2016 and September 30, 2015.

The Company is subject to taxation in the U.S. and various state jurisdictions. Since no tax returns have been filed, all years are subject to examination by the U.S and Illinois tax authorities due to the carry-forward of unaudited net operating losses. The Company does not foresee material changes to its gross uncertain income tax position liability within the next twelve months.

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Basic and Diluted Loss Per Share

Basic net loss per share is calculated by dividing net loss by the weighted-average common shares outstanding during the year.  Diluted net loss per share is calculated by dividing the net loss by the weighted-average shares and dilutive potential common shares outstanding during the year. Dilutive potential shares consist of dilutive shares issuable upon the exercise of outstanding stock options, warrants using the treasury stock method and convertible debt computed using as-if converted method.  In periods of losses, basic and diluted loss per share are the same, as the effect of stock options, warrants and convertible debt on loss per share is anti-dilutive.

Recent Accounting Pronouncements

In May 2014, the FASB and the International Accounting Standards Board jointly issued ASU No. 2014-09, Revenue from Contracts with Customers ( “ ASU 2014 – 09 ” ), which clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. On July 9, 2015, the FASB approved amendments deferring the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date and permitting early adoption of the standard, but not before the original effective date for reporting periods beginning after December 15, 2016. The Company has not selected a transition method and management has not yet selected a transition method and is currently assessing the impact the adoption of ASU 2014-09 will have on its condensed consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statement-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern ( “ ASU 2014 – 15 ” ),, which provides guidance under GAAP about management ’ s responsibility to evaluate whether there is substantial doubt about an entity ’ s ability to continue as a going concern and to provide related footnote disclosures. In doing so, the amendments should reduce diversity in the timing and content of footnote disclosures. The ASU is effective for all entities and for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted. The adoption of ASU 2014-15 is not expected to have a significant impact on the Company ’ s condensed consolidated financial statements and related disclosures.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330) ("ASU 2015-11"). The amendments in ASU 2015-11 require that an entity measure inventory within the scope at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transaction. The amendments in this update more closely align the measurement of inventory in U.S. GAAP with the measurement of inventory in International Financial Reporting. ASU 2015-11 is effective for annual and interim periods beginning on or after December 15, 2016. The amendments in this update should be applied prospectively with early application permitted as of the beginning of the interim or annual reporting period. The Company is currently assessing this guidance for future implementation.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes ( “ ASU 2015-15 ” ), which eliminates the current requirement for an entity to separate deferred income taxes liabilities and assets into current and non-current amounts in a classified balance sheet.  Instead, the ASU requires deferred tax liabilities, deferred tax assets and valuation allowances to be classified as non-current in a classified balance sheet.  ASU 2015-17 will be effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods.  Early adoption is permitted.  Additionally, this guidance may be applied either prospectively or retrospectively to all periods presented.  The Company elected not to early adopt ASU 2015-17 and is evaluating the effect of the adoption of this ASU to its condensed consolidated financial statements.  

In February 2016, the FASB issued ASU No. 2016-02, Leases ( “ ASU 2016-02 ” ).  Under ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee ’ s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee ’ s right to use, or control the use of, a specified asset for the lease term.  ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  Early application is permitted.  Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.  The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented.  Lessees may not apply a full retrospective transition approach.  The Company is currently evaluating the impact of adopting this ASU on its condensed consolidated financial statements.

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In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718) ( “ ASU 2016-09 ” ), which simplified certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards and classification in the statement of cash flows. ASU 2016-09 will be effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. The Company is currently evaluating the impact of adopting the new stock compensation standard on its consolidated financial statements.

4.

5.

DEBT OBLIGATIONS

The Company has a note payable which is due in 60 monthly installments of $489.  The note matured in September 2015.  As of March 31, 2016 and September 30, 2015, the balance due on this note is $3,277 of which all is current.

In August 2012, the Company borrowed $20,000.  The note was originally due on December 21, 2012 but was extended to January 24, 2014. As part of the extension, the Company agreed to move $5,000 of accrued interest into the balance of the note and drop the interest rate to 1% per month. As of March 31, 2016 and September 30, 2015 the balance of this note is $25,000.

During the year ended September 30, 2012, the Company borrowed $70,000.  The loan was payable on demand.  The note was convertible at an amount that was less than the fair market value of the stock on the date the note was executed. This beneficial conversion feature was calculated at $25,714 and was amortized into interest expense immediately since the note was a demand note. During January 2013, the Company borrowed an additional $15,000 from the same entity and consolidated that and the previous $70,000 in loans into one promissory note in the amount of $85,000. The note was originally due in January 2014 but was extended to January 2015.  The note is convertible at $0.04 per share and bears interest at 12% per annum if interest is paid in cash and 24% per annum if interest is paid in stock. The Company has the option to pay interest in shares of common stock at $0.04 per share.  As of March 31, 2016 and September 30, 2015, the balance on this note is $85,000.

In July 2013, the Company borrowed $10,000.  The note was due in July 2014, has an interest rate of 24% per annum if interest is paid in cash and 48% per annum if interest is paid in stock.  The note is convertible at $0.04 per share. The Company has the option to pay interest on this note in stock at $0.04 per share.  As of March 31, 2016 and September 30, 2015, the balance on this note is $10,000.

In July 2013, the Company borrowed $10,000.  The note was due in July 2014, has an interest rate of 24% per annum if interest is paid in cash and 48% per annum if interest is paid in stock.  The note is convertible at $0.04 per share. The Company has the option to pay interest on this note in stock at $0.04 per share.  As of March 31, 2016 and September 30, 2015, the balance on this note is $10,000.

In September 2013, the Company borrowed $5,000.  The note was due in September 2014, has an interest rate of 24% per annum if interest is paid in cash and 48% per annum if interest is paid in stock.  The note is convertible at $0.04 per share. The Company has the option to pay interest on this note in stock at $0.04 per share.  As of March 31, 2016 and September 30, 2015, the balance on this note is $5,000.

In May 2013, the Company borrowed $15,000.  The note was originally due in November 2013 but was extended to May 2014.  The note has an interest rate of 24% per annum if interest is paid in cash and 48% per annum if interest is paid in stock.  The note was originally convertible at $0.04 per share but the conversion price was changed to $0.03 per share when it was extended. The Company has the option to pay interest on this note in stock at $0.04 per share.  As of March 31, 2016 and September 30, 2015, the balance on this note is $15,000.  As part of the extension, the Company agreed to pay a penalty of 30,000 shares of common stock for every month the loan and interest is in arrears. The estimated fair value of the shares of common stock as of March 31, 2016 is $9,279 and is included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheet.

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In April 2013, the Company borrowed $20,000.  The note was due in October 2014, has an interest rate of 12% per annum if interest is paid in cash and 24% per annum if interest is paid in stock.  The note is convertible at $0.05 per share. The Company has the option to pay interest on this note in stock at $0.05 per share.  As of March 31, 2016 and September 30, 2015, the balance on this note is $20,000.

In March 2013, the Company borrowed $15,000.  The note was due in September of 2014, has an interest rate of 12% per annum if interest is paid in cash and 24% per annum if interest is paid in stock.  The note and is convertible at $0.04 per share. The Company has the option to pay interest on this note in stock at $0.04 per share.  As of March 31, 2016 and September 30, 2015, the balance on this note is $15,000.

In April 2013, the Company borrowed $30,000.  The note was due in October 2014, has an interest rate of 12% per annum if interest is paid in cash and 24% per annum if interest is paid in stock.  The note is convertible at $0.05 per share. The Company has the option to pay interest on this note in stock at $0.05 per share.  As of March 31, 2016 and September 30, 2015, the balance on this note is $30,000.

In October 2013, the Company borrowed $5,000. This note was due in August 2014, has an interest rate of 24% per annum if interest is paid in cash and 48% per annum if interest is paid in stock. The note is convertible at $0.04 per share. The Company has the option to pay interest on this note in stock at $0.04 per share. As of March 31, 2016 and September 30, 2015, the balance on this note is $5,000.

In January 2014, the Company borrowed $10,000. This note was due in February 2015, has an interest rate of 12% per annum if interest is paid in cash and 24% per annum if interest is paid in stock. The note is convertible at $0.03 per share. The Company has the option to pay interest on this note in stock at $0.03 per share. As of March 31, 2016 and September 30, 2015, the balance on this note is $10,000.

In December 2015, the Company borrowed $13,854. This note is due in December 2019 and has an interest rate of 6% per annum if interest paid in cash and 12% per annum if interest paid in stock. The note contains a conversion feature in which it becomes convertible eighteen months subsequent to the borrowing for a conversion price of $0.016 per share. The beneficial conversion feature associated with such note is $2,511 based on the difference between the conversion price and the market price on the borrowing date, which will be recognized in earnings once the contingency is met. The note also contains an anti-dilution feature in which the conversion price would be reset in the situation where the Company has an equity issuance at a lower price than the conversion price. This feature becomes effective after the maturity date. As both the conversion feature and anti-dilution feature are contingent, no derivative liabilities or beneficial conversion features were recognized associated to this note.

As of March 31, 2016, a number of the outstanding debt obligation balances were delinquent and are classified as current in the accompanying condensed consolidated balance sheet.

As of March 31, 2016, total notes payable were $247,131, of which some are current and non-current. Interest expense related to the above notes payable was $30,753 and $12,408 for the three months ended December 31, 2015 and 2014, respectively. Accrued interest related to the above notes payable was $38,924 and $34,287 as of March 31, 2016 and September 30, 2015, respectively, included in accounts payable and accrued expenses.

6.

STOCKHOLDERS ’ DEFICIT

Common Stock:

In January 2016, the Company issued 469,388 shares of common stock as compensation for a total expense of $11,500.

7.

COMMITMENTS AND CONTINGENCIES

Legal Matters

In the normal course of business, the Company periodically becomes involved in litigation. As of March 31, 2016, in the opinion of management, the Company had no pending litigation that would have a material adverse effect on the Company's condensed consolidated financial position, results of operations, or cash flows.

Indemnities and Guarantees

The Company has made certain indemnities and guarantees, under which it may be required to make payments to a guaranteed or indemnified party, in relation to certain actions or transactions. The Company indemnifies its directors, officers, employees and agents, as permitted under the laws of the State of Nevada. In connection with its facility leases, the Company has agreed to indemnify its lessors for certain claims arising from the use of the facilities. The duration of the guarantees and indemnities varies, and is generally tied to the life of the agreement. These guarantees and indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not been obligated nor incurred any payments for these obligations and, therefore, no liabilities have been recorded for these indemnities and guarantees in the accompanying condensed consolidated balance sheets.

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8.

RELATED PARTY TRANSACTIONS

As of March 31, 2016 and September 30, 2015 the accounts payable balance due to Chamberlain Capital Partners ( “ Chamberlain ” ), a company owned by Jack Lennon, former president of the Company is $10,000.

9.

SUBSEQUENT EVENTS

The Company has evaluated subsequent events through filing date of this Form 10-Q, and have determined that no subsequent events have occurred that would require recognition in the condensed consolidated financial statements or disclosure in the notes thereto other then as discussed herein and in the accompanying notes.

From April 1, 2016 through the filing date of this Form 10-Q, the Company issued 1,433,962 shares of common stock in connection with compensations for services and subscription agreement.

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