Mar 29, 2016

, 82% of our sales were from one customer.For the year ended September 30, 2014 , 48% of our net sales were with twocustomers. As of September 30, 2015 , accounts receivable from one customercomprised 98% of the company's accounts receivable. Inventories Inventories are stated at the lower of cost or market, with cost beingdetermined using the first-in first-out method all of which are classified asfinished goods. Property and EquipmentProperty and equipment are recorded at cost. Expenditures for major additionsand improvements are capitalized and minor replacements, maintenance, andrepairs are charged to expense as incurred. When property and equipment areretired or otherwise disposed of, the cost and accumulated depreciation areremoved from the accounts and any resulting gain or loss is included in theresults of operations for the respective period. Depreciation is provided overthe estimated useful lives of the related assets using the straight-line methodfor financial statement purposes. The estimated useful lives for significantproperty and equipment categories are as follows:Equipment 5 yearsThe Company reviews the carrying value of property, plant, and equipment forimpairment whenever events and circumstances indicate that the carrying value ofan asset may not be recoverable from the estimated future cash flows expected toresult from its use and eventual disposition. In cases where undiscountedexpected future cash flows are less than the carrying value, an impairment lossis recognized equal to an amount by which the carrying value exceeds the fairvalue of assets. The factors considered by management in performing thisassessment include current operating results, trends and prospects, the mannerin which the property is used, and the effects of obsolescence, demand,competition, and other economic factors. Based on this assessment there were noimpairments needed as of September 30, 2015 or 2014. Page 23 of 38 -------------------------------------------------------------------------------- Derivative LiabilitiesThe Company evaluates stock options, stock warrants or other contracts todetermine if those contracts or embedded components of those contracts qualifyas derivatives to be separately accounted for under the relevant sections of Financial Accounting Standards Board ("FASB") Accounting Standards Codification("ASC") Topic 815-40, Derivative Instruments and Hedging: Contracts in Entity'sOwn Equity . The result of this accounting treatment could be that the fairvalue of a financial instrument is classified as a derivative instrument and ismarked-to-market at each balance sheet date and recorded as a liability. In theevent that the fair value is recorded as a liability, the change in fair valueis recorded in the statements of operations as other income or other expense.Upon conversion or exercise of a derivative instrument, the instrument is markedto fair value at the conversion date and then that fair value is reclassified toequity. Financial instruments that are initially classified as equity thatbecome subject to reclassification under ASC Topic 815-40 are reclassified to aliability account at the fair value of the instrument on the reclassificationdate.Certain of the Company's stock options, stock warrants and convertible debt areaccounted for as derivative liabilities due to the insufficient authorizedshares to settle outstanding contracts. The Company estimates the fair value ofthese stock options, stock warrants and convertible debt using theBlack-Scholes-Merton option pricing model ("Black-Scholes").Stock-Based CompensationThe Company grants options to purchase the Company's common stock to employees,directors and consultants under stock option plans. The benefits provided underthese plans are stock-based payments that the Company accounts for using thefair value method.The fair value of each option award is estimated on the date of grant usingBlack-Scholes that uses assumptions regarding a number of complex and subjectivevariables. These variables include, but are not limited to, expected stock pricevolatility, actual and projected employee stock option exercise behaviors,risk-free interest rate and expected dividends. Expected volatilities are basedon the historical volatility of the Company's common stock and other factors.The expected terms of options granted are based on analyses of historicalemployee termination rates and option exercises. The risk-free interest rate isbased on the U.S. Treasury yield in effect at the time of the grant. Since theCompany does not expect to pay dividends on common stock in the foreseeablefuture, it estimated the dividend yield to be 0%.Stock-based compensation expense recognized during a period is based on thevalue of the portion of stock-based payment awards that is ultimately expectedto vest and is amortized under the straight-line attribution method. Asshare-based compensation expense recognized in the accompanying statements ofoperations for the years ended September 30, 2015 and 2014 is based on awardsultimately expected to vest, it has been reduced for estimated forfeitures. Thefair value method requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates. The Company estimates forfeitures based on historicalexperience. Changes to the estimated forfeiture rate are accounted for as acumulative effect of change in the period the change occurred.Since the Company has a net operating loss carry-forward as of September 30,2015 , no excess tax benefits for tax deductions related to share-based awardswere recognized from stock options exercised in the year ended September 30,2014 that would have resulted in a reclassification from cash flows fromoperating activities to cash flows from financing activities.Revenue RecognitionIt is our policy that revenues will be recognized in accordance with ASC Topic605. Revenues are recognized only when the Company has transferred to thecustomer the significant risk and rewards of ownership of the goods, title tothe products transfers, the amount is fixed and determinable, evidence of anagreement exists, there is reasonable assurance of collection of the salesproceeds, the Company has no future obligations, and the customer bears the riskof loss. This occurs at the time of shipment (FOB shipping point) of theproducts from the Company's warehouse and an invoice is prepared. There are norights of return and exchange is allowed only on defective products. Recognitionof revenue is not affected as the right of exchange results in new units beingshipped to the customer once defective units have been received by the companyand verified as defective. Page 24 of 38 -------------------------------------------------------------------------------- Income TaxesThe Company accounts for income taxes and the related accounts under theliability method. Deferred tax assets and liabilities are determined based onthe differences between the consolidated financial statement carrying amountsand the income tax bases of assets and liabilities. A valuation allowance isapplied against any net deferred tax asset if, based on available evidence, itis more likely than not that some or all of the deferred tax assets will not berealized. Therefore, the Company has recorded a full valuation allowance againstthe net deferred tax assets.The Company recognizes any uncertain income tax positions on income tax returnsat the largest amount that is more-likely-than-not to be sustained upon audit bythe relevant taxing authority. An uncertain income tax position will not berecognized if it has less than a 50% likelihood of being sustained. There is nounrecognized tax benefits included in the 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 incometax matters in income tax expense. The Company had $0 accrued for interest andpenalties on each of the Company's consolidated balance sheets at September 30,2015 and 2014.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 bythe U.S. and Illinois tax authorities due to the carry-forward of unutilized netoperating losses. The Company does not foresee material changes to its grossuncertain income tax position liability within the next twelve months. Basic and Diluted Loss Per Share Basic net loss per share is calculated by dividing net loss by theweighted-average common shares outstanding during the year. Diluted net loss pershare is calculated by dividing the net loss by the weighted-average shares anddilutive potential common shares outstanding during the year. Dilutive potentialshares consist of dilutive shares issuable upon the exercise of outstandingstock options, warrants and convertible debt computed using the treasury stockmethod. In periods of losses, basic and diluted loss per share are the same, asthe effect of stock options, warrants and convertible debt on loss per share isanti-dilutive. Recent Accounting Pronouncements In May 2014 , the FASB issued ASU 2014-09, Revenue from Contracts with Customers.ASU 2014-09 supersedes the revenue recognition requirements in FASB Topic 605,"Revenue Recognition ". The ASU implements a five-step process for customercontract revenue recognition that focuses on transfer of control, as opposed totransfer of risk and rewards. The amendment also requires enhanced disclosuresregarding the nature, amount, timing and uncertainty of revenues and cash flowsfrom contracts with customers. Other major provisions include the capitalizationand amortization of certain contract costs, ensuring the time value of money isconsidered in the transaction price, and allowing estimates of variableconsideration to be recognized before contingencies are resolved in certaincircumstances. Entities can transition to the standard either retrospectively oras a cumulative-effect adjustment as of the date of adoption. On April 1, 2015 ,the FASB proposed deferring the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date. The FASB also proposedpermitting early adoption of the standard, but not before the original effectivedate for reporting periods beginning after December 15, 2016 . The Company hasnot selected a transition method and management has not yet selected atransition method and is currently assessing the impact the adoption of ASU2014-09 will have on our consolidated financial statements.In August 2014 , the FASB issued ASU No. 2014-15, "Presentation of FinancialStatements-Going Concern". Currently, there is no guidance in GAAP aboutmanagement's responsibility to evaluate whether there is substantial doubt aboutan entity's ability to continue as a going concern or to provide relatedfootnote disclosures. The amendments require management to assess an entity'sability to continue as a going concern by incorporating and expanding uponcertain principles that are currently in U.S. auditing standards. Specifically,the amendments (1) provide a definition of the term substantial doubt, (2)require an evaluation every reporting period including interim periods, (3)provide principles for considering the mitigating effect of management's plans,(4) require certain disclosures when substantial doubt is alleviated as a resultof consideration of management's plans, (5) require an express statement andother disclosures when substantial doubt is not alleviated, and (6) require anassessment for a period of one year after the date that the financial statementsare issued (or available to be issued). The amendments in this ASU are effectivefor the reporting periods beginning after December 15, 2016 and earlyapplication is permitted. Management is currently assessing the impact theadoption of ASU 2014-15 will have on our consolidated financial statements. Page 25 of 38 -------------------------------------------------------------------------------- Results of OperationsThe following is Management's discussion and analysis of certain significantfactors which have affected our financial condition and results of operationsduring the periods included in the accompanying consolidated financialstatements. Results of Operations for the Year Ended September 30, 2015 as Compared to theYear Ended September 30, 2014 Sales and Rental RevenueDuring the fiscal year ended September 30, 2015 , we recognized net revenue of $175,513